EP LANNING B USINESS P LANNING INCOME TAX P LANNING C … hale- program rela… · Casey S. Hale is...

ESTATE PLANNINGBUSINESS PLANNING

INCOME TAX PLANNINGCHARITABLE SECTOR

MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS

B SBROWN & STREZA LLP40 Pacifica

15th FloorIrvine CA 92618Irvine, CA 92618

949.453.2900www.brownandstreza.com



MERGERS & ACQUISITIONSQ

Protecting your treasure for good, because life is more than wealth!

Brown & Streza LLP is a law firm providing exceptional integrated legal services in the areas of tax estate businessBrown & Streza LLP is a law firm providing exceptional, integrated legal services in the areas of tax, estate, business,and charitable planning. We serve families, businesses, entrepreneurs, philanthropists, and charitable organizations.We provide caring service, deep expertise, innovative solutions, and a stable, professional, and well respected staffwhile embracing and communicating that life is more than wealth.

We serve the individual needs of our clients staff and advisory community by investingWe serve the individual needs of our clients, staff, and advisory community by investingin education and long-term relationships based upon loyalty and integrity.

Business Planning Charitable Sector Estate Planning Mergers & AcquisitionsIncome Tax Planning

We offer a full suite of services to help plan your business, from the strategic

process of forming a

• Exempt Organizations• Planned Giving• Private Foundations• Religious

Organizations

Are you making the right choices for your estate?

• Estate Planning

We can help you develop and implement

comprehensive strategic plans to

Our Mergers & Acquisitions department represents

entrepreneurs andcompany to the

transfer• Social Enterprise

g• Estate

Administration

strategic plans to minimize overall tax

liability and maximize retained wealth

entrepreneurs and business owners in their quest to sell or acquire a company



MERGERS & ACQUISITIONSQ

CASEY HALEE-MAIL: [email protected]

PRACTICE AREA: Exempt Organization

Casey S Hale is a member of Brown & Streza’s exempt organization department He advises charities on theirCasey S. Hale is a member of Brown & Streza s exempt organization department. He advises charities on theirgeneral tax and corporate legal issues; guides private and family foundations through complex Internal RevenueService and state regulations; and serves as general counsel to numerous nonprofit corporations. Hisrepresentation includes counsel regarding property tax, employment, intellectual property, internationalgrantmaking and operations, structuring subsidiaries and joint ventures. Casey routinely advises charityexecutives and boards of directors on executive compensation/intermediate sanctions and corporate governanceexecutives and boards of directors on executive compensation/intermediate sanctions and corporate governancematters. Casey recently established the first L3C under Wyoming law.

In 2009 - 2012, Casey was named a “Southern California Super Lawyers-Rising Star” by Los Angeles Magazine –a distinction recognizing just 2.5% of attorneys under age 40 for excellence in the practice of law.

Casey is actively involved with several charities. He serves on the board of Enlace USA. Enlace USA equips localchurches in El Salvador to become leaders in their communities and to collaborate with the local community tobuild enduring solutions to poverty. He also served on the Saddleback Valley YMCA’s board of managers.

Casey received his undergraduate degree from Vanguard University and attended Whittier Law School on a meritscholarship where he earned a Juris Doctoratescholarship where he earned a Juris Doctorate.

Program Related Investments:Program Related Investments: Unlocking Private Foundation G t th t B fit B th YGrants that Benefit Both Your

Charity and the Private FoundationPresented to:

Western Regional Planned Giving Conference

May 28, 2015

Presented by:Presented by:

Casey Hale Attorney

Brown & Streza LLPBrown & Streza LLP

IntroductionIntroduction

WelcomeWelcome

© Brown & Streza LLP 4

PRIs AgendaPRIs--Agenda

• D fi iti• Definition - What are Program Related Investments (PRIs)

• Applications - The value of PRIs for the private foundation

• Concerns - Tax issues and other concerns that might arise


PRIsPRIs





DefinitionDefinition

L l F kLegal FrameworkIRC § 4944(a) – Jeopardizing Investments • Prohibition on investments that jeopardize a

foundation’s exempt purposes

• Ordinary care and prudence in providing for long-term and short-term financial needs

• PRIs are exempt



Legal Frame orkLegal FrameworkIRC § 4944(c): PRI Exemption - 3 Requirements:• Primary purpose must further foundation’s exempt

purposes

• Production of income or appreciation of property must not be primary purpose

• No electioneering or lobbying activities



Legal Frame orkLegal FrameworkIRC § 4942 – 5% annual distribution requirement • PRIs are normally qualifying distributions



