In her recent blog post on the concept of “shared use” at National Trust historic sites ("Shared Use in Action at Cooper-Molera Adobe,” August 20, 2015), Katherine Malone-France described how the National Trust is deeply involved in exploring how to bring compatible new uses—both commercial and nonprofit—to historic sites, house museums, and other historic properties in ways that attract new audiences and create new opportunities for public engagement. The concept, which goes much further than traditional accessory uses such as gift shops, visitor food service, or special events, essentially involves a collaboration between several users of a historic site, one of which is the principal nonprofit steward. Shared use may not be appropriate for every historic site, but for many sites facing challenges relating to visitation and financial self sufficiency—or which simply are looking for more creative and relevant ways to engage the public—the concept is definitely worth exploring.

Katherine’s summary of the National Trust’s work at Cooper-Molera Adobe in Monterey listed a number of questions and issues that should be considered by any organization considering a shared use model at its own historic site. Of course, fundamental issues such as compatibility of uses, stakeholder views, and financial feasibility must be considered at the outset. However, before going too far down the road in exploring shared use options, a number of legal questions need to be examined as well.

Threshold Question: Authority

The first legal question is truly a basic one: Does the nonprofit owner of the historic site have the legal authority to use the property (or portions of the property) in new ways, particularly when some of those uses may be commercial in nature? Many nonprofit owners of historic sites come to that ownership through gift agreements, bequests, or even court orders that have specific terms and conditions that may severely restrict future uses. That was certainly the case with Cooper-Molera Adobe. The National Trust acquired Cooper-Molera Adobe and its associated Cooper family collections from the estate of Frances Molera (a direct descendent of Captain John Cooper) in 1972. The terms of the will—and the trust under which the National Trust held the property—required that the core Adobe structures were to be maintained as a “historical monument.” The will expressly provided that certain portions of the property could be rented out for commercial uses (parts of the two-acre property were used commercially at the time of Frances Molera’s ownership). Yet the will also included a broad limitation that expressly prohibited the sale of food, beverages, or other goods on the property. (The will also prohibited using any of the site as a mortuary, although that wasn’t a major problem for the Trust.)

What to do? The Trust felt that the restrictions imposed by the will effectively prevented options for other economically viable uses—and the need for such uses was critical, since the original bequest did not include an endowment and the site needed significant infrastructure improvements and seismic retrofitting. In California, trust restrictions in bequests such as this are subject to the jurisdiction of the state’s probate court system. And so in June 2014 the National Trust filed a petition with the probate division of the Superior Court of the State of California seeking permission to lift the restrictions on sale of goods, food, or beverages on those portions of the property already allowed to be used for commercial purposes.

The Trust worked closely with experienced local counsel in framing its case. The Trust also worked with local stakeholders, including the Alliance of Monterey Area Preservationists and their attorney, to find language that provided reassurance that the change in the terms of the testamentary trust would be narrowly tailored to honor the key purpose of the gift: to ensure that the principal adobe structures would be maintained as a historical monument. Late last year, after a public hearing, California Superior Court Judge Robert O’Farrell agreed, and granted the National Trust’s petition.

In this case, the National Trust was able to find its way past a very restrictive limitation in the original gift under which it holds Cooper-Molera Adobe. Other courts in other situations may not be as accommodating, and may not see the need to set aside the donor’s original terms. A nonprofit wishing to explore shared uses for a historic site should be aware of the seriousness of this threshold legal question and seek advice from experienced local counsel.

Threshold Question: Land Use Laws and Regulations

A second threshold legal question that will inevitably arise when shared uses are considered is whether proposed new uses are allowed, or can be approved, within existing land use laws.

Each historic site is unique, and each comes with its own set of legal restrictions. Obviously, zoning and planning regulations apply to almost every historic site—and many historic sites have zoning classifications that reflect their special character or value within a community. Some historic sites sit within areas zoned for residential use, but their use as a museum property may be “grandfathered” under the zoning, or may be allowed by special exception. But that authority under local planning and zoning may not apply to new uses contemplated under a shared use model, particularly those that are commercial in character. In some cases, “accessory” commercial uses may be permitted by right, or more likely as special exceptions. But in some cases, zoning variances or even re-zoning may be required to accommodate shared commercial uses—or even nonprofit uses.

In the case of Cooper-Molera, the proposed commercial shared uses are permitted or conditionally permitted under the underlying zoning. However, the property is also subject to a historic area overlay district requiring any alterations to the property to be approved by the Monterey Historic Preservation Commission under standards specifically developed for the district. (Again, this is not uncommon—many historic sites are similarly subject to local landmark regulations.) Fortunately, the changes necessary to meet new uses at Cooper-Molera Adobe could easily be accommodated through very minor alterations to the site. Even then, a thorough and well-documented case had to be made to the preservation commission, particularly regarding avoiding impacts to archaeological resources and demonstrating the compatibility of new infill construction (in this case, a kitchen building and a new storage shed).

With Cooper-Molera, assisted by a very experienced preservation architectural firm (Architectural Resources Group, in San Francisco), the Trust made its case and the commission provided its approval. But the risks of not making that case are significant, particularly in states such as California with a well-developed legal framework at the state level for environmental review: failure to demonstrate that the project would be compatible with the historic character of the site, including its archaeological resources, could subject any approval by the City of Monterey to review and possible challenge under the California Environmental Quality Act.

Again, in most cases, it will be advisable for a nonprofit historic site owner considering a shared use arrangement to consult with a land use or environmental lawyer who is familiar with the substance of local zoning and planning laws, state environmental laws, and even federal preservation laws that might come into play. In some cases, private regulations, such as conservation easements or covenants given to third parties, may also need to be addressed.

