Business/Investment people: help me structure this

[Ns1]

Well, yeah. But it wasn't an 'academic' question. My point was that you lose control over who your partners are. They may turn out to be adversarial. You want the lawyer of some angry ex-wife who got shares in a divorce harassing you to jack the rent on the NP so she can get some cash flow? (Rhetorical question).

The point of the investors owning a max of 49% is so that the NP can be insulated from all of that and just have the land-owning corporation send the investors their pro-rata share of profits every year.

in other words, ISO: Passive investors looking to support a non-profit

Why "immediately'? Why not make the notes for ten or twenty years? If the investors accept, make it interest only for 10 or 20 yrs. You may be able to pay out those investors after some years. Take out a bank loan and pay them off.

A good point, although wouldn't this be an even less enticing investment opportunity vs the equity model, from an investor standpoint?

That said, if you look at the verbiage in the OP, I am inferring that the NP may have to get loans to buy the 51%, and what you propose is in line with what I was thinking to make that side of the equation happen.

 

[Fern]

The point of the investors owning a max of 49% is so that the NP can be insulated from all of that and just have the land-owning corporation send the investors their pro-rata share of profits every year.

in other words, ISO: Passive investors looking to support a non-profit



A good point, although wouldn't this be an even less enticing investment opportunity vs the equity model, from an investor standpoint?

That said, if you look at the verbiage in the OP, I am inferring that the NP may have to get loans to buy the 51%, and what you propose is in line with what I was thinking to make that side of the equation happen.

I see two things mixed together:

1. Acquiring r/e property for the NP, and
2. Creating a r/e rental investment.

#2 doesn't fit well with #1. #2 wants the highest possible rents to maximize the ROI. #1 wants the lowest possible rent.
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From the investor standpoint debt may be better than equity. Debt may have a lower ceiling for profit, but it has a much higher floor for losses. I.e., with debt the investors' equity is much safer.

Example. The building costs $100k (just keeping the math easy). 10 yrs down the road the building must be sold for some reason. It sells for only $80k. If I, as a 'debt' partner, put up the $49k I get all my capital back plus interest income. I have no loss. If I put up $49k as an equity partner I get only $39k. That's a loss of $10k (and no interest income).
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The NP having 51% does not mean it can't be challenged in court by another angry owner/partner. If the NP owns 100% it can't.

 

[Ns1]

I see two things mixed together:

1. Acquiring r/e property for the NP, and
2. Creating a r/e rental investment.

#2 doesn't fit well with #1. #2 wants the highest possible rents to maximize the ROI. #1 wants the lowest possible rent.

Yes, you are absolutely correct, and that's the challenge of this thread. Really though, the objective is #1, and #2 is just a means to get to #1.

The NP having 51% does not mean it can't be challenged in court by another angry owner/partner.

Can you elaborate on what they would legally be able to challenge from their minority position? And while we'd offer 49%, I can't see any single person or entity getting more than 10% of that 49%...

We have similar non-RE deals at my current job, and the only thing these minority investors can do is audit the books (and even those rights are defined by contract).

 

[Carson Dyle]

My wife and I run a non-profit. We have been given an offer to buy the property our facility is currently on. We ("we" meaning the non-profit") do not currently have the money to do so.

And what about "we" meaning you and your wife?

All this talk about loans, trusts, investors... Cripes, can't you get some inlaws to lend you the down payment like so many other couples do when buying their first home?

 

[Ns1]

All this talk about loans, trusts, investors... Cripes, can't you get some inlaws to lend you the down payment like so many other couples do when buying their first home?

No, because the point of this NP is that it should be able to live and survive on it's own with support from the community. I'm not really interested in turning this into a personal money pit/passion project disguised as a 501c3; I want to take the NP to the next level.

 

[Carson Dyle]

No, because the point of this NP is that it should be able to live and survive on it's own with support from the community. I'm not really interested in turning this into a personal money pit/passion project disguised as a 501c3; I want to take the NP to the next level.

Not really sure what that means. Buying property doesn't have to become either a money pit or a passion project.

