GREENSBORO — Tax credits.
Since 2009, officials with the International Civil Rights Center & Museum have said its future hinges on its tax-credit financing, a complicated way owners of properties can finance construction and renovations.
Tax credits transformed the museum from a nonprofit with a simple financial structure into a profit/nonprofit hybrid of five business “entities” that work in partnership with two for-profit “investors.”
Even tax attorneys consider tax credits a morass of federal rules and regulations.
Museum leaders have said that most of the $26 million listed as “debt” on their most recent audit is not actually debt, and that the museum will emerge from the tax-credit structure in late 2016 without having to repay that amount. A museum official said last month that the museum is carrying about $2 million in debt outside of the tax credits.
All they have to do, museum leaders have said, is pay about $196,000 a year in fees on the tax credits, called “debt service,” through 2016.
And keep the museum open.
There’s little doubt the museum can pay the “debt service.” This summer, the city will give the museum the third and final installment of a $1.5 million forgivable loan. That installment, $250,000, is earmarked for “debt service.”
But a more pressing question is this: Given the museum’s near-empty coffers and the $963,000 in other loan payments that will come due by June 30, can the museum stay in business until the tax credits expire?
Unfortunately, there are more questions than answers.
Members of the museum’s board of directors either didn’t return calls and emails or declined to be interviewed or to discuss the tax-credit financing structure for this article, though they have spoken to the News & Record about it in the past.
Their only communication with the News & Record about museum financing has been a Dec. 29 letter from board member Douglas Harris, also a lawyer.
Oliver Bowie, a Greensboro accountant and the museum’s long-time auditor, did not return telephone calls.
At least one museum leader publicly acknowledged the need for money. Weeks before he was fired in November, former museum Executive Director Lacy Ward Jr. told a gathering of potential donors that the museum “has no operating reserve.”
“We’re at zero,” he said.
Others say the situation is better than Ward suggested. Earl Jones, a co-founder and the board’s vice chairman, said in mid-November that the museum had $150,000 in reserve.
Resolving whether Ward and Jones were working from different facts or interpreting the same facts differently has been difficult to determine.
Some museum leaders also have said it’s incorrect to characterize as “debt” all of the $26 million listed as “debt” on the audit. They have objected to a News & Record article published Nov. 20 under the headline “Museum’s debt close to $26M.”
Harris, a museum board member and lawyer, told the News & Record in his Dec. 29 letter that the tax-credit financing did not generate debt “as the normal person understands it with principal and interest being repaid.”
In an op-ed piece in the Dec. 28 News & Record, board Chairwoman Deena Hayes-Greene wrote, “in no sense are tax credits used to finance the same as debt in the usual sense because the money advanced is never intended to be paid back.”
Todd Brockmann, a Charlotte tax-credit expert interviewed by the News & Record, agreed that the tax-credit financing probably should not have been listed as debt in museum audits.
But even if it’s true that this is not debt in the traditional sense, the IRS could ask investors in the tax-credit structure to return money to the IRS.
If that were to happen, the project could be jeopardized.
First, some background about why the museum needed tax-credit money.
The idea of a museum first came about in 1993. Jones and Melvin “Skip” Alston formed “Sit-in Movement, Inc.,” the nonprofit that bought Woolworth’s five-and-dime on South Elm Street in downtown Greensboro.
They preserved the building as a museum, which honors the “Greensboro Four” — Ezell Blair Jr., known now as Jibreel Khazan; Joseph McNeil; and the late Franklin McCain Sr. and David Richmond.
These N.C. A&T students refused to leave the Woolworth’s lunch counter at a time when service there was reserved for white customers. Their actions on Feb. 1, 1960, sparked a nationwide movement to end segregation in restaurants and other public spaces.
It’s difficult to determine how much money Jones, Alston and other museum leaders have raised since they formed the nonprofit in 1993. From past news accounts and donor recognitions listed on the museum’s website, the News & Record calculated at least $20 million.
It’s also difficult to determine how much money leaders have spent on construction, exhibits and administrative fees — particularly construction. The rehabilitation happened in fits and starts, in part because of a lack of money, but also because the building needed so much work.
