A major donor went to the University of Louisville Foundation in 2014 with a proposition.
The company Henry Vogt Heuser Jr. ran for nearly three decades was in bankruptcy. His factory, empty and racking up expenses, was for sale. Would the foundation be interested in making a deal and helping him out?
University leaders assured Heuser it would.
There was little risk, then-president James Ramsey explained in an April 2014 foundation board meeting. The reward would likely be a “multi-million dollar benefit.”
And that is how the university’s nonprofit fundraising arm took a 99 percent ownership stake of a vacant factory in Oklahoma, 666 miles from campus.
For more than two years, prospective buyers came and went, and the U of L Foundation waited while the factory sat on the market.
At least, until the foundation received a series of records requests from WFPL’s Kentucky Center for Investigative Reporting. A day after a reporter visited the site in August, the foundation and its attorneys signed off on a set of “unwinding” documents, canceling the whole deal without ever making a penny.
U of L administrators said the timing is merely coincidence, and they backed out because the factory wasn’t selling.
A university foundation heeding a big donor’s request to buy into a building of questionable value, with no academic purpose, raises ethical red flags, according to several experts in tax law or nonprofit management who discussed the transaction with KyCIR.
Documents plainly call it an investment. University staffers said in interviews that it was a gift, but couldn’t explain why it was handled this way. Experts were baffled by the transaction’s uncommon setup, and several said the agreement appears designed to shield the donor from some taxes.
“It’s a good example of how fundraising arms of colleges and universities in particular really can basically sell their souls to a donor in return for the possibility of a contribution,” said Marcus Owens, a Washington, D.C. attorney who ran the IRS Exempt Organizations division from 1990 to 2000 and reviewed this transaction.
Heuser sits on the U of L Board of Overseers, a non-governing advisory board, and has given millions to U of L scholarship programs. Nothing about the deal appears illegal on Heuser’s end; citizens and businesses can legally maneuver the tax codes for the biggest deductions. But the foundation could jeopardize its tax-exempt status by taking part.
IRS code says nonprofits have a responsibility to avoid accommodating a taxpayer trying to enter into a tax shelter. The transaction raises serious questions about Heuser’s relationship with the foundation and how the nonprofit allowed itself to be used.
The abrupt unraveling of the transaction comes amid an upheaval of university leadership and a series of scandals that have cast a cloud over the secrecy-cloaked university and its foundation. The nonprofit manages the school’s roughly $700 million endowment, and it’s the focus of both a state audit and an upcoming forensic audit by the university. (Read KyCIR’s U of L coverage)
The unique Oklahoma agreement invites further scrutiny about the financial stewardship of the foundation, its mission and its assists for donors, experts said.
Heuser declined to comment. David Saffer, the foundation’s attorney, said in late September the nonprofit planned to “have the transaction independently reviewed” and refused to answer additional questions.
A VERY FRIENDLY TRANSACTION
Signs on the factory in an industrial town near Tulsa still proclaim it the home of Thermal Engineering International, though the company terminated its lease and left almost three years ago for Missouri. Sapulpa city leaders, looking to lure new jobs to town, praise the property’s marketability.
“For the right heavy manufacturer, it’s a pretty strong facility,” said Greg Pugmire of the Creek County Industrial Authority.
The Oklahoma factory has been owned since 1990 by Louisville-based Henry Vogt Machine Co., a company run by Heuser’s family since its formation more than 100 years earlier.
Bankruptcy records show that Heuser in 2003 formed a shell company, CF One, to loan money to the struggling machine company. By 2010, the company was buckling under the weight of class-action asbestos lawsuits. With bankruptcy looming, the machine company transferred ownership of the Oklahoma property to CF One to erase $5 million in debt.
In 2013, the factory’s tenant announced plans to move and take with it the rent money that flowed to CF One.
The foundation and Heuser’s family have a long relationship. The Vogt family name adorns a building at the Speed School of Engineering, and Heuser emptied out his family foundation’s coffers with a $2 million gift in 2013. His scholarship fund helps hundreds of students attend U of L.
In late 2013, Heuser pledged to the foundation a huge estate gift valued at $13.8 million, documents show.
