Sowing Seeds of Doubt

Charity’s plan to raise money through property deals falters

When Quebecor World closed its 685,000-square-foot printing plant in Salem, Ill., in 2002, it left a huge hole in the small city’s economy.

More than 800 jobs were gone. A signature industrial building was left vacant. A city with fewer than 9,000 residents lost an anchor business.

But in 2007, an out-of-town nonprofit group gave Salem cause for hope.

The charity, Seed America, in Alpharetta, Ga., works closely with companies like Quebecor to rid themselves of their vacant industrial properties.

Seed America has been collecting such properties with the goal of selling them to raise money for its ultimate mission — building a graduate business school that would base its curriculum on Christian values.

The organization approached Quebecor with a plan that would allow the company to relinquish ownership of the property and claim a charitable deduction on its income taxes.

Charitable Deductions

Quebecor, a Montreal company that runs printing plants in the United States and several other countries, agreed to donate the building to Seed America; in exchange, the company was eligible to claim a $6-million charitable deduction on its federal taxes — a deduction that was equal to the property’s appraised value. Seed America, in turn, vowed to restore the building, rent it to industrial tenants, and help bring new jobs to Salem.

Economic-development officials in the city believed they had found a white knight.

“We were very excited when Seed America came in. They had a good plan,” said Tracey McDaneld, Salem’s director of economic development. “Our industrial commission got behind them and supported them as well.”

Less than a year later, however, Seed America has not followed through on its promise to bring new life to the property.

Worse, Seed America has left Salem officials — and dozens of its own former employees at the Alpharetta headquarters — wondering if they will ever be able to recover the time and money they lost as a result of their relationship with the organization.

In June, Seed America stopped paying about 50 of its employees after its leaders said they could not make payroll. In late July, Seed America informed those workers that they would be laid off immediately — and offered no answers as to when they might recoup their unpaid salaries.

Meanwhile, Salem, one of at least 16 cities that are home to a Seed America-owned industrial building, is left with a building that is in much worse shape than it was before.

Business School

Seed America’s origins can be traced to 2001, when Joseph Johnson, an Ohio businessman, created an organization called the Business Reform Foundation.

According to the organization’s Form 990 informational tax form, the group planned to “solicit large donations, particularly in real-estate investments, in order to create an endowment to fund future activities.”

Mr. Johnson said he took that approach to fund raising because he believed it would be difficult to get contributors to donate money to a business school that didn’t exist. And working to rehabilitate vacant industrial buildings would mesh with the group’s mission to advance business education.

“Our whole focus is for business education, entrepreneurial education,” Mr. Johnson said in an interview. “We don’t have alumni to try to build an endowment. In trying to decide what is the best way to build an endowment, we found the best way was to acquire real-estate assets.”

By 2005, the organization had received approval from the Internal Revenue Service for tax-exempt status.

The fledgling group was largely a part-time operation at first. Mr. Johnson received no compensation from the organization, according to its first filing with the IRS in 2005, and Mr. Johnson said he worked other jobs for income.

In 2005, the group accepted the donations of two former industrial properties, according to news releases posted on its Web site.

The first, in March 2005, was a former ConAgra Foods factory in Ashland, Ohio. Seed America said independent appraisers valued the 165,000-square-foot property at $738,000. The charity noted in a news release that if ConAgra claimed that sum as a charitable deduction, it could save $250,000 on its federal taxes.

To earn money from the building, Seed America leased it to a cargo-delivery company.

A second company turned over a vacant factory in Wisconsin that Seed America said had an appraised value of more than $1.2-million. Again, Seed America said the company was eligible to claim a tax deduction for the property, and the charity took ownership of the building.

The charity changed its name to Seed America in 2006, according to its tax records; the first word in its name is an acronym that stands for Supporting Economic and Entrepreneurial Development.

Under its new name, Seed America began to more aggressively promote its efforts to take ownership of industrial properties through a program it called the 561 Exchange. The “561″ refers to IRS Publication No. 561, a 15-page booklet that describes the procedures for the valuation of donated property.

Its largest transaction involved a building in Clinton, Mass., valued at $4.3-million, according to the charity’s Web site and its Form 990.

All told, Seed America listed its gross receipts for 2006 at nearly $13.9-million.

Growing Rapidly

By 2007, the organization was rapidly expanding. The real-estate market was beginning to cool, which meant it had more options for finding available vacant properties. Seed America took out mortgages on its properties to finance its day-to-day operations, Mr. Johnson said, since otherwise it had little income to pay for its operations.

