Nonprofit director's compensation raises questions

Developer BFC Partners' decision to team up with Local Development Corp. of Crown Heights may complicate the very problems it was meant to resolve

By: Joe Anuta

WHAT'S IN STORE? BFC's plans look good on paper, but locals question how they'll work out.

The executive director of a Brooklyn nonprofit dedicated to providing affordable housing, social services and youth programs has personally received a percentage of profits from past development deals, an arrangement in his contract that charity watchdogs call a red flag.

That is one of several unusual financial details Crain's found in the operating statements of the Local Development Corp. of Crown Heights. The nonprofit, considered a trusted resource in the African-American community in Crown Heights, was brought on by developer BFC Partners earlier this month to help overcome local opposition to a proposed mixed-income apartment and recreation complex on city-owned land.

The revelations alarmed experts in nonprofit administration, who said the payouts to Executive Director Caple Spence cast doubts about the organization's management.

"This is not normal," said Ken Berger, the former chief executive of Charity Navigator, the largest nonprofit evaluator in the country, after reviewing the organization's Form 990 financial disclosures from 2015.

The nonprofit's involvement in the city-led effort to redevelop the Bedford-Union Armory in Crown Heights raises questions about why it was selected by BFC Partners and how it will help manage a half-million-dollar fund that is part of the project.

Opening doors

For-profit developers often partner with charities to win over community members who are skeptical of a project's promise of social and economic benefits. When developments undergo public scrutiny, nonprofit partners can deflect criticism because making money is not their primary goal. They also often bring specialized skills and sometimes allow projects to qualify for subsidies that would not otherwise be available to for-profit enterprises.

In late 2015 a team including BFC and Brooklyn nonprofit CAMBA won a competitive bid to transform the city-owned armory with a proposal to build market-rate condos and rentals around it. The developments would help pay for new affordable housing, a low-fee sports and recreation facility, and community and office space. CAMBA, which specializes in housing, economic development and education programs, is set to run the day-to-day operations at the rec center and provide discounted or free activities to nearby residents.

But despite that partnership, community members continue to oppose BFC's $195 million plan. They said the entire project should be dedicated to affordable housing. In September New York Knicks star Carmelo Anthony pulled his support, and another early partner, Slate Property Group, dropped out amid controversy surrounding an unrelated nursing home sale on the Lower East Side.

In reaction to increasingly vocal opponents, BFC principal Donald Capoccia announced in early March that BFC was bringing in the Local Development Corp. of Crown Heights, which has deep roots in the community. The group planned to hold meetings, reassure residents that the development was in their best interest, seek out minority- and women-owned businesses to participate and explain why the market-rate units in the project are vital to its success. In addition, the nonprofit would manage a fund seeded with $500,000 from BFC—and potentially boosted by future revenue from the project—that is designed to build additional affordable housing elsewhere in the working-class but gentrifying neighborhood.

'Rare' arrangement

Spence's employment contract, as detailed in his 2015 state filing, was structured to give him a cut of the nonprofit's development deals, allowing him to take a 10% share of profits the charity earned and 20% of what the nonprofit received from developer fees—money the city or state pays developers for working on affordable-housing projects. It was unclear whether the development corporation and BFC would get developer fees for the Bedford-Union project and if the revenues would be divided between them. The charity is involved only with the condo portion of the project, according to the city. Regardless, Spence's compensation arrangement is rare in the nonprofit world, experts said.

Nonprofit executives' compensation is generally a fixed amount. That ensures they are not pursing deals for personal gain, according to Nonprofit Compensation, Benefits and Employment Law, a book by David Samuels and Howard Pianko. And unlike for-profit businesses, nonprofits are required to reinvest any leftover money in the organization. When compensation is based on profit percentages, pay can fluctuate year to year, meaning that in some years extra money might flow to executives, just like at a for-profit business. Berger said such fluctuations could draw the eye of state and federal regulators, who can seek to recover payments they deem improper.

The Local Development Corp. of Crown Heights' 2015 filings stipulate that this arrangement boosted Spence's total compensation to a maximum of $312,000 in a given year, which one lawyer Crain's spoke with said makes the arrangement more palatable. But Berger still found it troubling. "The fact that the questionable number has a cap on it doesn't make it any less questionable," Berger said.

And Spence has pulled in quite a bit more than that amount in the past.

