Q&A: Renting Church Property for Business Use

Should our church rent space to a member for use as a meeting room?

A member in our church wants to operate her cosmetics business in a room at our church. She would like to conduct meetings in the room as well as maintain an office. Are there any reasons why we should not accommodate her?

Many churches have considered, or even implemented, such arrangements. After all, most churches have rooms that are unused during the week, so why not let members use them? There are many reasons why these arrangements are not advisable, including the following:

  1. Your church property is exempt from property taxation so long as it is used exclusively for religious purposes. By allowing a for-profit business to operate on your premises, you are jeopardizing the church’s property tax exemption, in whole or in part, depending on the circumstances.
  2. Is your church property zoned for commercial use? Often, churches are in residential zones in which the operation of commercial businesses is not legally permitted.
  3. Is the church member going to pay the church a rental fee for the use of the room? If so, this may implicate the federal unrelated business income tax.
  4. The church may be responsible for injuries that occur during the member’s use of church property. As a result, there should be a written agreement that addresses each party’s obligations, and this agreement needs to address liability and insurance. For example, the agreement could include indemnification and “hold harmless” clauses, and require the member to obtain adequate liability insurance (naming the church as an additional insured) in an amount that is acceptable to the church. An attorney should be retained to prepare such an agreement.
  5. Before agreeing to such an arrangement, church leaders must consider how they will respond to other members who would like to use church property for commercial purposes. After all, once members see the favorable arrangement that this woman has received, what’s to stop others from wanting similar treatment? The church could be inundated with such requests, and by rejecting all or most of them you will be perceived as showing inappropriate favoritism to the one member who is granted permission to use church property. This could result in a negative backlash.
  6. The takeaway point is that church leaders should not allow a member to use church property for commercial purposes without a careful consideration of the legal, tax, and risk management implications, including those mentioned in this response. When in doubt, legal counsel should be retained.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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