Event:2015/11/16 Fundraising

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Talking with Jesse Palmer November 16, 2015 3pm

jesse talks

  • always a doomsday scenario if you pour money down, have liability but have no equity in the building
  • if you're gonna go with broccoli, i don't think you can avoid this basic structure. he's not the only person who can lend you money...
  • ask what happens to that million. Maybe he'll say "yeah I don't really recognize that as mine", so maybe sign some document saying if it doesn't work out, that money will come back to us
    • or maybe we loan the million - no interest
    • donor needs some protection
  • you know this place can generate money, but can it generate as much as you need?
  • 5% is a lot. rick would say this. difference between 4 & 5 is a lot. that's what a bank would get
  • proposal says it could go UP from 5%
    • laura: matt said he seemed flexible on that
  • if we do a longer term lease ... 99 years is the longest possible. more than 35 years it's seen as a property transfer subject to prop 13. but we're hoping to get welfare exemption
    • a 501c3 can get welfare exemption. as long as everyone renting is exempt, that portion of the property's square footage is exempt.
    • county inspects you
    • how much does it cost to get this? not much. maybe broccoli had an expensive lawyer
  • how to avoid long term contracts or debt?
    • technically the LLC is a subsidiary of another nonprofit
    • lease would say rent amount
    • 'if we give you this amount, you'd reduce this' - drop the expenses other than taxes / insurance / admin
    • not the whole million at once, but if give x amount that would knock x% off what we owe to the llc
    • need to insist on incrementally paying down the principle at any time
    • insist on no penalty for pre-payment
      • there's no "prepayment" though? if we pay more each month than our minimum to pay off what we owe
  • his nonprofit could own the building and do whatever they want. don't like that. fine if that's your only option besides renting from john ... but you have another 1.5 years of your option
  • other option is the million donation could be a loan to broccoli's llc, interest-free, no payments so long as omni is there.
  • matt: so if we lost the building...
    • jesse: idea is donor loans the $1M
    • matt: attack vectors that incentivize people to take advantage ... is also how he thinks. he'll respond to that better than abstract or vague needs to act quickly
    • would the loan be tax-exempt?
      • yes, either through broccoli's 501c3 or omni's pending 501c3, not through the llc though
      • "you can get the tax write-off in the future when the loan is forgiven"
  • dk: what about a bank loan with the $1M as down payment, with building as collaterol?
    • depends if you could even get the loan and at what rate. for 5% or less would be a better deal. they may say, 'well, you have collaterall but your income stream is not ideal'
    • if broccoli can go down to 3%, less reason to go to a bank
  • incentivizing bank to steal property?
    • several sudoroom members are afraid of this
  • use BACLT as conduit for donation?
    • earmarked for "whatever omni does next?"
    • scoped to "an anticapitalist project"?
      • jesse: hard to define anticapitalist in legal documents...
      • yar: absolutely indefensible in court lol
  • neither broccolli nor the bank have an objective for you to not pay rent. broccolli doesn't want it and foreclosure is expensive
    • bank only gets back the loan value due + attorneys fees
  • yar: does seem better. llc collects a maintenance fund on top of a minimum $4K rent/monthly.
  • laura: he put in $70K/yr on building costs and we've paid far more than that this year.
  • yar: broccoli's proposal includes $50K/yr capitol + $70K/yr business costs
  • jesse: other option is to borrow from someone else who doesn't require this structure. if you can get a loan that would be a decently good option - go with broccoli's if you can't get the loan.
  • jesse likes the idea of just an internet millionaire out there who can write the check, even at 4-5%, that'd be a better deal
  • matt: he thinks he's doing us a favor. somethings about cost he's blind to. BACLT is a better cultural investment. he's skeptical of topheaviness of a CLT. he sees his model as simpler, sleeker.
  • jesse: sounds like there's cost for iceberg but it's invisibilized. who's paying that? not you which is great, but do some research. doesn't happen for free. i'm on BACLT board, you can do it just as well with it than without it though... true that if something goes wrong within omni you wouldn't have somebody to bug you, but that just means you need to put more energy into maintaining your own org.
  • nothing in ground lease talks about maintaining a radical grassroots anticapitalist thing. you can't do that. intangible. rick won't be alive in 99 years...
  • jesse: land trust thing was under the premise that the lender wanted to see that - internal preference is for things that are simpler and have less moving parts... vs land trust model of 2 nonprofits collaborating. some value to it, but its more meetings and you have plenty of those already. lot of hands in the pot already. land trust is better for more residential projects, your interest is long-term sustainability not immediate gain/cost cuts.
  • matt: we talked about splitting the capital between two orgs. and building real stakeholdership. between the orgs.
    • really ask yourselves who comes after rick. it's not just "some other org"