Structuring a Shared Use Arrangement

Once these threshold legal considerations are considered, addressed, and resolved, the fun work begins: What is the best way to structure a shared use arrangement? Again, each property is unique, and terms must be crafted specifically to address the unique features of the property and the relationships between the nonprofit steward and its shared use partners (whether nonprofit or commercial). But what does the overall framework look like? The National Trust is still in the process of crafting a specific legal model for shared use at Cooper-Molera, but the framework we are developing has similarities to another legal framework that we are very comfortable using: the co-stewardship model.

Co-stewardship historic sites are those owned by one nonprofit organization but operated by another, typically a special-purpose nonprofit organization created to serve as the site’s operating entity. The National Trust uses this model for a number of its historic sites: of 27 National Trust historic sites, ten are owned by the National Trust but operated by partner nonprofit organizations—such as the Drayton Hall Preservation Trust (Drayton Hall, in Charleston, South Carolina), the White House Historical Association (Decatur House, Washington, D.C.), the Filoli Center (Filoli, in Woodside, California), and Brucemore Inc. (operating Brucemore, in Cedar Rapids, Iowa).

These co-stewardship arrangements are legally structured with not one but several interconnected agreements. First is a long-term lease, a legal agreement that is very recognizable as a basic conveyance of leasehold rights to the property (together with restrictions designed to protect its historic character). The second document, which runs co-terminus with the lease, is a cooperative agreement, which provides the real “color” to the relationship between the two organizations and frames the operating principles for the site. (In most cases, there is also a third agreement, a loan agreement covering the collections owned by the National Trust but used by the co-steward organization for interpretative and educational purposes.)

The approach that the Trust is developing for Cooper-Molera will be similar, in that we expect to use a basic long-term lease agreement conveying leasehold rights to portions of the property to be used for agreed-upon purposes, and subject to restrictions designed to protect its historic character. But a second agreement, co-terminus with the lease and tied closely to it, will be paired with the lease to provide the real “color” to the relationship between the National Trust and its commercial partner.

Katherine’s earlier blog post suggested how one goal of the shared use model is to infuse historic interpretation throughout the commercial operations at the site—the second agreement, the “shared use agreement,” will spell out how the lessor and lessee will work together to make that happen. And in the case of Cooper-Molera (as with other sites we are contemplating using a similar arrangement), much of the historic site will be truly “shared space,” which means that some order must be imposed on shared space by agreement: by daytime, the Cooper-Molera “learning garden” may be used by schoolchildren learning about early California agriculture; in the evening, the same space may be used as the site for a small party or other event, under the auspices of a commercial event center. The shared use of common space, and the priorities and rights of each party, will be spelled out in detail in the shared use agreement, which will make clear the essential purpose of preservation in all uses of the property.

This model is not unique to this type of property and this type of relationship. Commercial developers are accustomed to using a package of connected agreements to define complex relationships; at Cooper-Molera, the developer partner is very familiar with agreements that define and clarify tenants’ rights and obligations to common areas and other space, from parking lots to garden areas.

Even in the nonprofit context, shared use agreements of one sort or another have been used to define the relationship between two or more nonprofit organizations sharing space. An excellent example is that of a historic church or synagogue that lends or rents space out to other nonprofit entities. Partners for Sacred Places, a Philadelphia-based organization that works nationally to promote preservation and reuse of historic religious buildings, has for a number of years encouraged creative use of shared space in historic religious buildings—particularly to co-locate human service operations or performing arts organizations in underutilized space. Those relationships work best when they are organized and defined by shared use agreements that clarify rights, responsibilities, and priorities. Under its National Treasures program, the National Trust is working to help one such church, the historic First Baptist Church of New Bedford, Massachusetts, establish this type of relationship with a community theater group, through development of shared use agreements to define and regulate the use of common spaces within an iconic historic church building.

Special Tax Considerations for the Nonprofit Participant in a Shared Use Arrangement

Nonprofit organizations by definition are highly regulated organizations, and to the extent that their activities rub up against the commercial world the rules and regulations get complicated. One important consideration for many nonprofits will be to ensure that the structure of any shared use agreement with a commercial partner will comply with applicable tax laws and IRS regulations. This is particularly the case when it comes to unrelated business activities, since IRS rules provide that nonprofits may engage in non-exempt activities only “as an insubstantial part of its activities.” (There is no specific definition of “insubstantial,” but clearly the smaller an organization the greater the risk that non-exempt commercial activities by a nonprofit may not be “insubstantial.”)

Assuming that participation in a shared use arrangement doesn’t cross this line (and a good nonprofit lawyer can help to ensure that this is the case), nonprofit organizations that generate income streams that are unrelated to their exempt purposes may still be subject to taxation of that income, like any commercial entity. In the case of nonprofits, the tax is “unrelated business income tax,” or UBIT. Of course, there is nothing wrong with paying taxes (after all, paying taxes means that an activity is actually profitable), but most nonprofits prefer to avoid the opportunity. Nonprofit tax law, like other tax law, is complex: there are important exceptions, and exceptions to the exceptions. For example, rental income is generally not treated as subject to UBIT under an exception in the tax code, but there are limits to that exception that must be kept in mind. Ultimately, it is important for any nonprofit entity to obtain effective legal advice to make sure that relationships with commercial partners are (1) permissible in the first place, (2) structured optimally for the nonprofit, and (3) properly disclosed and addressed to comply with the legal obligations of the nonprofit.