In 2004, construction crews found serious damage to the foundation stemming from years of water leakage. Repair estimates ranged from $9 million to $11 million. Faced with a self-imposed opening date of Feb. 1, 2010 — the 50th anniversary of the sit-ins — museum leaders needed cash fast.
Enter David Winslow, a Winston-Salem consultant with a statewide reputation for raising money for daunting projects.
In a 2009 interview with the News & Record, Winslow said he introduced museum leaders to the idea of tax credits.
“We met,” Winslow said then, “and I just asked them what they had done about tax credits.
“They looked at me and said, ‘Tax credits?’
“I told them, ‘Guys, we’re talking about millions of dollars.’”
The tax-credit agreement netted $10 million for the museum, which did, in fact, open in 2010.
Not simply a nonprofit
Tax credits are complicated — so much so that even experts have trouble explaining them.
Tax credits attract investors with tax burdens large enough to benefit from using tax credits for five to seven years to lower their overall tax bills for unrelated profit-making ventures.
Private investors give money to a project that serves the public good — saving an historic structure, rehabilitating a rundown building, revitalizing a section of a poor community.
In return, the investors get “tax credits,” which reduce their tax bills to federal or state governments. The credits can equal as much as 40 cents off an investor’s tax bill for each dollar invested in the project.
The museum has two investors, Stonehenge Capital and the National Trust for Historic Preservation, a nonprofit with a for-profit subsidiary that deals in historic tax credits.
Stonehenge, based in New York City and Columbus, Ohio, is a for-profit company that invests in tax-credit deals, usually involving state tax credits. Stonehenge’s Ron Newsome, who out of the Columbus office leads the company’s efforts for state tax credits, didn’t return calls or emails seeking his perspective on the museum’s situation.
The tax credits gave the museum an infusion of cash — $10 million, according to published reports, which generated $30 million in tax credits.
It also fundamentally changed the museum’s structure from the nonprofit status it held from 1993 until 2009. Now, because of the tax-credit financing, it’s actually five separate entities, including four limited liability companies.
This clunky system is required by the IRS, the Department of Interior, the National Parks Service and the N.C. Department of Revenue.
The museum couldn’t remain just a nonprofit, because a nonprofit doesn’t owe federal corporate taxes and, therefore, couldn’t generate tax credits for Stonehenge and the National Trust.
Hence the five entities.
Paying the 'debt'
Here’s how officials from the city explained the five entities in a presentation to Greensboro City Council members in July 2013:
* Sit-In Movement, Inc., the only nonprofit among the five museum entities, raises money and educates the public. This is the original nonprofit Jones and Alston created in 1993.
* Civil Rights Museum, LLC, is a wholly-owned subsidiary of Sit-In Movement Inc. and manages the museum’s operations and staff. It was created by Alston, according to the N.C. Secretary of State’s website. It lists as its directors Hayes-Greene, Jones and Harris. On Dec. 9, 2011, the Secretary of State’s Office threatened to dissolve the entity because it had failed to file two annual reports. The museum filed both reports 12 days later.
* ICRCM, LLC, is a partnership of funders from the community and members of the museum’s board. This group, also directed by Hayes-Greene, Jones and Harris, oversees the tax-credit arrangement.
* Museum Landlord, LLC, owns the property. It is responsible for paying property taxes and maintaining the building. Hayes-Greene, Jones and Harris are listed as this entity’s directors, as well. As of Friday, it is past-due paying property tax to Guilford County, Greensboro and Greensboro’s downtown business district, according to county tax records. The $29,282 bill includes $574 in interest, which increases each month until paid.
* Museum Tenant, LLC, leases the building from Museum Landlord and to the Civil Rights Museum, LLC. Hayes-Greene, Jones and Harris are its directors, according to the Secretary of State’s Office.
The museum will operate under this system while Stonehenge and the National Trust enjoy their tax breaks until late 2016.
Meanwhile, the entity called Museum Landlord is responsible for paying the “debt service” on the tax credits. Similar to an interest payment, this amounts to about $392,000 until the credits expire, according to information on the city of Greensboro’s website.