T pes of In estmentsTypes of Investments• Loan Guarantees

• Loans

• Equity Investments


PRIsPRIs





Application Loan GuaranteeApplication--Loan Guarantee

Case St d #1 Loan G aranteeCase Study #1 – Loan Guarantee• 501(c)(3) organization providing child care services

in low-income neighborhoodin low income neighborhood

• Facility is at capacity with a long waiting list

• Cannot obtain a loan from conventional sources due to lack of sufficient credit

F d i i i h• Foundation enters into a guarantee agreement with bank and a reimbursement agreement with the child care organization


g

Application LoanApplication--Loan

Case St d #2 Loan ith belo market rateCase Study #2 – Loan with below market rate of return • Business located in rural area that employs large• Business located in rural area that employs large

number of poor persons suffers after a natural disaster damages the area and harms the business

• Business has insufficient funds to continue operations and can’t obtain other financing

• Private foundation makes loan with below-market interest rate



Case St d #3 Loan to LLCCase Study #3 – Loan to LLC • LLC purchases coffee from poor farmers in a

developing country directly or through co-opsdeveloping country, directly or through co-ops

• To fund LLC’s agribusiness education component, PF makes a below market rate loan to the LLCPF makes a below-market-rate loan to the LLC

• Without the loan, the LLC cannot provide the agribusiness training to the farmersagribusiness training to the farmers


Application HybridApplication--Hybrid

Case St d #4 Loan ith Eq it KickerCase Study #4 – Loan with Equity Kicker • New solid waste recycling business in developing

country; will combat environmental deteriorationcountry; will combat environmental deterioration

• Has only been able to raise a portion of the necessary initial capitalnecessary initial capital

• Makes loan on commercial terms in exchange for stock will sell stock when business shows it isstock, will sell stock when business shows it is profitable or cannot be profitable



Case St d #5 Loan to non 501(c)(3)Case Study #5 – Loan to non-501(c)(3)• 501(c)(4) organization that conducts art exhibits

needs to purchase a large exhibition space toneeds to purchase a large exhibition space to accommodate demand

• Conventional funding sources are unwilling/unable• Conventional funding sources are unwilling/unable to provide funds on economically feasible terms

• Private foundation makes loan with below market• Private foundation makes loan with below-market interest rate


Application EquityApplication--Equity

Case St d #6 P rchase of Common StockCase Study #6 – Purchase of Common Stock • Small business enterprise in a deteriorated urban

area owned by members of an economicallyarea owned by members of an economically disadvantaged minority group

• No access to conventional funds on economicallyNo access to conventional funds on economically feasible terms

• Private foundation buys common stock to encouragePrivate foundation buys common stock to encourage economic development; foundation may realize a profit and stock may appreciate


Application EquityApplication--Equity

Case St d #7 P rchase of Common StockCase Study #7 – Purchase of Common Stock with Potential High Rate of Return• New solid waste recycling business in developing• New solid waste recycling business in developing

country; will combat environmental deterioration

• Has only been able to raise a portion of theHas only been able to raise a portion of the necessary initial capital

• PF invests on same terms as initial investors; highPF invests on same terms as initial investors; high risk but potential for high return


ApplicationsApplications

Locating and identif ing PRI opport nitiesLocating and identifying PRI opportunities• Root Capital example