And the cost of those day-to-day operations was rising quickly. The organization needed additional employees to maintain the factories it had received and to seek tenants for them. It also hired agents to identify other companies that might donate properties to the charity.

It was during this time that the group decided to move its headquarters from Ashland, Ohio, to Alpharetta, a suburb of Atlanta.

Mr. Johnson said the move was necessary because the group was having a difficult time recruiting employees to live in Ohio.

“Atlanta was such a rich recruiting ground for us,” he said.

By early 2008, Seed America said it had a portfolio of properties worth $50-million and a growing work force of about 60 employees.

New Assessment Sought

That portfolio included a significant new acquisition — the Quebecor World printing plant in Salem, which it had taken over in November 2007.

Ms. McDaneld, Salem’s economic-development director, said she first began to question Seed America’s approach in March, when Quebecor filed an assessment appeal with Marion County, Ill., to attempt to lower the assessed value of the property to reduce its obligation for unpaid property taxes.

The county had assessed the Quebecor World property at $6-million — the same value the company had claimed for the property in its transfer of ownership to Seed America.

But Quebecor asked the county to cut the plant’s assessed value in half, even though the company and Seed America had reported its value at $6-million and the company was eligible to claim that number for federal tax purposes, according to Patty Brough, the county’s chief assessment officer.

Ms. McDaneld said she and others in Salem saw the appeal as a red flag.

“You can’t have it both ways,” she said.

The appeal was denied.

Quebecor said in a statement that the company stands behind the $6-million appraisal for the property transfer.

“Quebecor World completed the transaction with Seed America in good faith, based on an independent third-party appraisal of the building,” the company said in a written statement.

It referred all other questions about the property to Seed America.

The dispute over the assessment was the start of what became a strained relationship between the charity and the city of Salem — and it foreshadowed some of the troubles that would soon follow.

Several former employees interviewed by The Chronicle said they began to question the way Seed America was managing its properties.

For example, many of the buildings acquired by Seed America were in poor condition, said Fred Burtscher, a former Seed America leasing agent, who resigned from his position in June.

Some had faulty roofs. Others had environmental hazards. Some were in such disrepair that it was difficult to find willing tenants, he said.

“Most of the properties that they acquire are not in the best of locations and not in the best of condition,” Mr. Burtscher said. “They weren’t the most attractive buildings. We were leasing them at a lot lower rate than a standard commercial building.”

Other former employees said the organization was devoting most of its resources to acquiring new buildings, rather than finding tenants for its existing properties — an approach that would have produced a more predictable flow of money.

“I spent 12 years in finance in the mortgage business before I went to work with these guys and what they were doing never made sense,” said Dane Becker, another former Seed America employee who said he is owed $9,300 by the organization for work he performed since June. “Had I been a lender, based on their business plan, I would have never lent them a penny.”

Mr. Becker, who worked in the organization’s property-research department, said Seed America failed to meet its financial obligations because it was basing too much of its income on its ability to get loans for the properties it managed.

As the credit market tightened throughout 2008, Seed America had a much more difficult time securing loans than it had when it was growing during 2006 and 2007, Mr. Johnson said.

As a result, it was harder to get enough cash to finance its operations, he said.

“We were becoming liquid by financing the properties that were coming in,” he said. “We have to change that strategy.”

Some former employees question whether the credit market is solely to blame.

Trey Burgess, a former Seed America employee who worked in its property-valuations department, said the organization was holding assets that weren’t worth what it said they were worth when it accepted them.

Mr. Burgess said he left the organization in June after it missed its first scheduled payroll.

Mr. Burtscher said Seed America reported values for the properties it accepted that were often higher than what those properties would have fetched on the open market. As a result, he said, some companies that donated to Seed America were reporting values for the properties on their IRS tax forms that exceeded what they would have received had they sold the properties to another business.

“Was it true market value? Absolutely not,” he said. “The appraisal was at least double what the actual market value was. Some of them were more than that, to be honest with you.”

Mr. Johnson said that while it was common for Seed America’s properties to have appraisal values that were higher than what they had been listed for when they were for sale, the values were set by using industry standards.

“Seed America does not control the appraisal process or engage the appraiser,” Mr. Johnson said. “We simply know how to find properties that will be appraised higher than what the owner is willing to sell it for.”

He said the organization required the companies that were donating the properties to get their own independent appraisals. Seed America would then have its staff validate the companies’ valuations. “We’ve never had an appraisal questioned or even challenged because we are so focused on quality appraisals,” Mr. Johnson said. He added that some of the former employees who have been critical of the appraisals were not familiar with the process.

