Home Brokers & Agents Association, MLS, RPAC: An Idea for Political Domination

Association, MLS, RPAC: An Idea for Political Domination

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Tywin_Lannister_2
Tywin Lannister, Chair of Casterly Rock Association of REALTORS

File this one under: “There Is No Box” kind of thinking. The reason why this isn’t a Black Paper (yet) is that I haven’t checked with enough lawyers to see all of the possible pitfalls, but that might happen sooner rather than later.

A couple of weeks ago, I mentioned that I was having an email exchange with a couple of lawyers from NAR’s Legal team that was sending electric tingles of excitement down my legs. The reason is that so far, on a preliminary basis, while requiring further research, and a dozen other caveats — very typical for smart lawyers, since one never knows for sure until the Supreme Court rules, and even then, things can be overturned and so on and so forth — it appears that it’s possible to….

Okay, just in case you haven’t had enough of the caveats and maybes and warnings, let’s say that you should check with your own legal counsel in your state. But here’s the rough outline.

It appears that it is perfectly legal under federal law for the Association of REALTORS to transfer its ownership in the MLS to the PAC. The result would be total domination at the local and probably state levels in terms of political contributions.

Say what? Let’s delve in.

The Basic Concept

Last year, at the GAD Institute in Austin, I sat in on a couple of sessions in which the various GADs (Government Affairs Directors) were talking about the difficulty of fundraising for RPAC. Now, keep in mind that we’re talking about local/state RPACs, not the national NAR RPAC. It seemed to me that so much of the GAD’s attention and energy were spent on begging for dollars from Association members.

The key difference here is between “hard money” and “soft money”. You can research the difference if you’d like, but this is not a bad primer here. Basically, “soft money” which is unlimited and not regulated by the Federal Election Commission (FEC) can only be used for “education” on the issues or “party building” activities. That means soft money cannot be given directly to a candidate or to his campaign, and it cannot be used to ask people to vote for or against a candidate. It cannot be used for direct campaign activities, although it can be used for things like get out the vote (GOTV) efforts, voter registration (of people likely to vote for your guy), etc. etc.

“Hard money” which is subject to FEC regulation and giving limits is the single most precious commodity in politics, after the votes themselves. Because it can be given to candidates directly, can be used to urge voters to vote for or against a candidate, and so on. Also, corporations and unions are prohibited from making “hard money” donations.

When RPAC goes fundraising, it has to segregate “hard money” and “soft money”. So when a RPAC supports a particular candidate for city council, that has to come from hard money. But when RPAC opposes a city council proposal to raise property taxes, that can come from soft money, as long as no candidate is mentioned.

Here’s the thing. Say the local RPAC raises $100,000 in hard money donations from members. What does it actually do with those funds? Likely, it puts the money into a bank account. What if that bank account is an interest-bearing checking account? Say it pays 1% interest, so at the end of a year, the hard money checking account contains $101,000. What is the status of that extra $1,000? Is that hard money or soft money?

No one could actually tell me the answer, until last week.

I ran into Katie Johnson, the new General Counsel of NAR, at the AE Institute and had a fun conversation about the topic in the bar. She remembered it, and asked Ralph Holmen, Associate General Counsel at NAR, who specializes in election law and campaign finance. Here is her answer:

I believe you asked us wither an association can invest RPAC funds and, if so, whether the interest or profits earned from that investment is considered “hard money” or “soft money”. The answer is generally yes, associations can invest RPAC funds but such investment may be subject to specific state law. Federal law does not prohibit such investment. Investment income earned by a PAC is taxable. The investment profit would be considered as the same type of money as the PAC. So, if the PAC contains hard money, the investment profits would be hard money and vice versa for soft. (Emphasis mine)

So subject to caveats and state law, profit from an investment would be the same as the source of the money; if the source is “hard money” then the profit is “hard money”.

Holy cow. Let me say that again: HOLY COW!!!!

I went through a bunch of iterations of the issue (“if bank accounts are ok, what about gold? What about real estate? What about bonds? What about stocks?”), and I’ll abbreviate those. Basically, a PAC can indeed own things like stocks and real estate (where not prohibited, e.g., Texas prohibits campaign contributions being used for real estate), and any gains from such investments, net of Unrelated Business Income Tax (UBIT), are hard money if the original source of the investment was hard money dollars.

The Association Should Sell the MLS to its RPAC

That leads to the crazy-seeming idea: the Association should sell its interests in the MLS to its RPAC. Consider a situation which is not at all uncommon in today’s world, but set in the world of Westeros for fun.

Casterly Rock Association of REALTORS (CRAR) has 5,000 members, and operates the Lannister MLS (LMLS), Inc. as a wholly owned subsidiary of CRAR. CRAR has also set up a RPAC open to all members of CRAR called the Lannister For King PAC (LKPAC). Each company is a separate legal entity with its own Board of Directors and its own Officers, but the same individuals (Jaime, Cersei, Joffrey, Osmund Kettleblack) serve on all three.

The CEO of CRAR, Tyrion Lannister, is also the CEO of LMLS. The Chairman of the CRAR Board, Tywin Lannister, is also the Chairman of LMLS and LKPAC. All policies are coordinated, such that MLS rules work together with Association rules, and CRAR members pay one annual fee that includes CRAR dues as well as LMLS fees. LKPAC solicits donations solely from CRAR members.