Compensation package

In 2014 the nonprofit reported about $752,000 in revenue, mostly in fees from affordable-housing buildings it manages. Yet Spence took home around $1.15 million in total compensation that year, including base pay, bonuses and about $956,000 in retirement and other benefits. The payouts resulted in an operating loss at the charity of more than $1 million.

A lawyer for the group said 2014's compensation was an anomaly that likely stemmed from a split-dollar life insurance policy that was transferred to Spence in lieu of other retirement benefits. Split-dollar policies, which are paid in part or full by an employer,are sometimes used as incentives for high-ranking nonprofit employees. And premiums, which the charity will get back after the policy is paid out by the insurer, can be put down in one year instead of the cost being spread out over several. But the incentive is more often used by larger organizations, according to Gregg Hirsch, an attorney specializing in insurance products at Mound Cotton Wollan & Greengrass. The football coach at the University of Michigan, for example, has a split-dollar life insurance policy.

Even excluding 2014, however, Spence's average compensation was about $318,000 between 2007, the first year he's listed as executive director in the organization's publicly available filings, and 2015, the year when the salary cap is detailed. Executive pay can vary across organizations depending on the work and how prized the person's skills are, but experts noted that Spence's compensation seemed high relative to the size of the nonprofit. In 2015, for instance, the head of a Bronx affordable-housing nonprofit of similar scale made less than half of Spence's average compensation. Even executives at much larger affordable-housing firms, such as the Fifth Avenue Committee and the St. Nicks Alliance, made no more than three-quarters of Spence's compensation.

"I would say this salary falls into the range of screwiness," said Odell Mays, an adjunct lecturer at the Columbia University School of Professional Studies, who reviewed the organization's annual 990 filings for 2007 to 2015 for Crain's. "There is a lot of stuff in here that is ripe for being questioned."

If a charity or executive does exceptionally well, he said, high compensation can be justified. But the Crown Heights nonprofit might have a hard time proving it is far outperforming its peers. In 2007, Spence's first year as executive director, he completed the organization's first ground-up development, a 173-unit senior residence in east Flatbush. The project pushed the corporation past $100 million in total construction spending for the first time.

"This award-winning project moved [the organization] beyond its humble beginnings as a redeveloper of old walk-up tenement buildings to a full-fledged developer of modern mid-rise apartments for its community," the group wrote on its website.

Three years later Spence completed a 143-unit senior residence in Crown Heights. In total he has brought in millions in revenue for the nonprofit, his lawyer said, noting that the executive's compensation package was drafted with the help of an outside specialist. Spence has continued to run several education and senior centers.

But Spence has not completed a major project since 2010. And under his leadership, the charity ran an operating loss for seven of the nine years between the beginning of 2007 and the end of 2015.

Plans to open a charter school, which videos on the nonprofit's website show Spence discussing as far back as 2013, never came to fruition. The costs involved made the idea unworkable, the organization said.

Nevertheless, Spence continued to receive perks that are unusual for small nonprofits. A 2013 filing showed he took out a personal loan of $166,000 from the nonprofit at 5% interest. Although charities sometimes make personal loans to employees, they are typically amounts akin to a paycheck advance, Mays said. At the very least, the board would typically require a written agreement for a loan of that size, yet it was issued without one, according to the state filings. Spence's lawyer said the corporation has largely been paid back.

Potential missteps over executive compensation are often avoided in the tax- exempt world by having a board of directors with a wide range of professional experience who can push back on anything they deem improper. To get Charity Navigator's stamp of approval under Berger's leadership, boards had to consist of at least five people, he said. The Local Development Corp. of Crown Heights has just three. Two of them are also listed as executives of the First Baptist Church of Crown Heights, the religious organization founded by the late Rev. Clarence Norman Sr. The house of worship is the institution from which the charity gets its neighborhood clout.

Strong connections

Norman, who was a highly influential figure in the Crown Heights community, started the local development corporation in 1987 to further the mission of his church. After his death in 2015, a local street was named after him and his wife. The organization has retained its connections in the neighborhood and currently manages about 670 units of affordable housing. "We have been looking out for the community for more than 30 years," Spence told Crain's at the announcement of his group's participation in the project. "We have worked with several government agencies, state and city," he added, "and we have a close working relationship with the elected officials." He has since referred all questions to the organization's lawyer, who would speak only on background.