Museum officials say they’ll cover the debt service payments with the City of Greensboro loan, including the final installment of $250,000, which the museum will receive later this year.
It’s not entirely clear, at least to the general public, what happens after 2016. Stonehenge and the National Trust will stop receiving tax credits. The museum will stop making quarterly “debt service” payments.
The tax-credit “debt” goes away, too. How much goes away? When does it go away? Under what conditions does it go away? None of the museum officials who understand the arrangement would explain it for this article.
In 2013, then-Mayor Robbie Perkins explained the tax-credit structure to the News & Record. After 2016, the newspaper wrote, “government rules would free the project initially from $11 million in debt.
“The remaining $19 million debt would survive after that but only within a project subsidiary that essentially would leave the nonprofit museum owing itself the money, the mayor said.
“‘That remaining $19 million is basically owed from one entity within the civil rights museum to another,’ Perkins said.”
Museum leaders did not object at the time to that description.
Emerging from the tax-credit structure debt-free assumes the museum continues to operate, bringing in sufficient money from ticket and merchandise sales, donations and other sources to pay staff, utility bills, property taxes and other operating expenses.
But the museum must meet certain requirements — some initiated by the IRS, others by the U.S. Department of the Interior because of the building’s historic status — for Stonehenge and the National Trust to continue receiving the tax credits.
In fact, the IRS could make Stonehenge and the National Trust repay some of their tax credits, what the IRS calls a “recapture,” said Todd Brockmann, the Charlotte attorney who specializes in tax credits told the News & Record. Brockmann had no role in the museum’s tax-credit arrangement.
Brockmann said two events can trigger a “recapture:”
* A change to the building that makes it no longer qualify as an historic structure.
* A change in ownership.
A change in ownership could happen, Brockmann said, if one of museum’s creditors were to foreclose on the property to receive money for an outstanding loan.
The creditor would seize the property, auction it and keep enough money to recoup its outstanding loan.
Other lien-holders could collect from the proceeds of the sale, too.
“If a lender forecloses, there’s not a 100 percent chance but a good likelihood of a recapture,” Brockmann said.
Brockmann said that if one of the museum’s creditors were to foreclose, Stonehenge and the National Trust could be required to repay the tax credits they already had received.
He said the outstanding balance on the tax credits “should not show up as debt on the (museum’s) audit.”
The auditor may have wanted to show the potential amount of recapture, to reflect the debt between the museum’s five entities, or to reflect debt that could be forgiven in 2016, he said.
Could this happen?
Because no one at the museum would talk to the News & Record for this article, it’s unclear how great of a possibility a foreclosure and recapture is.
The museum owes banks and other lenders almost $2 million, according to an email sent to donors in late December by John Swaine, the museum’s chief money manager and its acting leader since Ward was fired.
Nearly half is due within six months. That includes:
* $131,000 to Wells Fargo, due this month.
* $50,000 to the Community Foundation of Greater Greensboro, due in March.
* $783,000 to Carolina Bank, due June 30.
The museum also needs money each month to pay employees, fund-raising expenses, utility bills and other internal costs. A financial statement from November estimated the museum would need $507,000 from January to May for these expenses.
The museum also could be required to repay the City of Greensboro up to $750,000 within 18 months. The agreement between the city and the museum specifies that a dollar would be knocked off the amount for every dollar the museum raises in private donations.
The museum must repay what debt remains from the first installment by June 30, 2016.
According to the city’s agreement with the museum, officials can use the money to pay the “debt service,” to retain existing jobs or to pay water and electrical bills.
Then there’s the matter of its mandatory contingency funds, reserves of money the tax-credit arrangement obligates the museum to hold.
According to the most recent audit available, which reflects the 2013 calendar year, the agreement specifies that Museum Landlord must have $1 million in a reserve account one month before the agreement ends in late 2016.
As of Dec. 31, 2013, that fund contained $275,954, according to the audit.
Museum Landlord also is required to maintain a fund for “working capital” and “contingency reserves.”
That fund was empty, according to the audit.