Nonprofit Sets Up Innovative ESOP Structure

In what could be a model for others, a Pennsylvania nonprofit organization has developed an innovative structure that incorporates employee ownership. Supportive Concepts for Families (SCFF), a 501(c)(3) nonprofit provider of supportive group home services for people with developmental disabilities, has set up a subsidiary S corporation holding company that will be 49% owned by an ESOP. The holding company will own the real estate assets of SCFF and lease them back to SCFF. In the future, SCFF plans for the holding company to acquire other operating assets, such as a manufacturer of energy-efficient equipment that is used in the group homes that SCFF operates. SCFF has 1,100 employees and anticipates becoming larger.

Nonprofits, including SCFF, traditionally have had difficulty in acquiring real property, partly because they cannot raise equity capital to fund down payments or take a tax deduction for mortgages. With this new model, appreciated real estate assets were transferred to a holding company and exchanged for stock. As the holding company acquires additional properties, the process will be repeated. The value of ESOP assets depends on the value of the property and its leases. SCFF will receive distributions from the holding company to pay its unrelated business income tax on any profits attributable its 51% ownership of the holding company; the ESOP will receive a pro-rata share.
The transaction was put together by Angler West Consultants, which has dubbed (and trademarked) the plan a "C3SOP."