SBM Real Property Law Section eNewsletter

November 2012

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Howard A. Lax, Lipson, Neilson, Cole, Seltzer & Garin, PC

Patricia Paruch, Kemp Klein Law Firm

Foundations as Investment Partners: Program-Related Investments through Low-Profit LLCs

By Kristin Lusn, Lusn Law, PLLC

Urban revitalization addresses sustainability, repurposing, social consciousness, and a desire to improve the post-industrialized world through unique initiatives. These initiatives need new sources of investment and funding, such as a Program-Related Investment (PRI) made through a Low-Profit Limited Liability Company (L3C).

A PRI is a loan or equity investment made to a for-profit entity by a private foundation for one of its tax-exempt purposes. No significant purpose of the investment can involve production of income or appreciation, the investment must significantly further the foundation's tax-exempt activities, and the investment cannot have been made but for the relationship between it and the foundation's exempt activities (IRS Regulation § 53.4994-3). For instance, a foundation dedicated to improving urban nutrition might loan to or investment in an urban food cooperative. If the investment is properly vetted and documented, profits distributed to the charity would not jeopardize the foundation's tax exempt status.

An L3C is a "for profit entity with a non-profit soul," i.e. a taxable for-profit entity with a socially conscious mission designed to streamline the process of receiving PRIs. Investment in an L3C will qualify as a PRI if the missions of the foundation and L3C align. Thus, the foundation may provide capital when the L3C's business concept is too unusual or the financial risks are unacceptable for traditional investors and lenders.

The ABA's Business Law Section criticizes the L3C concept as unnecessary and misleading (see PDF). This criticism alleges that an L3C is not a better entity to receive a PRI than other forms of business entities. Whether practitioners utilize a L3C entity or a traditional entity as a vehicle for urban projects, their focus should remain on the requirements and qualifications for a PRI rather than the form of entity managing the project.

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November 1, 2012
2:00-5:00 p.m.
Homeward Bound
Your Government, Your Neighbor, and Your Water: The Ebb and Flow of Property Rights

Inn at St. John's, Plymouth

January 17, 2013
"Groundbreaker" Breakfast Roundtable
Dealing with Distressed Properties, Part II—The Lawyer's Guide to Buying Distressed Property
Breakfast at 7:30 a.m.
Roundtables 8:00-9:30 a.m.
Townsend Hotel, Birmingham

Save the date
March 14-16, 2013
Winter Conference 2013
J.W. Marriott, New Orleans

Interested in writing a future article for the e-Newsletter?
Please contact co-editors:
Howard Lax at or Patricia Paruch at

Material Changes to the Rights of Condominium Co-Owners

By Jessica Hallmark, Banas & Assoc. PLLC

In Pole v. Sterling Woods Condo. Ass'n (Mich. App., No. 304001, unpublished, August 7, 2012), the court invalidated a consolidating master deed which included amended bylaws that materially altered the rights of condominium co-owners, as it was recorded by the developer without co-owner approval.

The original master deed provided that a master deed or bylaws amendment materially affecting the co-owners' rights required approval by 66 2/3% of all co-owners. The developer recorded a consolidating master deed and amended bylaws without seeking co-owner consent. The amended bylaws eliminated a provision requiring approval of the annual budget by two thirds of the co-owners. This materially affected the co-owners' rights by removing a check on the association's power to budget for any expenses it chose and assess the co-owners accordingly.

Under the Michigan Condominium Act (the Act) the developer may reserve, in the condominium documents, the right to amend them for a specified purpose without co-owner consent (MCL 559.190(3)). The court here did not consider whether the documents contained such a reservation because the issue was never raised in the trial court and therefore was not preserved on appeal. The Act prevents condominium associations from materially amending condominium documents absent the consent of two thirds of all co-owners and mortgagees (MCL 559.190(2)).

Application for Counsel: Counsel should carefully consider provisions in condominium documents that may create co-owner rights, and whether and how such provisions may be changed. Counsel should also consider whether the language in the condominium documents satisfies FHA, FNMA and FHLMC guidelines so that the Units are eligible for conventional financing and/or FHA mortgage insurance.

The views and opinions expressed in these articles are those of the authors, and they do not reflect in any way the positions of the State Bar of Michigan or the Real Property Law Section. These columns are meant for informational purposes only and should not be construed as legal advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed in this communication.