Clarence Norman Jr., son of the late pastor, was a powerful Democratic Party boss in Brooklyn until he was convicted on campaign finance charges and sentenced to several years in prison. Spence said in a recent news report that Norman Jr. acts as a consultant to the local development corporation. He even listed himself as a contact for the organization during a meeting the city hosted for nonprofits interested in a community land trust. But according to reports, he is not working on the armory project.

BFC Partners said it picked the nonprofit because it was seeking to join forces with an organization with "deep community roots."

"After more than a year of community engagement, there was consensus among Crown Heights stakeholders that [it] would be the most appropriate local, nonprofit partner for the Bedford-Union Armory project," BFC said in a statement. "The ... team's deep community roots and our comprehensive approach to this project will ensure that the armory is a success for all Crown Heights families."

Correction: Caple Spence said in a recent news report that Clarence Norman Jr. acts as a consultant to the Local Development Corp. of Crown Heights.The attribution was misstated in an earlier version of this article.

A version of this article appears in the March 13, 2017, print issue of Crain's New York Business as "A curious partnership".

http://www.crainsnewyork.com/

Now Available: New NYCON Fiscal Tools

New NYCON Fiscal Tools
Now Available: Budget and Cashflow Toolkits

Just in time for next year’s budget and cash flow planning, NYCON has developed a new benefit for our member that will truly be the “best friend” of every fiscal person who uses it. Designed with the needs and resources of the smaller to medium sized nonprofit in mind, NYCON’s Chief Fiscal Officer and staff have designed a “fool proof” tool for developing a streamlined, compliant and easy to understand budget.

The features of the Budget Toolkit include:

1. Built in instructions on “Getting Started” and “How to Develop Your Budget” 

2. Built in formulas and linked spreadsheets

3. Definitions & Glossary on types of budgets, frequently used budgeting terms & more

4. Templates that your organization can utilize to customize for your own organization’s budget and salary and fringe expenditures.

5. And more!

COST:

Budget & Cash Flow Toolkit Combo
Members:                    $299.00
Non-Members:              $399.00
*Any nonprofit attending this webinar (our first for this very important tool!) will receive a 25% discount off of the prices above.

Cash Flow Toolkit
Members:                     $29.99
Non-Members:              $59.99
*Any nonprofit attending this webinar (our first for this very important tool!) will receive a 25% discount off of the prices above

Link to a recording of a recent webinar on these fiscal tools

Paperwork problems jeopardize nonprofit status of several Broome organizations

Like hundreds of other area nonprofits, Union Volunteer Emergency Squad was in jeopardy of losing its nonprofit status.

The reason? Failing to file paperwork with the Internal Revenue Service.

"I honestly don't know why it wasn't sent in," said UVES Executive Director Matthew Fellows.

UVES is joined by hundreds of nonprofits in the Southern Tier who were flagged by the IRS as organizations that haven't filed their 990 forms -- paperwork required for nonprofits -- by an Oct. 15 deadline, meaning they could lose their nonprofit
status.

If that happens, the agencies could be required to pay taxes -- and perhaps more significantly, donors would find their generosity was no longer tax deductible.

The 990 forms verify to the IRS that the nonprofits are still in operation.

In 2008, the IRS established a new form -- the 990 -- to be filed annually by nonprofits. For those with an income of less than $25,000, the form was a 990N, said Kevin Stadelmaier, legal advisor for the New York Council of Nonprofits Inc.'s Buffalo office.

Over the decades, as groups were added to the IRS's nonprofit database, there was no mechanism to remove those that were no longer active. The 990N was established as a device to recognize which small nonprofits were still operating and which had
ceased to exist.

"The real reason why the law was enacted was to kind of cull out these nonprofits ... that were no longer conducting tax-exempt activities," Stadelmaier said.

For smaller organizations -- those with incomes of less than $25,000 -- filing with the IRS isn't a typical function, which is why they might have missed the new requirement, Stadelmaier said.

"They didn't realize they were required," he said. "They might have gone years and years without filing anything."

At UVES, the error was noticed recently, Fellows said. Actually, it was the IRS that noticed. Since then, the organization sent in its missing 990 forms.

"We had some internal issues that we self-reported," Fellows said. "Everything has already been sent in."


Each year, UVES has an independent audit performed by its accounting firm. The audits showed the bills were paid and the forms were filled out, but no red
flags went up about the missing 990s because UVES paid to have them completed and assumed they had been filed properly, said Fellows, who has been with UVES for the past year.