But Seed America’s approach — and the problems that have followed — prompted at least one watchdog to question whether the government should have beendoing more to monitor its activities.

Dean Zerbe, who previously advised Sen. Charles Grassley, Republican of Iowa, on charity issues, said Seed America’s approach of using donated property to raise money for a business school should have attracted the attention of regulators. The organization had been offering tax benefits for companies to donate money to an organization that had not used any of its assets to fulfill its charitable mission, said Mr. Zerbe, who is now a lawyer in Washington.

“It is an odd model and a disconcerting model,” Mr. Zerbe said. “If the state tax authorities and the IRS are not waking up every day and looking particularly at the donations and valuations, they are failing to do their jobs. It is ultimately the poor and the vulnerable in our society that suffer from this kind of activity and the charitable community needs to wake up and realize that.”

Shoring Up Finances

Despite the questions, many employees said they continued to work for Seed America because they believed in the organization’s goals — and they believed in its Christian values.

“I was finally working for a Christian organization, and I was doing something that my years inside of the mortgage industry prepared me to do very well,” said Tim Dawson, an employee who was laid off from the charity in late July. “I was doing amazingly well, and the company supposedly was as well.”

But with little income coming from rentals and the mortgage loans getting harder to come by, the organization began taking other steps to remain solvent.

Ms. McDaneld said Seed America this spring began hiring salvage crews to recover materials from the Quebecor building.

“It’s a shell,” Ms. McDaneld said of the building. “That’s all it is now. They’ve removed the boiler system. They’ve removed the sprinkler system. What do you do with a 700,000-square-foot building with no sprinkler system?”

Mr. Johnson said Seed America did hire crews to remove materials from the building, but that it was done to make the property more marketable to potential tenants.

“We took out the metal and the things that are out there that make it more attractive for other businesses,” Mr. Johnson said. “This is a common thing we do. The city of Salem isn’t happy. We’re not happy either. No one is happy. It is the reality of the marketplace. We wish the property was rented out. The city of Salem isn’t happy with that. They’ve questioned our plan, and they have every right to do so.”

At the same time, the organization was attempting to secure mortgages on some of its properties in order to pay its employees and maintain its operations.

Seed America in May was approved for a $1.3-million mortgage on the Salem building by Pinecrest National Funding LLC. Mr. Johnson said the financing fell through and Seed America never received the loan. The organization, in fact, has been unable to secure a loan since early March.

On May 31, employees said, they received their final paycheck. By mid-June, Mr. Johnson said, Seed America informed employees that it did not have enough money to cover their salaries.

The organization, however, encouraged employees to have faith in the organization and to keep working, with the hope that it would soon be able to get a loan to cover their back pay.

In a June 20 e-mail message to employees, Jerry Corbier, Seed America’s chief operating officer, said the charity was working with three potential lenders to secure financing on one of its properties.

Mr. Corbier then quoted Scripture to encourage employees to continue working.

“God has some great things in store for us,” he wrote. “And, if that is true, then He will meet ALL of our needs. I can also tell you that the finance team is more excited right now than ever as we start to work on what is coming in the near future.”

Four days later, Mr. Corbier relayed a similar message. “We are absolutely going to make it and we are going to come out of this on fire for the things of God,” he wrote. “What the enemy meant for bad, God is going to turn to good.”

One month later, the group had not secured a new round of financing, so Seed America told its employees that it was laying them off.

Many of those who lost their jobs hadn’t been paid for nearly two months.

Like Ms. McDaneld in Salem, they felt betrayed. “We believed in the cause and we believed in what we were doing. We were going to bring back morals to the marketplace,” said Pamela Thompson, a Seed America employee who lost her job last month. “It turns out we were all stupid to work there for as long as we did without pay.”

Mr. Johnson said that, despite the recent troubles, he expects Seed America to reward Ms. Thompson and others who haven’t been compensated.

The group, he said, is continuing to pursue new loans and is retooling its approach to sell some of the properties in an attempt to meet its obligations.

Seed America has also offered its former employees collateral on a property the charity is hoping to accept as a donation. Mr. Johnson said that offer would give employees security until the organization can repay them. He did not name the property involved.

He added that he expects them to be compensated soon.

“We think within three months we will have weathered the storm,” Mr. Johnson said.

Ultimately, he said, the group will also move ahead with its goal of creating the Spire School of Business. “Our goal is to have something in the next three years,” he said. “If we do all of this and we don’t start the school, there is no value in any of this.”