Months later, in February 2014, Heuser’s representatives and the foundation started to talk about Sapulpa, according to emails obtained by KyCIR. The emails make clear that several university and foundation staffers bent over backwards to accommodate Heuser.
For Heuser’s part, accounting firm Strothman and Co. and attorney Ted King of Frost Brown Todd represented CF One.
“I believe this will be a very friendly transaction and one that will inure to the benefit of the Foundation,” King wrote in an email obtained by KyCIR through a records request.
The agreement, hatched in emails over two months, left the foundation owing $3.47 million, at least on paper, to its longtime benefactor’s company.
U of L administrators said in recent interviews that it wasn’t a true debt, because payment would be triggered by the factory’s sale. In essence, whoever bought the factory would pay the debt to Heuser, not the foundation.
“The foundation was never going to be out a dollar,” said Jason Tomlinson, the foundation’s chief financial officer.
Tomlinson said he couldn’t explain the rationale of the Sapulpa transaction’s setup and referred questions about the structure to Heuser.
Tomlinson did say that the $3.47 million promissory note functioned as a vehicle to get a donation to the foundation. The note gave the foundation any proceeds from the factory, which was on the market for $6 million.
The foundation was apparently so confident in the factory’s sale that leaders put a $1.94 million pledge from Heuser’s company on the nonprofit’s books.
AN INVESTMENT, A GIFT, OR SOMETHING AKIN TO A GIFT?
More than two years later, the nature of the deal still defies categorization. It’s described as a purchase in documents. In financial statements, the foundation calls the shares in the Sapulpa factory an “equity method investment.” Meanwhile, university and foundation staffers call it a gift, or something “akin” to a gift.
The distinction matters. Though it has made controversial investments in real estate, the foundation’s mission is to support the university’s goal of becoming a premier metropolitan research university.
A foundation bylaw lays out rules for business deals: “no part of the Corporation’s income or property shall inure to the private profit of any donor, member, trustee, or individual having a personal or private interest in the activities of the Corporation.”
Keith Inman, vice president of university advancement and lead fundraiser, said he doesn’t technically work for the university’s fundraising arm and had no knowledge of the bylaw. The foundation’s organizational chart on its website, however, lists Inman as second-ranking in the nonprofit, under the president and alongside the executive vice president.
“I’m not familiar with what the bylaws of the foundation are, and whether this would or wouldn’t meet that,” said Inman. “This did not inure to Henry’s benefit in that way.”
Owens, the former IRS official, said the deal “certainly seems like it was structured to benefit the donor rather than the university.”
The deal could have brought financial benefits for the donor twice, Owens said: first, when the foundation bought the shares and again when someone bought the factory. The foundation’s involvement may have shielded the donor from certain taxes on each transaction, he said.
“Even though it didn’t put its own assets at risk, it allowed itself to be used for the benefit of a donor, to appease the donor,” Owens said.
Had the property sold, the foundation’s debt to Heuser’s company would have reduced any taxable gain, since the $3.47 million from the note would become an untaxed loan payment. (Heuser’s company, CF One, would have likely paid tax on any interest it received.)
The purchase doesn’t fit with the foundation’s academic mission and reason for tax-exempt status, Owens noted.
Inman, the university’s lead fundraiser, said he doesn’t get involved in the details of donations. He said Heuser has been uninterested in a tax deduction in past gifts.
“This thing has been scrutinized and it’s a very creative and certainly aboveboard way of giving,” Inman said of the Sapulpa transaction, citing internal oversight at the foundation.
Another questionable aspect of the Sapulpa transaction surrounds shortcuts the foundation took in evaluating and appraising the empty factory.
An independent appraisal is a basic aspect of any real estate transaction. In this case, the foundation didn’t demand one.
The foundation relied upon a far less rigorous “calculation of value” by Strothman & Co., the accounting firm already working on the deal for Heuser.
The Louisville CPA firm’s “calculation of value” used four-year-old appraisals, information from Heuser and other documents to determine the value of Sapulpa Real Estate Holdings, the LLC that Heuser created to own the factory. The method is typically used to determine the value of a business when the numbers aren’t scrutinized by the IRS or in court.
John Brenan, director of appraisal issues for The Appraisal Foundation, which sets the nationwide standard for real estate valuation methods, said he has never heard of a calculation of value. Brenan added that a bank would never accept it as proof of a property’s worth.