When contacted by the IRS, the first thought was the federal agency was at fault.

"We thought it was an error at first," Fellows said.

UVES is not alone. The Broome County Sheriffs Benevolent Association, Boys & Girls of Western Broome Foundation Inc., New York State Electric & Gas Foundation Inc., several American Legion posts from Bainbridge to Owego, various union branches and a host of other organizations and associations failed to file by the Oct. 15 deadline, according to the IRS.

Contacting nonprofits on the list was nearly impossible for this newspaper. Telephone calls were not returned, while others couldn't be contacted because they didn't have listed phone numbers and had only Post Office box addresses. Some of the
nonprofits on the IRS list include:
* Maine-Endwell Booster Club Inc.
* Endicott Rotary Foundation Inc.
* International Association of Fire Fighters in Johnson City
* Tioga County Industrial Development Corp.
* Vestal Lions Club
* Broome County Sheriff's Foundation
* Vestal Youth Football League Inc.
* Dress for Success - Binghamton
* City Rescue Mission Inc. in Binghamton

Also on the list is Binghamton Crime Stoppers, which is a participating member of Crime Stoppers International. The organization had invalid e-mail addresses on its web site regarding fundraising, publicity and general information. An e-mail and
telephone message sent to the website's administrator was not answered.

Crime Stoppers, which offers rewards to help solve area crimes and works alongside area police departments, failed to file with the IRS for the past three years, meaning the do-good organization might not be able to stay in operation as a nonprofit.

Not being able to contact nonprofits, some of which have addresses filed decades ago with the IRS, is another reason why some missed the deadline to file, said Kelly Mathews, chief operating officer and senior vice president of financial, accountability and compliant services with New York Council of
Nonprofits Inc.

"Getting the word out to a lot of those very small organizations -- it was probably difficult to find some of them," she said.

Though the IRS and groups like NYCON had extensive educational promotions regarding the new procedures, many smaller nonprofits, including those no longer in existence, weren't kept in the loop, Mathews said.

"I think a lot of organization, particularly the smaller guys, weren't aware of the filing requirements," she said. "Historically, there was nothing for those little
guys to report with." Read more here.

Forum Recap featuring NYS Comptroller and Panel on Strategic Alliances & Partnerships

The blog, Done by People, by Joe Brown, Principal and Founder of Slope Resources, LLC, offered the following recap of the "A Conversation with NYS Comptroller Thomas P. Di Napoli and Panel Discussion on Strategic Alliances & Partnerships."

On Monday, I had the opportunity to attend a highly informative and engaging forum which brought together government and nonprofit representatives to discuss the topic of strategic alliances and partnerships among nonprofit organizations. While the discussion focused on New York State’s nonprofit sector, the challenges, considerations, and ideas discussed are applicable to organizations nationwide. In the absence of a video or audio recording of the session, I wanted to share this detailed recap and my impressions of the session.

The event was sponsored by the Community Foundation for the Greater Capital Region and the New York Council of Nonprofits (NYCON) and held at the headquarters of New York State United Teachers (very nice digs, by the way) in Latham, New York, a few miles northeast of Albany.

Karen Bilowith, President and CEO of the Community Foundation for the Greater Capital Region, presided over the session. The approximately 75 attendees included representatives of various nonprofits, including arts, cultural, health, and human services organizations, as well as a number of funders and consultants (including yours truly). Following Ms. Bilowith’s welcoming comments, New York Secretary of State Lorraine Cortés-Vázquez provided brief opening remarks. Ms. Cortés-Vázquez assured the attendees that “most in government” recognize the importance of the nonprofit sector and rules and regulations pertaining to the sector should not be so onerous as to provide disincentives for staff, board members, and volunteers to participate.

I’m from the government, and…
Ms. Cortés-Vázquez then introduced the session’s keynote speaker, New York State Comptroller Thomas P. DiNapoli. The Office of the State Comptroller has responsibility for the review, approval, and payment of the state’s contracts with nonprofit organizations. Mr. DiNapoli noted the importance of the nonprofit sector to the state and its economy, citing 2006 statistics that the state’s approximately 24,000 nonprofits reported revenue of $133 billion and employed nearly 1.2 million people, or 17% of the state’s workforce. He quantified the state’s contractual bonds with the sector as consisting of nearly 31,000 active contracts totaling $14.6 billion, as of June 2009. Read more here.

