For nonprofits that derive substantial support from fundraising, offering different types of naming rights can be a strong enticement to donors. That being said, throughout the process of negotiating and conferring specific naming opportunities, an organization should focus simultaneously on short-term and long-term implications—with respect to both the particular donor in question and the organization's broader fundraising activities. Often, carefully crafted agreement provisions can help avoid confusion and potential conflict; at best, they ensure that the organization honors the donor's wishes while maintaining appropriate flexibility to solicit comparably meaningful gifts in the future. Consider the following best practices when structuring naming rights provisions in gift agreements:
1. Establish a Naming Rights Policy
While not required as a matter of law, nonprofits that grant naming rights to donors should consider adopting an organizational policy designed to ensure consistent guidelines and practices pertaining to naming opportunities. Such provisions could be incorporated into a broader gift acceptance policy, or they could comprise an independent organizational document. By establishing uniform rules and practices pertaining to naming rights, the policy can help safeguard important donor relationships while also limiting certain areas of negotiation surrounding a particular gift. A thorough naming rights policy should outline organizational practices pertaining to important naming rights considerations, such as:
- The process for formalizing naming agreements;
- The process and criteria for name proposal, change, and approval;
- The timing for selecting and announcing a name, including if a name may go into effect at the time of a pledge or only after a gift is paid in full;
- The types of gifts that may carry naming rights, and the minimum amount required for specific naming gifts;
- Permissible methods for appropriate, consistent, and equitable donor recognition based on the type and amount of the gift;
- Duration of naming rights; and
- Circumstances when a naming right can be revoked, such as unfulfilled pledges, possible reputational harm, or material changes.
Ultimately, the key material terms of any particular naming rights agreement should be memorialized in the gift agreement entered into by and between the organization and donor. However, the uniform policies may help set the parameters for negotiating those terms, and the policies themselves can be incorporated into a gift agreement as an attachment.
2. Specifically Describe the Naming and Promotional Expectations
A naming rights agreement should describe in detail how the name will be publicly displayed or utilized. For physical displays, such as the way a name will appear on a building façade or in a common area, the agreement should incorporate a visual rendering. If the gift agreement leaves certain items, such as font styles and sizes, open to future decisions, memorialize in writing how the parties will determine those details. In addition, the nonprofit should consider all applicable zoning and safety regulations before agreeing to matters related to the size, type, and location of signage.
To the extent that the agreement provides future consent rights to the donor over the name's display, an organization may wish to stipulate some time limitations for necessary approvals and that the donor will not unreasonably withhold consent. Some donors may also wish to ensure that their naming rights retain a certain prominence even if other donors secure other naming privileges. To the extent that the agreement addresses these issues, the nonprofit may be able to sidestep future conflicts or disappointments with its most important and established supporters.
Of course, donors may convey varying preferences regarding public recognition and ceremonies. Particularly for donors that expect the nonprofit to "roll out the red carpet" in publicly announcing the named item, the gift agreement should memorialize the parties' understanding as to any ceremonies, events, or other gatherings to celebrate and honor the donors. Likewise, the agreement should address the manner in which the parties will otherwise publicize the gift and the naming rights, particularly in those scenarios that implicate the overall "branding" of an organization or program. In many instances, the organization may expect to generate further gifts and prominence within the community by promoting its relationship or affiliation with a particular donor, and therefore the organization should take care to secure the donor's consent to the necessary publicity rights.
3. Avoid Granting Perpetual or Indefinite Rights
While donors may attempt to negotiate for a naming right in perpetuity, nonprofits should carefully consider whether to agree to such terms.
Nonprofits have taken different approaches to defining the duration of naming rights. Some may stipulate a set number of years that the naming rights will remain in place, while providing the donor with a right of first refusal or extension upon completion of the initial term. Others have defined the duration by generations, rather than years. Still others have not defined a set duration, but instead included a clause where the naming right continues if the donor's family contributes a certain percentage to the maintenance of the named item in the future. Defining the term based on the depreciable life of the named item is another possibility.
By avoiding an outright grant of perpetual rights, an organization retains some flexibility to account for future economic needs and, potentially, to secure future significant gifts. No matter the path, reserving flexibility will help maximize the value of the gift and possible future naming rights. That being said, an organization and donor can always choose to modify a previously agreed-upon arrangement based on future developments, and any such agreed-upon changes should be memorialized in a written agreement signed by both parties.
4. Retain Termination Rights
Removing a donor's name, or distancing the organization from a donor, may prove uncomfortable and confrontational. Therefore, a naming rights agreement should clearly establish the circumstances in which naming rights may be rescinded. For example, every naming rights agreement should include a morals clause, defining particular circumstances that would be embarrassing or harmful to the organization's reputation and values. Similarly, donors may wish to ensure that they are affiliated with people and groups that align with their values, and to that end the donors may retain the ability to rescind their naming right for various reasons. For these reasons, the morals clause of a naming rights agreement may be reciprocal.
Similarly, years after a naming rights agreement is signed, a named item can cease to exist, no longer be useful, or have an impractical condition. Some organizations may choose to transfer the name to a new item, with permission of the donor; others may assert that the naming right expires. A gift agreement may also specify successors to the donor, such as family members or other representatives, who can exercise the necessary consent rights in the event that the donor is deceased or otherwise unable to consent.
To minimize the likelihood of requests for a repayment of the donation in the event of early termination, an agreement should include a term that specifies the effects and remedies for both parties, including a provision for graduated damage amounts relative to the length of time for which an item was named. Again, the parties can always separately negotiate particular details at a future date, but a carefully structured agreement may prove helpful in managing expectations and addressing situations before they arise.
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Naming rights can aid a nonprofit in securing important gifts from major donors, while also providing donors and their families with prominent recognition and honor. Moreover, unlike certain other types of "tangible" return benefits that a nonprofit might confer on a donor, the tax law does not treat naming rights as "goods or services" that reduce the amount of a donor's tax-deductible gift. For all of the reasons described above, the parties to a naming rights agreement should carefully consider the terms and conditions to which they agree.