Public, private investments linked in new LLC

February 22, 2009
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Michigan has a new type of limited liability company that permits investments from nonprofit foundations in exchange for putting social benefit before profits.

Gov. Jennifer Granholm signed the law in January, making Michigan the second state to allow the low-profit limited liability company, or L3C, for charitable or education purposes. Vermont also has adopted the L3C, as has the Crow Nation, a Native American tribe with a reservation in Montana.

The legislation, which amends Michigan’s LLC law, passed the lame-duck Legislature in December unanimously.

“It’s a new tool that has been designed to help promote public-private partnerships that have a charitable purpose,” said Rob Collier, president and CEO of Council of Michigan Foundations, who championed the bill. “It’s more designed for private foundations, but it doesn’t mean community foundations couldn’t invest in it, as well.”

Foundation leaders in West Michigan were mostly unfamiliar with the new law. But Vermont’s law has sparked the creation of 35 L3Cs in sectors such as medical research and facilities, alternative energy, carbon trading, economic development and job creation, according to the CMF.

Michigan’s law states that the L3C may have profits, which can be returned to investors, but income and capital gains must be secondary to the charitable or educational purposes. It also prohibits lobbying as an L3C purpose. It gives the state attorney general power to bring action against an L3C that was created fraudulently or willfully exceeds its legal authority or stops meeting the legal requirements.

“I’m talking about everything from economic revitalization to affordable housing to neighborhood redevelopment to job creation,” Collier said. “The goal is to do this as a for-profit entity. This is a for-profit tool, but to allow foundations to invest in these entities along with other nonprofit partners and for-profit partners to help share the risk to get more stuff going for economic revitalization in our state.”

The L3C was devised by Robert M. Lang Jr., president & CEO of the Mary Elizabeth & Gordon Mannweller Foundation in Connecticut, and Washington, D.C., attorney Marcus Owens to re-purpose an empty, historical department store into a convention center.

Now Collier has joined them and Steve Gunderson, president & CEO of the national group Council on Foundations, to champion the legislation across the nation. Federal legislation remains a possibility.

Some foundations have used “program-related investments” to make investments, rather than grants, in certain programs. PRIs, including loans and equity stakes, made to for-profit ventures have been a challenge for federally designated nonprofit foundations because of the legal challenges of getting approval from the Internal Revenue Service. Also, fiduciary responsibilities may put off some for-profit companies from participating in a PRI.

Foundations still would have to obtain IRS permission to participate in an L3C project with a for-profit entity, according to the state Senate Fiscal Agency analysis of the bill.

Kalamazoo Community Foundation has been a leader in the use of PRIs to invest in project such as downtown revitalization.

“Any tool that everyone can use to help grow the Michigan economy is a good tool,” said Wes Freeland, adviser to KCF President & CEO Juan Olivarez.

“We’ve been involved in using PRIs for a good solid eight years. We’ve not found any impediments to doing that. We obviously follow federal laws very carefully, and use them for charitable purposes to benefit the broader community itself.”

KCF has earmarked $22.5 million of its endowment toward PRIs, which are often in the form of loans, Freeland said. He said KCF has undertaken about 25 PRIs over the years, and has $14 million to $15 million in use at any given time.

Freeland said he expects the law may be more useful for private foundations, which rarely use PRIs, but have the resources to invest in the community.

The Grand Rapids Community Foundation does not expect to utilize the L3C law, spokeswoman Roberta King said. “It may help us by giving us alternative ways we can work in the community,” added Fremont Community Foundation President & CEO Libby Cherin.

The newness of the concept has some uncertain about its impact.

“It has, in my view, very limited broad utility,” said Jeffrey B. Power, a partner at Warner Norcross & Judd. He said he expects it to be useful mostly for affordable housing charities, because of the heavy use of LLCs in real estate ventures. Other states allow nonprofits to be organized as LLCs, although in Michigan they must be trusts or nonprofit corporations, he added.

Sean P. Fitzgerald, of Kreis, Enderle, Hudgins & Borsos’ Grand Rapids office, agreed that housing nonprofits are likely to find use for the L3C.

“It might want to be used for some sorts of education, as well, that deal with the education of special needs kids, for example,” he added.

L3C laws are under consideration in other states, including Georgia, Illinois, Montana and South Carolina.

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