• Capital Campaigns

• Social Enterprises



The ProcessThe Process• Due Diligence

• Documentation

• Managing the Process



The ProcessThe Process• Repayment/Return on Investment

YearFoundation

Assets Under Management

Market Growth

Rate

Foundation AUM

Year End

Gift orGrant 100%

PRI Allocation

0%

Community Impact

1 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

2 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

3 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

4 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

$ $ $ $ $5 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

6 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

7 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

8 $ 5 000 000 5 00% $ 5 250 000 $ 250 000 $ $ 250 000


8 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

9 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000

10 $ 5,000,000 5.00% $ 5,250,000 $ 250,000 $ - $ 250,000



F d ti M k t F d ti Gift PRIYear

Foundation Assets Under Management

Market Growth

Rate

Foundation AUM

Year End

Gift or Grant90%

PRI Allocation

10%

Community Impact

1 $ 5,000,000 5.00% $ 5,250,000 $ 225,000 $ 25,000 $ 250,000

2 $ 5,000,000 5.00% $ 5,250,000 $ 225,000 $ 25,000 $ 250,000

3 $ 5,000,000 5.00% $ 5,250,000 $ 225,000 $ 25,000 $ 250,000

4 $ 5,000,000 5.00% $ 5,250,000 $ 237,500 $ 37,500 $ 275,000

$ $ $ $ $5 $ 5,000,000 5.00% $ 5,250,000 $ 237,500 $ 37,500 $ 275,000

6 $ 5,000,000 5.00% $ 5,250,000 $ 237,500 $ 37,500 $ 275,000

7 $ 5,000,000 5.00% $ 5,250,000 $ 243,750 $ 43,750 $ 287,500

8 $ 5 000 000 5 00% $ 5 250 000 $ 243 750 $ 43 750 $ 287 500


8 $ 5,000,000 5.00% $ 5,250,000 $ 243,750 $ 43,750 $ 287,500

9 $ 5,000,000 5.00% $ 5,250,000 $ 243,750 $ 43,750 $ 287,500

10 $ 5,000,000 5.00% $ 5,250,000 $ 246,875 $ 46,875 $ 293,750



YearFoundation

Assets Under Management

Market Growth

Rate

Foundation AUM

Year End

Repaymentof PRI

Re-Allocationof PRI 50%

Gift or Grant 90%

PRI Allocation

10%

Community Impact

1 $ 5,000,000 5.00% $ 5,250,000 $ - $ 225,000 $ 25,000 $ 250,000

2 $ 5,000,000 5.00% $ 5,250,000 $ - $ 225,000 $ 25,000 $ 250,000

3 $ 5,000,000 5.00% $ 5,250,000 $ - $ 225,000 $ 25,000 $ 250,000

4 $ 5,000,000 5.00% $ 5,250,000 $ 25,000 $ 12,500 $ 237,500 $ 37,500 $ 275,000

$ $ $ $ $ $ $5 $ 5,000,000 5.00% $ 5,250,000 $ 25,000 $ 12,500 $ 237,500 $ 37,500 $ 275,000

6 $ 5,000,000 5.00% $ 5,250,000 $ 25,000 $ 12,500 $ 237,500 $ 37,500 $ 275,000

7 $ 5,000,000 5.00% $ 5,250,000 $ 37,500 $ 18,750 $ 243,750 $ 43,750 $ 287,500

8 $ 5 000 000 5 00% $ 5 250 000 $ 37 500 $ 18 750 $ 243 750 $ 43 750 $ 287 500


8 $ 5,000,000 5.00% $ 5,250,000 $ 37,500 $ 18,750 $ 243,750 $ 43,750 $ 287,500

9 $ 5,000,000 5.00% $ 5,250,000 $ 37,500 $ 18,750 $ 243,750 $ 43,750 $ 287,500

10 $ 5,000,000 5.00% $ 5,250,000 $ 43,750 $ 21,875 $ 246,875 $ 46,875 $ 293,750



R All ti Gift PRIYear

Foundation Assets Under Management

Market Growth

Rate

Foundation AUM

Year End

Repayment of PRI

Re-Allocation of PRI

Gift or Grant

PRI Allocation Community

Impact 50% 75% 25%

1 $ 5,000,000 5.00% $ 5,250,000 $ - $ 187,500 $ 62,500 $ 250,000

2 $ 5,000,000 5.00% $ 5,250,000 $ - $ 187,500 $ 62,500 $ 250,000

3 $ 5,000,000 5.00% $ 5,250,000 $ - $ 187,500 $ 62,500 $ 250,000

4 $ 5,000,000 5.00% $ 5,250,000 $ 62,500 $ 31,250 $ 218,750 $ 93,750 $ 312,500

$ $ $ $ $ $ $5 $ 5,000,000 5.00% $ 5,250,000 $ 62,500 $ 31,250 $ 218,750 $ 93,750 $ 312,500

6 $ 5,000,000 5.00% $ 5,250,000 $ 62,500 $ 31,250 $ 218,750 $ 93,750 $ 312,500

7 $ 5,000,000 5.00% $ 5,250,000 $ 93,750 $ 46,875 $ 234,375 $ 109,375 $ 343,750

8 $ 5 000 000 5 00% $ 5 250 000 $ 93 750 $ 46 875 $ 234 375 $ 109 375 $ 343 750


8 $ 5,000,000 5.00% $ 5,250,000 $ 93,750 $ 46,875 $ 234,375 $ 109,375 $ 343,750

9 $ 5,000,000 5.00% $ 5,250,000 $ 93,750 $ 46,875 $ 234,375 $ 109,375 $ 343,750

10 $ 5,000,000 5.00% $ 5,250,000 $ 109,375 $ 54,688 $ 242,188 $ 117,188 $ 359,375