Furthermore, since LKPAC is the corporate PAC of CRAR, its overhead expenses are paid for entirely by CRAR. LKPAC holds only hard money contributions from individual members of CRAR. And like most REALTOR Associations, only about 250 of the 5,000 members of CRAR contribute to LKPAC, which it uses to urge people to vote for Joffrey Lannister as King of the Seven Kingdoms.

LMLS generates $270K each year in profits (15% margin) on $1.8M of revenues from MLS subscription fees ($30/mo x 5,000 members), which is paid to CRAR as the sole shareholder. CRAR uses those funds for its Association activities, which includes paying for LKPAC’s administrative costs and overhead, including the salary of LKPAC staffers.

When LKPAC wants to run ads throughout the Seven Kingdoms opposing Renly Baratheon, it has to use hard money, which averages $100 in donations times the 250 donors out of 5,000 members. $25,000 per year is all it has. When LKPAC wants to encourage war against the rebel North without naming any names, it can use soft money, which includes corporate funds directly from CRAR.

What we’re talking about is changing the ownership structure of the three organizations here, such that LKPAC “buys” LMLS from CRAR and owns it as a wholly owned subsidiary of LKPAC. The $270K in annual profits from LMLS would flow directly to LKPAC, instead of to CRAR. Since LKPAC only contains hard money contributions, as long as the acquisition of LMLS was paid for with hard money dollars, the $270K in profits from LMLS would be considered hard money.

Explanations, Caveats, Warnings

This is almost purely hypothetical, since every Association is subject not just to federal law and regulations, but to its state laws and regulations. Let me give you some of those warnings and explanations from Ralph Holmen directly:

Having thought about this, it would appear that the advantage to this arrangement is that the PAC could earn higher investment returns from investing in the MLS by acquiring ownership of it from the association.  That’s the principal (indeed, only) virtue; it’s also the principal vice.  As noted below, the acquisition of the MLS by the PAC from the association would have to be done on a clearly “arms-length basis”, including payment of fair market value of the MLS valued in some reasonable way, and use of terms for the transaction (financing, for example) that are the same as, and indeed no more favorable than, customary terms that would be available “in the market” if the association were to sell the MLS to another entity.

Each state’s campaign finance laws are unique, but in general (as under federal law) those laws will likely deem any favorable treatment for the PAC in this transaction (or in its ownership and operation of the MLS by the PAC)  to be a contribution by the association (or the MLS) to the PAC.  In those states that prohibit contributions from corporations, or impose a limit on the amount of any contributions a corporation may make to a PAC, any “preferred treatment” of the PAC in connection with ownership of the MLS, would constitute a contribution.  Before proceeding with acquisition of an MLS by a PAC for the purpose of earning higher than  normal investment returns, it would be prudent for the state to consult with counsel or, better yet, seek guidance from the state campaign finance regulator regarding the acquisition transaction itself, and the later payment of dividends by the MLS to the shareholder PAC.  Such guidance can often be issued in the form of an Advisory Opinion confirming the lawfulness of a particular arrangement or activities proposed.

So, there you have it. Another thing to be aware of is that the profits from the MLS to the RPAC would be taxed at the highest 35% rate, as an unrelated business income tax. In the Game of Thrones example above, that $270K in profits would actually be $175,500 after federal taxes.

But still. The fact that this is even possible should make Association leadership think.

Using the Lannister for King PAC example above, let’s assume that outside consultants from the Iron Bank of Braavos determine that the FMV of LMLS is 3 time earnings, or $810K. CRAR would sell LMLS to LKPAC on 20% down payment ($160K) and seller-finance the rest over say a 15 year term at 8% interest (way above market). Monthly payment works out to $6,211 and change for LKPAC. Monthly profits work out to about $14,625 after paying federal UBIT tax. After debt service, we’re still looking at some $8K or so in hard money income. Each month.

And of course, donors can still continue to donate to LKPAC. This investment doesn’t change that. What it does is raise almost four times what it raises from donors from the MLS investment, and it does so as hard money that can be given directly to the Joffrey for King Campaign, or to the Friends of Doran Martell, or any other candidate for office.

It’s a game changer.

Such a move would make the RPAC a totally dominant player in local and state politics. Local campaigns are not your Presidential races with billions of dollars being raised. In many cases, especially for city council type races, we’re talking about thousands of dollars, not millions. Even statewide races in many states don’t often involve millions in money raised. An extremely well-funded hard money PAC would be an organization that no candidate can possibly afford to ignore. One of the reasons why the state REALTOR Associations and large local REALTOR Associations are so powerful is that they have hard money PACs from member donations that can contribute significant sums to campaigns.

Now imagine quadrupling that amount.

Crazy Idea, Right?

Once again, I’ll echo Ralph Holmen in warning everyone that if you’re even remotely interested, you should talk to a lawyer in your state who understands campaign finance laws and regulations. You might want to check with the state election regulators as well, as Ralph suggests. And you could contact Ralph Holmen directly and get his thoughts.

There are likely lots of other reasons why this would never work in your area, for your Association. But… having said all that…

Real estate is absolutely unique in its structure. As sketched above, the three entities — the MLS, the Association, and the PAC — are really three arms of the same organization. The REALTORS firmly control all three in most cases, and the three entities share policy, coordinate activities, have symbiotic relationships, and often share staff, office space, and other overhead. In such a scenario, some clever corporate restructuring could yield incredible dividends. (Get it? Heh.)

Might be a crazy idea. It’s certainly an “out of box” idea, of the “There is no box” variety. And it just might be crazy enough to work.

Who wants to give it a try?

-rsh

 

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