April 4, 2010; Washington Post | It’s hard to summarize the alleged nonprofit misdeeds of a for-profit retirement community developer named John Erickson prior to the recent bankruptcy of his firm. This guy, with a $4.2 million riverfront home, a downtown penthouse, a mini-cruise ship-sized yacht, and a corporate jet, earned his money on top of a number of nonprofits ostensibly owning the senior citizens housing that his firm “served”.
The 20 retirement communities his company ran were structured as nonprofits. But they gave the for-profit firm the contracts to manage the developments, they leased their land from the for-profit firm (or purchased the land from the firm, in one case giving the for-profit a $140 million net gain), and in many cases the board members of the nonprofits were executives and employees of the for-profit (or relatives of the for-profit’s owner).
Even when some of the nonprofits caught the attention of the IRS, all it took was a little jimmying and repositioning, handing them over to an umbrella group which operated out of the for-profit’s headquarters, to satisfy the Service. This was despite findings like this one from the IRS about one of the nonprofit “villages”: “Under the facts presented, we conclude that you are not operated exclusively for charitable purposes, but substantially for the purpose of serving the private interests of ERC and its owners. Aside from your board of directors, all of your operations are under the control of ERC. You are managed by ERC. All of your officers are ERC employees . . . Your advertising promotes ERC as well as yourself.”
Eventually, the real estate market did the for-profit in. What made these nonprofits nonprofits when they were basically controlled by and generating profits for the firm? It’s hard to say. Maybe someone will defend the salaries, yacht, jet, and even the post-bankruptcy $1 million a year consulting gig for the for-profit’s owner as OK. But this wasn’t to attract top-flight talent to the nonprofit sector. It was to support profitmaking behind a veil of nonprofits.—Rick Cohen