Chronicle article was unfair

A year ago The Chronicle of Philanthropy published an article that was unfairly critical of the American Foundation and its founder, Ben Schaub (“A Risky Mix for Charity,” May 16, 2002).

The article was replete with misinformation, unfair innuendos, and false accusations. We thank The Chronicle for now allowing us to tell “the rest of the story.”

The article began with an unattractive photograph of what looked like worthless desert land with a caption insinuating that Ben Schaub and the American Foundation had invested donor contributions in real estate like the photographed parcel. This was a blatant misrepresentation of the truth.

The American Foundation has never invested in real estate that looks like the parcel in the picture. The inference of the ugly desert picture was that Ben Schaub and the American Foundation are involved in Arizona land fraud. Actually, the parcel that was shown had been donated to the American Foundation many years earlier.

The American Foundation does not buy real estate; rather it places loans on prime real-estate properties, and it only makes first-position mortgage loans (no seconds). These loans, which earn between 14-percent and 16-percent interest, are secured by prime real estate, such as in Sedona, Ariz.; Park City, Utah; and Phoenix.

If your readers want to see pictures and information about the actual properties on which loans were made, they can be viewed by going to the Web site, http://www.AmericanFoundation.org and then clicking on the link “Charitable Trust and Foundation Investments.”

Part of the American Foundation’s investment asset allocation includes real-estate-related investments such as mortgages or first-position loans secured by deeds of trust. It doesn’t purchase real estate; rather, it participates in first-position mortgage loans on prime real estate based on a low loan-to-value ratio.

The article criticizes the American Foundation for making this type of investment. However, “95 percent of our real-estate loans have returned 14 percent to 16 percent or greater in interest or returns,” says Ken Schaub, Ben’s brother, a mortgage broker helping place the foundation’s real estate loans.

Also, there is no investment cost to the trusts and foundation accounts for these investments because the borrower pays all the loan costs.

The Chronicle article also implies that the American Foundation was overbalanced in the real-estate sector.

Actually, the foundation’s real-estate-related investments have proven to be real, viable, and profitable assets.

“We’ve been very fortunate,” says Ben Schaub, “our real-estate holdings and loans have included some of the most valuable property in the world, including prime locations in Park City, Utah; Sedona, Arizona; and Phoenix, Arizona. The most important consideration in our real-estate loans has been the quality and high value of the underlying real estate — location, location, location.”

The American Foundation has grown in value during a time when most other foundations have plummeted in value. Ironically, The Chronicle had a cover story in its April 4, 2002, edition reporting huge drops in foundation values. The Chronicle pointed out that “assets of 6 of the 10 largest foundations declined for a combined loss of $10.6-billion.” Instead of criticizing the American Foundation for its real-estate-related investments, The Chronicle should have praised the American Foundation for preserving and growing its overall value.

Many professionals refer foundation business to the American Foundation because of its unique success with real-estate loans.

There is another reason why it was so unfair of The Chronicle to criticize the American Foundation for its real-estate investments. According to Ben Schaub, the American Foundation welcomes the opportunity to work with financial planners, investment managers, and other professionals, and they have recommended such investments: “Part of our investment objective is to preserve principle and facilitate good investments. Anytime you have an institution or entity that preserves and builds assets, you have an opportunity to provide helpful direction in the management of invested assets. We have a strong belief in diversification. We also recognize that any one money manager, no matter how good he or she may be, can make mistakes.”

Many investment advisers strongly recommend the real estate-secured assets that the American Foundation often uses.

The Chronicle’s article incorrectly characterized two projects affiliated with the foundation as “bankrupt.” As the story later noted, bankruptcy protection was sought by the projects’ developers, not by the projects. Significantly, rather than losing money on its real-estate investments, the lending entity, of which the American Foundation was the largest investor, gained title to the two real-estate parcels referred to in the article.

There has been no loss because the properties have a combined worth far more than the amounts loaned on them. Specifically, the two properties have had MAI appraised value of an aggregate of $73-million, even though less than $20-million was loaned on both properties. When the parcels sell, and they will, the American Foundation will profit handsomely from these investments.

From the beginning, The Chronicle’s article took the tack of painting Mr. Schaub and the American Foundation in the most negative light possible. For example, The Chronicle’s article states that Mr. Schaub purportedly said “that his objective was to make money for himself and his family” and it attributes to him the statement that he was looking to do that in a way that “would create significant personal profit.” Again, The Chronicle’s innuendo was that Mr. Schaub’s sole motive was to get rich by swindling naive and unsuspecting donors.

Mr. Schaub denies saying what was attributed to him. However, to the extent that he made a similar statement, he told The Chronicle’s reporter that one of his motivations as a young man when he began in this industry 25 years ago, was to make money and profit. Like all young men getting out of school, he wanted to make a “good living.”

