Unconventional Investments 8518-02 ZZmis

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                    TO: Interested Ministries                                                                                                        FROM: Jim Bramer, Retired CPA-Auditor
                                                                                                                                                                         FILE: 8518-02/mis

                     RE: Unconventional Investments                                                                                       UPTD: May 04, 2008

          Below is a hypothetical Online Email thread (THRD) between Jim@bcidot.org and one of the these Ministry MFTeam members: PAT (Ministry Executive), LEE (Ministry Volunteer Treasurer), and FRAN (Ministry Computer Bookkeeper).  Click here and go to List of threads (THRDs) at www.bcidot.org

From: Pat -

        Hi, Jim.   In addition to my recent phone call to you, I want to to dialog with you in this manner as to the unconventional investments that we are involved with here at our Mission Agency; appreciate your help?

From: Jim@bcidot.org

                    Sure .... please state in this format what you mean when you say unconventional ?

From: Pat --

        OK, as we discussed on the phone, here is the story.   Via the auspices of a governmental agency (I can be more specific here if you prefer), we have been buying a piece of property, fixing it up and then selling it for a good return on the investment (ROI) of our money and time. Some of the issues we talked about include:

>> The possible need to change our corporate by-laws to meet the governmental agency's requests -- this agency prefers to make such investment opportunities available to tax exempt organizations like ours.
>> The possible implications of what you CPAs and the IRS call "Unrelated Business Income" that is subject to Federal and State Income taxation.
>> The prospect of this investment endeavor being incorrectly viewed as a Fund Raising endeavor. Or some of the costs be included within the GAAP required annual Fund Raising costs, etc.

From: Jim

               You are right, Pat   ..... this is not the conventional investment in such things as insured Savings accounts or even direct investments in Stock/Bonds or indirectly via Mutual Funds, etc. Click here for some more Investments thoughts.
                  It is even a little different than most investments in property. As I understand it, your effort is to obtain such an asset, fix it up so that you can dispose of it ASAP at a good price. Sometimes there are economic reasons for you to even pay off the original mortgage.

From: Pat --

        That is correct. These investments are being made now in a very good real estate market, so it is well worth the use of our resources to be involved like this. But what about the above issues?

From: Jim

                From my perspective, based on what you have indicated, it is imperative that this effort have an "Investment" flavor, thrust, or emphasis. The only reason for you to get involved is to use the Ministry's resources to prudently make an investment that will result in a good yield for the benefit of your tax exempt Ministry. This includes not only available money, but applicable staffer time and energy, plus other Ministry overhead.

From: Pat --

        I say amen to your statement, Jim, but we need to cope with these named issues.

From: Jim:

        Based on this Investment premise, Let me share .......

        >>   As to the possible change to your corporate by-laws: No way do you change your major "reason for Ministry purpose declarations"   to accommodate this effort. But you may need to fine tune the "Investment" portion of your by-laws to be a little more specific as to this type, etc. For example, your by-laws might include some reference to it being OK to have a relationship with this government agency for this investment purpose and other stated criteria, etc. You will want to limit the Ministry's liability; no tangible property of the Ministry is to be collateral for any of these endeavors, etc. Plus, you will want to have adequate insurance coverage to handle any potential claims related to any of this, etc.

        >> "Unrelated Business Income" should not be an issue because, again, you are appropriately involved in making an investment and not engaging in some type of business that is contrary to your exempt purpose. Of course, like any investment endeavor, if it consumes all of your overhead resources and virtually replaces your reason for existence, then you have a problem. But I see none of this from any of our discussions.

        >> The costs of making an investment has nothing to do with operating costs ...... one of which is to righteously incur operating costs (Fund Raising) to solicit donations. Let's suppose the following fact pattern: You go out and make such a investment; you spend $4,450 for down payment and related costs plus $4,987 on property improvements and related mortgage payment interest. This investment is sold and you end up with $11,344 after all of the closing costs, etc.. The gain of $1,907 ($11,344, less $4,450 and $4.987) appears within your annual report as "Gain on Sale of Investments" within the other Income Area, etc. It is in no way connected to reflecting Functional Operational costs as required by GAAP.   Let's suppose that that above fact pattern changes in that you pay off the original mortgage of $45,333 so you do not have to make any mortgage payments during the time of this project. This means that instead of the above $4,987 costs, you had only $3,187; or your net gain would be increased by $1,800 (the difference between $4,987 and $3,187). Seemingly, another good investment decision.

From: Pat --

        OK, Jim, I see where you are coming from on all this and what you have shared should help us a great deal as we proceed with these endeavors. Thank you.

    This Publication originated in July 2002 and was UPTD: May 04, 2008

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