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Preserving Major Assets for Future Generations
Just as many camps are celebrating their 100th anniversaries with growing equity in real estate and capital fund/endowment accounts, our industry is also facing the consequences of a legal system spun out of control. With nearly 70,000 lawsuits filed every day in American courts, juries are awarding judgments for amounts that were unheard of a decade ago. These unprecedented awards often are based on legal theories that were also unheard of even a decade ago. These, in turn, are forcing many business owners into costly out-of court-settlements just to avoid the cost of defending a lawsuit. And, of course, all of this ripples through the insurance industry by straining premiums, types of coverage, and the level of insurance coverage.
As is the case throughout commercial America, the camp industry has begun to direct its attention to these timely questions:
- How can we preserve our precious asset base for use by future generations of campers?
- What can be done to protect our critical capital funds, endowment/trust funds, and equity in our real estate assets from this litigation onslaught?
Many camps, both for-profit and nonprofit, are serving second, third, and fourth generation campers. With fond memories of their own youthful camp experiences, parents and grandparents are beginning to donate funds for capital improvements, camper scholarships, and other "charitable" purposes. With these financial gifts comes the expectation that the money will be used wisely and for the intended purposes. The size and weight of large donations opens a wide range of accounting, legal, and tax issues for the unprepared. (The receipt of a $1 billion gift to the Salvation Army from the McDonald's heir, Mrs. Ray Kroc, caused significant internal issues, for example.)
There are a host of threats to our major assets:
- Mismanaged investments
- Money spent on projects not intended by the donor (e.g., you can't spend money on capital improvements that was donated for camper scholarships)
- A verdict or settlement that either exceeds insurance policy limits or involves a claim that is not covered by the insurance.
In today's camp environment, millions of dollars can be raised in capital campaigns or endowment/trust funds. These funds create "deep pockets" that require protection so that they may be put to use in the manner that the contributors expected. Increasing real estate values have also created significant equity in many camps. So, how can camp administrators protect these funds and make the most of them?
Many camps miss an important opportunity to help protect their campuses from unjust or excessive legal judgments before they buy land or build their facilities, resulting in the loss of those properties. But you can help your building committee avoid repeating this fundamental mistake — one that could plague your camp for years to come — with six important steps.
Build your professional team now.
Every camp building committee should include both a seasoned real estate attorney and certified public accountant (CPA) experienced in dealing with Internal Revenue Service laws governing nonprofit and for-profit corporations. These advisors can help your committee avoid tax traps involving the use of mortgages. In addition, by properly positioning the ownership of the land separate and apart from the company that operates the camp, an important safeguard can be built into the most basic legal structure of your camp.
If such qualified professionals are not available within your camp board to serve on a volunteer basis, consider retaining paid advisors. Contact your state bar association to obtain a list of certified real estate specialists.
If your camp does not have a regularly retained attorney, consider taking this important step now. (It is unnecessary to pay the attorney monthly. The important point is to establish a relationship with legal counsel and to include him or her at least in your annual meetings for loss prevention purposes.)
Consider using two (or more) companies.
Many large commercial corporations do not own the land and buildings in which they operate. By placing ownership of the land in a separate company that is legally separated from the operating company, you can build an important legal shield to protect the equity in the land and buildings from claims that arise from the operating company's activities. How?
- Company A (the "land-holding company") will acquire the title to the land.
- Company B (the "operating camp") will hire employees, operate the camp, and conduct all activities that involve interfacing with the public.
Consider using a ground lease.
In this situation, the operating camp obtains the legal right to use the property by signing a long-term ground lease with the land-holding company equal to the amount necessary to maintain the premises. (Be sure to consult with your CPA on this part of the ground lease.) Your attorney will draft this important document. Consider recording a Memorandum of Lease in your local recorder's office to give the public notice of this arrangement.
Consider using deed restrictions.
Another important safeguard to ensure that the camp will be available for future generations of campers (and not taken by some excessive plaintiff's judgment and converted to condominiums!) is the use of deed restrictions.
A deed restriction is created by inserting restrictive language into the deed by which the land-holding company acquires title. These restrictions allow continued use for camping but prohibit ownership and operation of the premises for other, non-related purposes.
Consult your attorney prior to writing these deed restrictions. Be sure to allow sufficient latitude for operation of items such as the camp bookstore, incidental food service, and other nonprofit and for-profit uses incidental to the mission of the camp. Check these deed restrictions with your potential or permanent construction lender.
Consider filing a deed of trust before you build.
If your camp does not require a loan to acquire the property or to construct the improvements, you have a large amount of equity in the property to protect. In this case, it is still worthwhile to establish a line of credit with a third-party or institutional lender. Be sure this loan is secured by a mortgage on the property. It is not necessary to draw against the credit line. The recording date on the deed of trust will be important in protecting the campus from attack by third-party creditors.
Placing this lien on the property well ahead of any claims strengthens the argument to protect the campus from creditors. Consult with your local attorney for details on implementing this process.
Review your insurance coverage now.
Have a planning meeting with your attorney, CPA, and insurance advisor to conduct a comprehensive review of your coverage. Be sure to check the terms of your primary liability policy, and inquire whether an umbrella policy can be obtained to add low-cost, additional protection. These days, minimum coverage for a camp is $5 million. I recommend acquiring at least twice as much insurance protection as equity in the property. (If the equity in your property is $1 million, for example, you should have at least $2 million in liability coverage.)
In an increasingly litigious society, many camp leaders have concluded that good stewardship demands intergenerational protection be a part of the planning process for new camp facilities.
In a future article, we will consider the details of establishing an independent entity. Follow specific legal and accounting rules about (i) how closely affiliated the foundation or trust is to your camp; (ii) salaries of fund managers; and (iii) a host of other legal issues about which an attorney, familiar with the establishment of trust funds or foundations, can advise. There are groups such as the American Foundation Organization (www.americanfoundation.org) that can help with this planning, or you could get an accountant and an attorney with experience establishing foundations and trust funds. Since the IRS applications for tax exempt entities are more than twenty-five pages long and tax laws change every year, you really want to use experts to assist with this process.
Originally published in the 2005 Fall issue of The CampLine.