Don F. Harris

“No, Really! Now may be the time to start that Charitable Organization!”

In Law on March 14, 2013 at 6:00 am

If you have ever seriously thought about starting a charitable organization, now might be the time.  And simply put, it might be a lot easier than you think.  I advise my clients to engage in a three-step process; Planning, Forming, and Launching.   I will be sharing these insights and more at the upcoming Community Legal Series offered by my law firm in Sacramento, CA at the Guild Theater from 4-6 pm on March 20, 2013. Click here for the flyer.    Although the seminar will cover a broad spectrum of topics related to charitable organizations, below are highlights of some of the things that I will personally talk about.  In addition, the CFICS Innovation Fund will be around to talk about how you can get money to get started and webconnex will be there to show you how to raise money online and through social media.  All this, and discounted coffee from Old Soul Cafe!  Too good to be true?  Don’t be “Swayed.”

Planning

You should first make sure that forming a charitable organization is what you should do.  You should only plan to form a charitable organization if the principal activities of that organization are in fact going to be “charitable.”  For a discussion regarding this see  “Free Lunch” at the Flying Pig Bistro-Part II:  Today’s Special-Why You Should Start a Nonprofit Charitable Organization (and Why You Shouldn’t)

Financial Model

Once you are confident a charitable organization is the right type of organization to form, you need to focus on its anticipated financial model.  How will it pay for general and administrative (G&A) expenses?  How will it pay for its program costs?  Will you rely solely on donations or grants?  Are there revenues that you can earn as a result of providing services that are substantially related to the organizations charitable purpose?  Examples of this are tuition payments for a child care facility or admission fees for a museum.  If so, this “related business income” will also qualify as income for which your organization does not have to pay taxes.  Do you anticipate activities that you are think are great money-makers for your organization but are not related to the organizations charitable purpose?  You have to be careful with this one.  Too much “unrelated business income” could jeopardize your charitable status.

Start-up Resources

Many times I counsel people who believe that starting a charitable organization poses a “Catch 22.” They need to have an IRS Determination Letter in order to raise money, but they need money to pay for the costs of completing and filing their 1023 Application with the IRS.  A solution?  Identify another charitable organization that already has an IRS Determination Letter (preferably for providing service or activities similar to those of your organization) and ask it to serve as a “sponsor” of your organization. This sponsoring agency can receive donations on behalf of your organization under a simple “donation agreement” until such time as it has received its IRS Determination Letter.

Forming

Your Formation Team

Before you form a charitable organization, it is best to assemble your formation team.  You will need a volunteer board of directors that can bring expertise or resources to your organization.  You will need corporate officers, generally a president (or chief executive officer) and secretary (think corporate records keeper and document signer, not typist) and a treasurer (or chief financial officer) (think someone who focuses on the finances, not necessarily someone who manages the finances.)  Who is going to do the work?  Are you planning on being the president (or CEO) and the “Executive Director” (a title that is often used by the lead staff person in a charitable organization)?  If so, do you have the necessary skills and experience?

Your Formation Documents

Generally, in order to actually form a charitable organization you are going to need to file Articles of Incorporation with the Secretary of State. This document states the purpose of the organization and contains other language required by state law in order for your organization to qualify as a charity (aka, a nonprofit public benefit corporation.) You are going to also need bylaws, the documents that govern the governance of the organization.  While a great deal of flexibility exists within certain aspects of your bylaws, such as the number of board members, the frequency of meetings, the number and type of committees, other provisions such as conflict of interest policies and prohibitions on using the entity for personal benefit are either required by state law or are essential to qualify as a recognized IRS 501(c)3 public benefit nonprofit under federal IRS law and regulations.  The completion of an Application for Recognition of Tax Exempt Status (or 1023 Application) is necessary to obtain the covered “IRS Determination Letter.”  This letter informs donors that based on the activities that you stated the organization is or will be engaged in, the IRS has determined that it believes that you are operating within a tax exempt purpose under the Internal Revenue Code.   HMS offers a service to complete all of this documentation for a flat fee of $2500 (plus state filing fees).

Launching

Launch Event

Personally, I think that one of the best ways to launch a charitable organization is to plan a “launch event.”  By this I mean an event that services as a sort of “coming out” party to introduce the organization to the people who will most likely be involved in helping it become a success.   A “launch event” is not necessarily a fundraising event.  It might instead be an event that simply introduces the mission of your organization and its formation team members (e.g., directors, officers, and staff).

Commencement of Operations

It is important to build on small successes.  Identify smaller, obtainable projects or activities at which the organization can “succeed” versus large (and often expensive and risky) ventures that will strain your resources a potentially straddle the organization as being DOA (dead on arrival).

Compliance

Once you have formed a charitable organization it is important to stay current with state and federal corporate and tax filing requirements so that you do not lose your rights to conduct business or your IRS status as a presumed 501(c)3 charitable organization.  HMS monitors this for charities for a quarterly fee of $250.

Conclusion

You could be very surprised at how quickly you could be on your way to starting the charitable organization that you always thought of starting.  In the Google, Facebook and social media era that we live in your support base could potentially be all over the world.  See for example www.givingfuel.com.  If you or someone you know in the Northern California area is interested in starting a charitable organization please contact me.  I am providing free one-hour “Planning” consultations  to everyone that sees this blog, or my Facebook, LinkedIn, or Twitter feeds.  Just tell me how you saw this. And like I said, now just may be the time.

P.S.- If this message is for you, and you are not “Swayed,” I hope to see you at the seminar. Please come as my guest!