Leveraging the Power of Foundations – 2013

Key Findings• Less than 1% made PRIs each year but• Less than 1% made PRIs each year but

interest is growing significantly.• Increasing:• Increasing:

• Total PRI dollar amount• Total number of PRIs granted • Total number of PRI providers



Key FindingsTraditional PRI funding areas (> 70%):Traditional PRI funding areas (> 70%):

• Housing• Community Developmenty p• Education

But funding areas expanding to:• Environment• Health• Arts and Culture


• Arts and Culture


Key Findings• Types of Financial Instruments:• Types of Financial Instruments:

• Most Common: Loans/Promissory Notes• Increase in use of:

• Other debt, such as loan guarantees and loan funds

• Equity• Equity



Key Findings• Small and medium foundations made over half• Small and medium foundations made over half

of all PRIs• Independent and family foundation were the• Independent and family foundation were the

most active PRI providers• About 76% of PRIs were under $1MAbout 76% of PRIs were under $1M



Key Findings – Motivations• Develop stronger recipient organizations by• Develop stronger recipient organizations by

building organizational capacity • Weathering the economic downturn• Weathering the economic downturn• Improving legal environment



Key Findings – Challenges• Lack of knowledge and information• Lack of knowledge and information• Lack of expertise in PRI management• Potential transaction costs• Lack of opportunities


PRIsPRIs

• Definition - What are Program Related Investments (PRIs)


• Concerns T i d th th t i ht i• Concerns - Tax issues and other concerns that might arise


ConcernsConcerns

IRC § 4940IRC § 4940 • Annual 2% tax on net investment income

A li i i l i• Applies to interest, capital gains, etc.


ConcernsConcerns

Unrelated B siness Income TaUnrelated Business Income Tax• Income from a trade or business regularly carried

on that is not substantially related to theon that is not substantially related to the foundation’s exempt purposes

• Subject to regular corporate tax ratesSubject to regular corporate tax rates


ConcernsConcerns

IRC § 4941 Prohibition on Self DealingIRC § 4941 – Prohibition on Self-Dealing• Financial transactions between private foundations

and disqualified personsand disqualified persons

• A disqualified person is any substantial contributor to the foundation foundation manager their familyto the foundation, foundation manager, their family members, and entities controlled by them

• Beware of side by side investments that give• Beware of side-by-side investments that give access or reduced investment costs to a disqualified person


ConcernsConcerns

IRC § 4942 5% ann al distrib tion req irementIRC § 4942 – 5% annual distribution requirement • PRIs are normally qualifying distributions

• Requires appropriate planning both for when investments are made and repaid

R t d l l ti i i di t ib ti• Recapture and calculating minimum distribution requirements


ConcernsConcerns

IRC § 4943 E cess B siness HoldingsIRC § 4943 – Excess Business Holdings • PRIs not taken into account when calculating excess

business holdingsbusiness holdings


ConcernsConcerns

IRC §§ 4942 & 4945 Administrati e E pensesIRC §§ 4942 & 4945 – Administrative Expenses • Administrative expenses connected to PRIs are

considered direct charitable expendituresconsidered direct charitable expenditures


ConcernsConcerns

IRC § 4945 E pendit re ResponsibilitIRC § 4945 – Expenditure Responsibility• A PRI to a non-501(c)(3) organization requires

the foundation to exercise responsibilitythe foundation to exercise responsibility• Due diligence plus reporting requirements

• Pre PRI inquiry• Pre-PRI inquiry• Written PRI agreement• PRI-recipient reportingPRI recipient reporting• Foundation reporting to IRS on 990-PF• Strict compliance/documentation


SummarySummary

• Definition• Definition –• “the primary purpose is to accomplish one or more

(charitable ) purposes;” and• No significant purpose...is the production of income or

the appreciation of property”

• Applications L t l d it• Applications – Loan guarantees, loans, and equity investments. Alternatives that can provide growing community impact.

• Concerns - Tax issues, self dealing, business practices, expenditures. Must maintain philanthropic integrity.


ConclusionConclusion

Q estions?Questions?


Next StepsNext Steps

Please complete evaluation form and turn in

For more information contactCasey Hale at 949.453.2900 orCasey Hale at 949.453.2900 or

[email protected]

Thank you for your time!



MERGERS & ACQUISITIONSMERGERS & ACQUISITIONS

B SBROWN & STREZA LLP40 Pacifica

15th FloorIrvine CA 92618Irvine, CA 92618

949.453.2900www.brownandstreza.com

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