The balance of the session was devoted to presentations and discussion by a panel consisting of:
■Doug Sauer, who has served as Chief Executive Officer of New York Council of Nonprofits (NYCON) since 1980. NYCON’s membership represents approximately 1,600 charitable nonprofit organizations across New York State.
■Cristine Cioffi, who is a partner in the law firm of Cioffi • Slezak • Wildgrube P.C., but spoke primarily in her role as Chair of the Board of Trustees of Ellis Medicine, an organization which resulted from the recent merger of three nonprofit hospitals in Schenectady County.
■David W. Palmquist, who as Manager of the New York State Museum’s Chartering Program, oversees the chartering of museums, historical societies, and similar cultural organizations with educational purposes across the state.
The panelists responded to questions posed by Ms. Bilowith, as well as several questions from audience members.

Doug Sauer
While all three of the panelists presented interesting perspectives on the potential of various collaborative models for nonprofit organizations, I was particularly impressed by Mr. Sauer’s insight and candor on a number of fronts. Early in his presentation, he discussed the recent proliferation of nonprofits, describing the creation of thousands of new organizations each year, many of which are not active, and the resultant saturated environment. (I was reminded of a recent article in the Chronicle of Philanthropy, which noted that the number of nonprofit organizations nationwide has increased by 90% to 1.2 million since 1996). Read more here.

One-Fourth of Nonprofits Are to Lose Tax Breaks

The NY Times reported that As many as 400,000 nonprofit organizations are weeks away from a doomsday.

At midnight on May 15, an estimated one-fifth to one-quarter of some 1.6 million charities, trade associations and membership groups will lose their tax exemptions, thanks to a provision buried in a 2006 federal bill aimed at pension reform.

“It’s going to be an unholy mess once these organizations realize what’s happened to them,” said Diana Aviv, president of the Independent Sector, a nonprofit trade group.

The federal legislation passed in 2006 required all nonprofits to file tax forms the following year. Previously, only organizations with revenues of $25,000 or more — or the vast majority of nonprofit groups — had to file.

The new law, embedded in the 393 pages of the Pension Protection Act of 2006, also directed the Internal Revenue Service to revoke the tax exemptions of groups that failed to file for three consecutive years. Three years have passed, and thus the deadline looms.

Read more here.

Governance Mistakes to Keep in Mind

The Charity Lawyer blog has a great post about governance mistakes, which has been mentioned by the Chronicle of Philanthropy, the Nonprofit Quarterly, and numerous others. The list was also expanded by San Francisco tax-exempt organizations lawyer and publisher of the Nonprofit Law Blog, Gene Takagi.Here is excerpt. We would encourage you to view the entire list and details here.

1. Failing to Understand Fiduciary Duties. When you volunteer to serve as a director or officer of a non-profit, you accept the responsibility to act with the duties of good faith, due care and loyalty. You also accept the potential liability for failing to fulfill those duties. Increased scrutiny from the I.R.S., Congress, state attorneys general, the Department of Justice, donors and the media require vigilance at every step. It is no longer sufficient to rubber stamp committee or staff recommendations or to simply “abstain” from dicey decisions. Today, board service comes with real responsibilities and real consequences for those that fail to live up to them.
Read about the next two points and more.
2. Failing to Provide Effective Oversight.
3. Deference to the Executive Committee, Board Chair or the Organization’s Founder.

New York Council of Nonprofits Announces New Publication

Standards for Common Sense: A Practical Guide to Basic Accountability Standards for New York Nonprofits, published by NYCON, was supported by Council Services Plus and the Dyson Foundation. This booklet, available to download for free here, is a practical guide for the average nonprofit seeking a reasonable understanding of what accountability standards are, who is promoting them, what related state laws say, and how to think about the choices presented. NYCON has selected eight of the most basic issues involving governance structure and practice, i.e. board size, board compensation, conflict of interest policies, board member independence, term limits, frequency of meetings, audit requirements and the creation of audit committees. The booklet outlines each issue, compares and discusses the standards set by laws or regulations and five different standards setting bodies - the Better Business Bureau Wise Giving Alliance, the Standards for Excellence Institute, the Panel on the Nonprofit Sector, the Evangelical Council for Financial Accountability and the Minnesota Council of Nonprofits.

In this 2nd Edition, NYCON has also added a section on Standards of Financial Accountability. This section explores guidelines for percentage of expenditures on program and fundraising activities along with the level of net assets relative to annual spending. Download your copy now.