  • laura: LLC board would be omni people, broccoli... what control does iceberg has? are teh board decisions contingent on what iceberg wants?
    • jesse: i love LLCs, they were invented the year i got out of law school. you used to have coroproations with a board... an LLC is where you combine limited liability of corp with operating structure of a partnership. by definition, when LLC is owned by one member there's not usually a board of directors. one owner with ultimate say. he could write up operating agreement saying there's a board of directors or whatever, but from my POV if someone owns 100% of an LLC they have the final say. difficult for them to veto themselves, or have the board do what they don't want it to do. not much wiggle room here either. they have the lease... what could they say or do? "we decided not to enforce lease this month"? i think broccoli has something in mind but to me it's smoke & mirrors, mystery & magic. i'd focus on the lease, that's the most enforceable thing. only thing LLC could help you do is maybe waive enforcement of provisions of the lease. that'd fly a little bit maybe but ultimately not.
    • rob: could he dissolve the LLC?
    • jesse: if you own it yeah you could dissolve it
    • rob: what'd that mean to us? what if he starts liquidating assets?
    • jesse: say you have a commercial lease, and your landlord goes out of business ... lease still binding
      • The LLC is nice because it's insulation. If there's something that goes wrong, remember that train wreck in canada -- there was a railroad that went bankrupt via the liabilities. Imagine a tragedy at omni -- this ridiculous liability might take out the property, but because it was own by an LLC, it wouldn't take out the properties or assests of the mother nON-PROFIT. I think if you have an enforcable lease, on a longer term, this would be better than any LLC operating agreement, etc.
      • I think we could arrange this properly w/ Brocolli or whoever.
    • David: Because BACLT has a track record w/ banks, if they were involved in procuring it, would it be easier to get than if we brought a portfolio to a bank?
      • jesse: I doubt it. Rick is getting loans for his affordable housing projects, but in each case it's a separate nonprofit that's getting the loan. they're looking at the assets - property value, income streams etc; so my guess is no. the one time when the banks might give a bit more is if the land trust has assets they're willing to pledge in addition. but rick doesn't want to do that.
    • matt: for the mother org, we could say 'this doesn't seem really to our advantage, that someone(s) in your org could pull this out from under us'. what if we ask, 'can we have a director or two on the board of your nonprofit?'
      • Jesse: not having a majority on the board won't help you much. you could say, 'we think we should have the option to purchase if we pay off the other million dollars' you could have an option to purchase it for the full amount. broccoli would probably go for it.
      • yar: he said 'if this nonprofit structure seems other or alien to you then just don't do it' - you basically said this sounds like smoke and mirrors
        • jesse: the million is not smoke and mirors. would be straightforward to loan it but he doesn't want to do that for various reasons. could write in that so long as you don't pay it back, that's fine, but if you pay it back, you own it' - you want both options taken care of.
    • Jesse: "I didn't say ludicrous" ;)
      • yar: we could sell that option to somebody else
        • jesse: yes, that'd basically be like...? - not just not paying interest if you pay it off, but the right to purchase
    • matt: from my perspective he's the king saying 'you can enter my fiefdom and have my protection'. don't think he's going to have a lot of incentives to screw us over, but i think he's incredibly naive. it's the cost of being part of his fiefdom. is that useful, or not?
      • yar: he needs to learn that people can exist his kingdom.
        • jesse: he said he hated debt. way to incentivize this in the long-term.
    • matt: two things i bring to EFF that i mandate is 1) you can't be in debt, and 2) can't enter into long-term contracts as that's equivalent.
      • jesse: that's a potential risk as you have an incentive to ___ the llc as long as you can make it, [lost it]
  • yar: the ownership thing was the first thing i said after his pitch and he was very resistant
    • matt: he wants to build a whole nonprofit ownership sector for the future, like his housing project
    • jesse: omni is a nonprofit, so whether his or yours owns it it's protected either way. like the idea of exploring to see if you could do financing. he could say he'd drop the interest but then i'd own it in perpetuity... may be the most economically advantageous way to go, but key might be to say 'we really want a 99 year lease'
    • yar: we need to convince him his whole strategy is fragile. wanting one entity to own everything?
    • jesse: current proposal doesn't address ownership once $ is paid off. proposal as written is a much shorter-term lease. leaves it open to abuse from their side. he might offer a seat on the board but that's not enough security either. if you owned it, you wouldn't be vulnerable to future whims of the llc. see if there's a way to just own it, compare loan offers.
  • laura: tried to look up info about iceberg and couldn't find it
    • jesse: might have a strong founder but if they go away the org collapses. don't want your building to be part of that collapse. having an org that has representation and is not insular is ultimately more stable. he's comparing you to the land trust but i'm saying your own structure may be robust and that's fine.