He also told the reporter something entirely different about his current motivations.

Mr. Schaub explained that he does not now feel it is important for him to build personal wealth. Instead, he has an intense desire to build philanthropic wealth as described in the American Foundation’s vision and mission statement. He explained to The Chronicle’s reporter that if he had excess personal wealth, it would be left to the American Foundation anyway. The article’s statement, out of context, was unfair and inappropriate.

The article also stated that Ben Schaub has “made millions of dollars in profit.”

In truth, he has never made millions. He reports that his net worth is well under $1-million, and it has never been more than that. He will potentially receive $1.3-million over 20 years (this equates to under $70,000 a year) through a note that is payable only out of income generated from a business he sold to the foundation at a 50-percent discount. If the business does not continue to be profitable, he won’t get these payments.

When The Chronicle’s article referred to “two major scandals” and identified the Baptist Foundation and the Mid-America Foundation, it “tarred by the same brush” the American Foundation. This was unfortunate because the American Foundation is not related to either of those foundations and in no way condones their methods of conducting business.

In truth, the American Foundation’s program of creating family foundations is the essence of a new movement that Mr. Schaub calls “the privatization of philanthropy.”

The family foundations, as part of the American Foundation, qualify for public-charity status. While the American Foundation allows great latitude in family direction of grants to charities, it otherwise maintains the necessary controls and has ownership of the assets. Mr. Schaub claims, “Our oversight legitimately protects the process from donor abuse that in the past has been a major issue with the Internal Revenue Service and government regulators. The American Foundation, in essence, provides the best of both worlds. It allows for family charitable direction but under public-charity ownership and oversight. Our family foundations are protected against the kinds of misguided actions that otherwise would be considered abusive.”

Mr. Schaub continues, “When we pioneered the concept of family foundation planning in 1978, we did so to allow people to set up donor-advised funds which accomplish two purposes: to obtain a tax deduction on funds deposited into special investment accounts, and to designate which charities would receive gifts funded by these assets. We formalized this concept by establishing the American Foundation, a 501(c)(3) public charity (initially known as the Interstate Community Foundation). As such, it is open to public scrutiny.

“Through our family foundation planning program, individuals and families are able to give more than they had ever dreamed, and to do so more effectively. Donors naturally give more when they have more involvement and direction in what happens to their gifts.

“Effectively, with this planning, donors can rearrange their affairs so that they have more cash flow every year for the rest of their lives; which helps them do more good things in life, including helping extended family members and charities. At death they are able to first leave amounts that can go tax-free to heirs and then, by using ‘wealth replacement’ insurance, they can leave additional amounts of tax-free life insurance that totals the amount of wealth they specifically want their heirs to have. In some instances, heirs are not prepared to manage and use wealth properly. Through a family foundation, individuals who have built wealth can select the amount of wealth that will go to their heirs and what will go to their family foundation.”

While many foundations and companies have lost huge value as a result of the significant drop in the stock market, the American Foundation’s value has increased in the last several years.

Currently, the American Family of Foundations has approximately $50-million of assets ($35-million of book value, with several properties having appreciated values of another approximately $15-million, as supported by MIA appraisals of properties currently in escrow and under contract for sale).

The American Foundation also manages another approximately $50-million of assets in charitable trusts known as Family Foundation Income Trusts.

The American Foundation is not a giant as far as foundations go, but it is strategically positioned to help individuals and families through charitable programs designed specifically to accomplish charitable purposes. In this format, the American Foundation is uniquely able to provide a convenient family-foundation account for donors to direct their charitable giving to the maximum extent allowed by law.

We hope that with this explanation, The Chronicle’s readers better understand the truth about Ben Schaub and the American Foundation. We hope that with this explanation, readers will be able to decide for themselves that the American Foundation is made up of honest, hard-working people who want to help charities more in a time when governments help less.

We hope that The Chronicle and its readers now understand that what was in the article about the American Foundation was a disservice to the American Foundation and to foundations and charities across the nation.

The American Foundation is proud to be positioned to continue to serve donors and charities for today and for tomorrow.

Kraig J. Marton,
Counsel
American Foundation
Phoenix

Editor’s note: The Chronicle stands by the accuracy of the article it published. It acknowledges that a parcel of Arizona land pictured with the article was donated to the foundation rather than purchased. A small headline in the article incorrectly characterized as bankrupt two projects affiliated with the foundation. However, the text of the article noted correctly that the projects’ developer sought protection from creditors under federal bankruptcy laws. Ben Schaub’s compensation for transferring ownership of Foundation Planners of America, a for-profit affiliate, is through a promissory-note arrangement in which he is due to receive $1.3-million over 20 years.