Sounds like a lot of intermixed finances and gray areas when this property will also be your primary residence. Gonna be some creative accounting going on there, in an case. You're making the whole thing a lot more complicated than need be. Buy the property yourselves, if at all possible, then rent it back to the non-profit. Ultimately, it will have _zero_ bearing on whether or not the non-profit is viable on its own.

 

[Ns1]

Sounds like a lot of intermixed finances and gray areas when this property will also be your primary residence

An understandable concern, but this is a fairly common business structure for kennels that are not called "City of XX Animal Shelter".

Buy the property yourselves, if at all possible, then rent it back to the non-profit.

This is a big legal no-no which is why we're having this discussion. The only way to put my own personal money into it and buy the property would be to donate cash to the non-profit and then have the non-profit buy; that would have it's own set of issues, such as max % of donations from a single source.

 

[Carson Dyle]

This is a big legal no-no which is why we're having this discussion. The only way to put my own personal money into it and buy the property would be to donate cash to the non-profit and then have the non-profit buy; that would have it's own set of issues, such as max % of donations from a single source.

You probably know better than I, but why is that not allowed if it's done at fair market rates? Buying the place and renting it back at 3x the old rent would be shady, but at the existing rate? You wouldn't be personally profiting any more than any other owner of the property would.

 

[Ns1]

You probably know better than I, but why is that not allowed if it's done at fair market rates? Buying the place and renting it back at 3x the old rent would be shady, but at the existing rate? You wouldn't be personally profiting any more than any other owner of the property would.

the IRS says this about the matter:

No part of an organization’s net earnings may inure to the benefit of an insider. An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director, or a key employee. This means that an organization is prohibited from allowing its income or assets to accrue to insiders. An example of prohibited inurement would include payment of unreasonable compensation to an insider. Any amount of inurement may be grounds for loss of tax-exempt status

I can certainly see the argument that owning property and then renting out said property to a non-profit I control would be considered "to the benefit of an insider".

 

[Carson Dyle]

Can we pay salaries to our board members? Can we rent a building owned by a board member, or purchase equipment from a board member?

Tax law always permits the payment of reasonable compensation for goods or services actually rendered. If the IRS finds that amounts received by insiders are unreasonably high, however, they can fine both the insider who received the payment, and the board members who approved the payment. In extreme cases, they can take away the organization’s tax exempt status.

It is a good idea, therefore, to fully document the board’s decision-making process when any kind of payment will be made to an insider. Place copies of all relevant information (salary surveys, job description, resumes, salary history, real estate appraisals, rent “comparables”) in the minutes, and never let a board member vote on his or her own compensation, or on the compensation of anyone related to him or her.

http://www.nonprofitlegalcenter.com/faq/nonprofit-faq/

 

[Ns1]

I'll be sure to reference that site when I get audited by the IRS.



Thanks for the link though, I'll do some more reading. Still, the objective is this:

No, because the point of this NP is that it should be able to live and survive on it's own with support from the community. I'm not really interested in turning this into a personal money pit/passion project disguised as a 501c3

I would rather pay for 10% of the shares of the corporation owning the property vs owning the property outright and then leasing it back to the NP.

 

[Carson Dyle]

I think that instead of figuring out how you're going to structure things this specific way or that specific way and getting advice from random know-nothings (like myself) it would more than pay to consult with an attorney to find out what you can and cannot do (note that I didn't say "what you can get away with"). The key, as I see it, is to not pay anyone involved _unreasonable_ compensation. Same as you can't get away with paying yourself $300,000 a year to run a two-person operation, or pay your nephew $150 an hour to walk dogs.

I would rather pay for 10% of the shares of the corporation owning the property vs owning the property outright and then leasing it back to the NP.

I don't understand why that would be, unless you just don't want to own the home in which you live. Or that particular one.

 

[Ns1]

Yes the plan is to talk to an attorney. But first I'm talking to you guys for free to brainstorm and get these thoughts and questions flushed out before I talk to an attorney who will charge by the hour.