  • matt: he's saying right now, 'if you want the million dollars you need to go with my nonprofit'
    • jesse: could be better, if you can't afford to make payments on the principal, pay on the interest forever.
  • matt: he's saying if we don't want the million he would still make a sizeable donation. so maybe we can balance with other offers. so other coin is we could get a donation that could immediately go into our operating fund.
    • robb: so several lenders, what if we went shopping..
      • jesse: if you take the property, sell it .... several lenders --> several deeds of trust. in general w/ a commercial lender you'd get one for the first deed of trust but less likely on the following. you already have a million $ donation, so i'd advise against getting many small loans - more complexity than you want to deal with. security laws issues - don't want to put out 'everybody lend us $100' - that's illegal
        • laure: good to know
    • jesse: possible you could get a relatively small group to put up the money, that's an option. seller-financing is also quite common, if you were really up against the wall you could ask 'john will you finance us for 3 years for say, $450K' - something small enough you might be making him an offer he can't refuse.
  • DK: Seller-refinancing was taken off the table over the lease negotiations. He’s trying to buy a house right now.
  • Marcus: Any way to give him a sense that this is his project, even if he’s not controlling it?
  • Matt: We can agree on an eventuality where if we fail at least something good happens in the world.
  • Robb: Seems obvious we would turn the commons into a library or something.
  • Daniel: No incentive? He’s in SF and Richmond, but not Oakland.
  • Jesse: He sees the million as a donation in a sense, as it may never be repaid (sunk cost).
  • Jesse: It allows you to get the property from John and that’s good. The worst thing that could happen is that it’s in the hands of some nonprofit. As long as you’re able to pay your rent and have a long-term lease, then you’re good. Ownership is a bundle of rights - the right to use the building is the most important right. It’s slightly better to just own it vs a 99-year lease. We don’t know whether anybody will be using this building in 99 years.
  • Matt: I see him trying to be creative but he’s not a lawyer so he’s bumbling over stuff. Incredibly insecure and feels super guilty that he’s wasting our time. Had to convince him that he’s not wasting our time. His character / reputation matters a lot to his business.
  • DK: One thing that was brought up was the possibility if things worked out that we might be able to leverage the equity of Omni for other things eg housing. Wouldn’t it be great if we could buy a squat using the equity of the building? Would this deal prevent us from doing that?
    • Jesse: Not with a 99-year lease, but on the flip side you might be in a situation where you make the million and just spend it on the affordable housing. Your nonprofit could have 1 99-year lease and also purchase another property. Might be better just to set up a separate thing. I’ve thought of this also, should’ve done this 10 years ago… a much bigger version of Hellarity.
      • Matt: Broccoli has been structurally opposed to leveraging the equity of this building at all. I hope that no one can use that vector.
  • Laura: Do we want to draft this or let Jesse do it?
    • Matt: Draft it and ask you to review. Two teams: Broccoli option & alt funders
      • Jesse: Could begin talking to banks now
        • DK: Mortgage brokers can also talk on your behalf.
          • Jesse: Slightly different cuz it’s not a residential property. Rick could give you some names. Call him immediately and ask for his suggestions / list of potential contacts.
  • Matt: Coop Credit Union?
    • Jesse: They’re not allowed to make commercial loans right now.
  • Jesse: Can also talk to Tracy Parent at the SF CLT, she would have some contacts.
  • Jesse: Could get it done Wednesday, but you should change it as you need to

Structure of response to Broccoli:

  • Intro that thanks him and makes general remarks
  • We need more info about this
  • We’d like to propose this
    • Give grounds for each point - we’re concerned about the future, there should be a cap

talking points

  • 5% interest rate is too high
  • interest will be adjusted as the market adapts -- why have this adjustability?
  • no penalty for pre-payment
  • can we repay part of it and get the rent proportionally readjusted?
  • make it a forgiveable loan or something, so if omni goes down that would potentially revert to the donor at least for a period
    • Some kind of provision about the donation -- either making it a forgivable loan or something, so if omni goes down then that would potentially revert to the donor -- or other party -- at least for a period, or that his organization has to use it in some way that jives with the donor.
  • option to purchase for $1 once we've paid off the debt
    • what happens if you repay it all? an option to purchase in the lease -- for $1? Not really sure if this would be considered an "option" -- just need to give the deed to the omni.
  • Proposal as-is opens up to abuse on his side of the coin, with his organization (non-profit).


paths forward

  • 1. counter proposal
  • 2. see if you can borrow $1 mil secured by the $2 mil property as a nonprofit. Rick has relationships w/ local banks that work w/ nonprofits and can advise.