Curiously, Strothman’s valuation arrived at nearly the same exact number as Heuser’s cost basis of $3.5 million in the property, a number the foundation and Heuser’s representatives had already agreed to set the note to match.
“I’ll tell you that [William Meyer’s] firm is undertaking the valuation so we can get the note amount,” Heuser’s attorney, Ted King, said in an email to the foundation’s attorney.
Meyer, who was copied on that email, didn’t respond to a call for comment. King declined to comment.
Emails show Saffer, the foundation’s attorney, was aware of Heuser’s tax-related needs.
“I agree that the plan is for the note to be Henry’s cost basis but to jump through their tax hoops they will need that valuation,” Saffer wrote.
Robert Wexler, a San Francisco tax and corporate attorney, called the valuation matching the pre-set number “suspicious.”
“Theoretically, valuations should be aboveboard and not tailored to what the donor wants them to be,” Wexler said.
Strothman found that Sapulpa Real Estate Holdings LLC was worth $5.5 million overall. Next, it calculated what the foundation’s stake — 99 percent of Class B shares — should be worth.
Strothman’s math, however, doesn’t add up.
Though 99 percent of the value would be about $5.4 million, Strothman applied dubious discounts that led to the pre-determined number of roughly $3.5 million.
First, Strothman’s valuation knocked 25 percent off because Heuser’s 1 percent stake still left him in control of the company. The discount itself is not unusual, but a line in the operating agreement specifically forbade it, saying the fair market value should be determined “without taking into account any minority or lack of voting power discounts.”
Second, Strothman knocked off 15 percent for marketability. Since 16 cranes were stored inside the factory, the market was limited to buyers who could use the cranes. But calling the cranes a negative contradicts Strothman’s claim earlier in the report that the cranes were actually “critical” for getting a good price.
The Sapulpa transaction had been arranged well before foundation board members learned of it. Emails show university staffers messaged each other, speculating whether they could meet Heuser’s timeline and complete the deal without the board’s approval.
The matter did go before the board in April 2014, with the Strothman valuation included in the presentation. It passed unanimously.
James Ramsey, who held a highly criticized dual role as U of L president and foundation president, declined to be interviewed through his attorney. He resigned from the university in July and the foundation in September.
The current foundation board chair, Brucie Moore, said she doesn’t know much about the transaction, but she believed it was aboveboard.
“If there’s criticism of the foundation, I would hate to see that creep over to our donors, who deserve nothing but praise for their support of the university,” Moore said.
Larry Benz, the U of L board chair who has been publicly critical of the foundation in recent weeks, was on the foundation board when the factory purchase was approved. He declined to comment “due to the complexity of a real estate investment and a donation.”
A QUICK CANCELLATION
The story behind this multimillion dollar university transaction eluded people in Oklahoma. Sapulpa residents had no idea the University of Louisville Foundation had a stake in the factory’s future.
And on a hot day in late August, the possibility of a payout lay ahead as a real estate agent escorted a potential buyer through the factory’s cavernous hallways.
A security guard declined to let a reporter on the property. The realtor declined to stop and talk. Ted Fisher, economic development director in Sapulpa, said the property is “really being worked hard” by the realtor.
“We’ve had interest just in the last week in perhaps seeing if the owner would entertain a lease,” Fisher said.
But the next day, after years of waiting for a potential payout, the foundation and Heuser’s company agreed to unwind the deal.
There were no discussions about canceling the deal until that week, no concerns expressed in emails in the previous two years.
The explanation in the unwinding document was just one sentence: “The property has not sold, substantial operating expenses have accrued, and CF One and the foundation have decided to unwind the transaction.”
And that was that.
Via email, the foundation’s attorney said the $1.94 million pledge will soon be rolled back to $0.00.
James McNair contributed to this report. Kate Howard can be reached at firstname.lastname@example.org and (502) 814.6546.
Disclosures: In 2015, the University of Louisville, which for years has donated to Louisville Public Media, earmarked $3,000 to KyCIR as part of a larger LPM donation. University board member Stephen Campbell and former member Sandra Frazier have donated. Foundation attorney David Saffer previously served on LPM’s board.