Matt Morris
This question raises many of the big issues that nonprofit attorneys work on. You definitely should talk to a local nonprofit lawyer because there are LOTS of issues lurking here.
Issue 1: Are you sure you should be a nonprofit? One thing that a lawyer for nonprofits will probably do here is ask a series of hard questions about whether it makes sense for you to become a nonprofit. There are benefits to moving into the world of nonprofits (potential tax exemption being one of them) but there are also costs, hurdles, and drawbacks.
Issue 2: You already spotted the second issue, which is the second floor lease income. If that income were to pass into the hands of the nonprofit, the IRS might consider it to be “unrelated business income” which would be taxed. (I say “might” because it’s not clear to me who is leasing the second floor from you. Is it residential space? Commercial? Artists?) And there is an exception from the unrelated business income for lease income, but not if the property is debt-financed. And, finally, if your unrelated business income is too high, the tax-exempt status of the nonprofit could be in jeopardy.
Issue 3: You raise the issue of potentially needing a business license for the second floor lease. You might. Is it residential space? Industrial? Check with the city depending on what activities are going on there.
Issue 4: Part of the discussion you have with a lawyer should include the difference between a public charity and a private foundation. Some of the rules for staying legal are different depending on which of those you are
Issue 5: Leasing the equipment is one such issue. If the nonprofit falls into the category of a private foundation, your question about leasing the equipment to the nonprofit is almost certainly something called “self-dealing.” That would be a problem regardless of how much you charge. But even if you are a public charity, you’ll want to be sure that the amount you charge for the equipment is reasonable, or you run the risk that those payments are considered an “excess benefit transaction” and “private inurement” to you.
So… (1) think carefully before going nonprofit, (2) you should probably separate the second floor income from the nonprofit income, (3) be careful leasing the equipment (if you create a public charity) and do not lease or sell the equipment (if you create a private foundation.)