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Help Raise “$5,000 Squared” for Innovative Community Solutions

In Law on February 20, 2013 at 6:04 pm

The typical 501(c)3 nonprofit needs about $5,000 to get started. That is the case with The HERS Project, Inc.  a start-up nonprofit seeking to provide 100 beds to get homeless women off the streets of Sacramento at night.  That was the case with Nehemiah Corporation of America, Sacramento’s award-winning community (and leadership) development nonprofit.  That’s why the Center for Innovative Community Solutions, a Sacramento-based nonprofit, is announcing the formation of its Innovation Fund. Simply put, the Innovation Fund is start-up money for innovative nonprofits.  More specifically, the Innovation Fund provides start-up loans to nonprofits in amounts of up to $5,000 to cover formation costs (e.g., incorporation, formation legal and accounting documents and obtaining recognition as a nonprofit from the IRS and from the state).  Recipient nonprofits repay the loan in a year or less, allowing the funds to be re-lent to yet another “innovative community solution.”   That creates the opportunity for exponential impact.  That’s great leverage and great stewardship.  Be part of something big by doing something small.  Contribute to Innovation Fund.  Its goal is to raise somewhere between $5,000 and $5,0002 (that’s $25,000,000) for start-up money for innovative nonprofits.   The impact of your support will be exponential.

P.S.-The first $5,000 has been pledged to the launch of The HERS Project.  Applications from other “Innovators” will be accepted starting March 1, 2013.

Author’s Note:  I am pleased to have the privilege to serve as Outside General Counsel to both The HERS Project, Inc. and to the Center for Innovative Community Solutions, Inc.  If this inspires you, maybe its time for you to “Start that Charitable Organization.” 

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FHA and the Mortgage Crisis: What We Have Here is a Failure to Regulate

In Housing, nehemiahfounder on February 11, 2013 at 7:16 am

This post is an open letter to Mr. Nick Timiraos of the Wall Street Journal (and hence to the Journal as well) in response to an article that posted today on the Journal’s Online Edition entitled “Tangled in Housing Bust, FHA seeks and Hand.”

Dear Mr. Timiraos,

I am the founder of Nehemiah Corporation of America and the creator of what became known as the “seller-funded” down payment assistance industry. You reported in the news today on what many of us in the housing industry have known for quite some time; FHA may need help.  Yes, according to FHA’s independent audit last fall, at its current pace, FHA may exhaust reserves and need billions of dollars from Congress to cover projected losses.

Since its creation in 1934, FHA has played a vital role in providing fair housing opportunities to low-to moderate income home buyers.  Its low down payment requirements have been an important equalizer for home ownership opportunities, addressing head-on the great wealth disparity that exists between minorities and women and non-minorities and men.  In short, the “legacy” form of down payment assistance in America is “mom and dad” or other relatives.  For years FHA has allowed gifts or loans from family members as a source of cash for a down payment.  FHA also had a provision in its guidelines for gifts to come from charitable organizations.  I believe this provision acknowledged that there needed to be a mechanism for people who could not receive help from mom and dad, but were otherwise qualified, to be able to obtain FHA-insured mortgages.  It was this regulatory provision that allowed for the architecture of what become known  as “seller-funded” down payment assistance, the first of which was The Nehemiah Program that I established under Nehemiah Corporation of America.

You state that FHA “never relaxed” its standards during the boom and didn’t insure the toxic mortgages that inflated the housing bubble.  This is where your article is in, shall we say, “default.”   The issue isn’t about FHA relaxing its standards, it is about its failure to impose new standards in a rapidly evolving mortgage industry.  It is about FHA’s and its parent agency, HUD’s  failure to regulate Fannie, Freddie and the down payment assistance industry.

HUD, the Cabinet-level agency over FHA, was responsible for providing regulatory oversight of Fannie and Freddie through its Office of Federal Enterprise Oversight.  If HUD had precluded Fannie and Freddie from becoming involved in “liar loans”  much of the mortgage crisis would have been averted.  Yes, it was that simple.

With respect to the down payment assistance programs, you are correct in stating that many of the problematic loans as associated with borrowers who received down payment assistance.  However, you “short sell” down payment assistance programs as the problem.  The programs themselves were not the problem.  FHA’s failure to regulate them was.   In September 1999 FHA issued a proposed rule to eliminate seller-funded down payment assistance, just a little over a year after having determined this methodology to conform to its then-existing regulations.  The proposed rule was subsequently withdrawn, primarily because we convinced FHA that under proper regulation these programs could help it achieve its policy objectives within reasonable risk parameters.  We provided FHA with a series of regulatory recommendations.  However, at the changing of the guard from the Clinton administration to the W. Bush administration these recommendations were completely disregarded.  This information is a matter of public record.  Perhaps you should consider a “modification.”    You should also take a look at David Broder’s historic on the ground assessment of Nehemiah’s work and my then almost prophetic words of what I believed was likely to, and in fact did, occur.  The fact is that FHA allowed “seller-funded” down payment assistance to be utilized in over 30% of it purchase money loans over a 10-year period without any substantive regulatory adjustments to shore up credit or income qualifications or to better assess asset values.  Congress should not have had to “kill” this program.  FHA should have regulated it.

We should not “foreclosure” the opportunity for home ownership on hard-working American families who are credit-  and income-qualified and merely lack inherited wealth to achieve home ownership.  We have to ensure that they are in fact credit- and income-qualified and that the asset values of the homes they are purchasing are valid and sustainable.  These fundamentals were largely ignored under FHA’s prior watch.  I am confident that these issues will be appropriately addressed, as they have been thus far, under the Obama Administration.

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