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Mercy Foundation Group raises money for charities — and red flags

 
This 193,000-square-foot Wisconsin building was acquired by Mercy, which raises money for micro loans by buying and selling distressed properties.
This 193,000-square-foot Wisconsin building was acquired by Mercy, which raises money for micro loans by buying and selling distressed properties.
Published Nov. 28, 2014

It seems like a win-win:

A company stuck with a shuttered factory or a vacant office building gets a big tax deduction for selling at a bargain price to a nonprofit. The nonprofit fixes up the property and leases or resells it, raising money for charity.

Tampa-based Mercy Foundation Group has used that model to acquire 40 properties around the nation and to make micro-loans to poor people across the globe.

But Mercy's leadership and model have raised what one expert on charities called "red flags":

• Mercy's most recent filing with the IRS suggests it spent nearly $1 million helping people in 2013. But its founder acknowledges that only about $70,000 actually went into microloans.

• The founder, who is also Mercy's CEO, ran a strikingly similar nonprofit, Seed America Foundation, which went bankrupt in 2010.

• Mercy's four-person board — two of the four are the CEO and his wife — is too small to provide adequate oversight of Mercy's finances and operations.

"The whole thing looks odd," said Sandra Miniutti, vice president of the charity watchdog group Charity Navigator.

Founder Joseph "Joe" Johnson, a 39-year-old entrepreneur, said Mercy's unusual fundraising approach is ''not for the faint of heart."

"But five years from now," he said, "Mercy ought to be doing millions (in loans) to underprivileged entrepreneurs."

Mercy Foundation and its affiliate, Mercy Real Estate, operate out of a nondescript building in Ybor City. There, employees scour commercial real estate sites for distressed properties and urge the owners to "sell to Mercy" and help "change the world."

All of Mercy's real estate transactions are known as bargain sales or "170 exchanges" because they fall under a provision of the federal tax code that covers gifts to charities.

The buyer, which must be IRS-recognized as a nonprofit, pays for the real estate with cash and gives the seller a gift receipt for tax purposes. The seller deducts the amount of the gift receipt on its tax return.

The "gift" is the difference between the sale price and the appraised fair-market value of the property.

Though bargain sales are sometimes used in donating real estate to universities, schools and the like, they are rare. And few, if any, other nonprofits use them as their only fundraising tool.

"Honestly, I don't know of any other organization that actively goes after them like we do," said Derick Sutton, Mercy's chief marketing officer.

On its website, Mercy said it has acquired more than 4 million square feet of commercial space in 18 states. Recent purchases include a former shoe factory in Milwaukee and a plant in Nebraska once used to make shock absorbers.

Mercy still holds most of the properties but has sold about a dozen. After closing costs and other expenses, the proceeds are used to make microloans — typically loans of a few hundred dollars that help people in mostly Third World countries start or build small businesses.

The money is distributed via Kiva, a California nonprofit that acts as an online middleman between borrowers and lenders. Called "crowd funding," a single loan could be funded by many lenders — individuals as well as organizations like Mercy.

In its 2013 filing with the IRS, Mercy said it has "helped fund" more than 2,000 microloans in more than 60 countries.

How much of Mercy's own money actually went into the loans?

It's impossible to tell.

According to the IRS filing, Mercy spent $906,148 last year on "program service accomplishments," including microloans. That was 63 percent of its total expenses.

Charity watchdog groups say nonprofits ideally should spend at least 66 percent of their budget on the charitable purpose. Most nonprofits spend at least 75 percent.

Mercy's 63 percent is "on the low side, but for a new charity it's probably more normal than not," said Miniutti of Charity Navigator.

Johnson said Mercy had to put a lot of money into startup costs. Thus most of the $906,148 for "program services" actually went for salaries and other expenses of Mercy's own employees.

The actual amount spent on microloans, Johnson said, was about $70,000, a figure that does not appear anywhere on Mercy's IRS filing.

Other nonprofits making microloans listed the amount in a box on the IRS form that asks for "grants and other assistance to governments, organizations and individuals outside the United States." Accion International, a Boston nonprofit, reported $6.3 million in assistance. Opportunity International of Illinois reported $10 million in assistance.

That box on Mercy's IRS form is blank.

Regardless of how much Mercy loaned last year, the amount this year should be about $250,000, Johnson said. "Yes, it's going to take a while, but like a snowball, you start small and keep growing."

• • •

Johnson, a former Ohio businessman who declared personal bankruptcy in 1996, started Mercy Foundation Group in 2009.

At the time, he was embroiled in controversy over his Seed America Foundation. It too bought distressed properties, but its charitable goal was to raise money to establish a business school based on what Johnson called Christian values.

Seed America expanded rapidly, employing about 60 people and holding properties worth about $50 million by 2008. As the credit dried up during the recession, the foundation had a hard time getting enough cash to finance its day-to-day operations, let alone fulfill its charitable mission.

"It's an odd and disconcerting model," Dean Zerbe, who advised the U.S. Senate on charity issues, told the Chronicle of Philanthropy in 2008 for a critical story on Seed America. Regulators should have been paying more attention to the organization, Zerbe said.

In 2010, Seed America laid off all of its employees and declared bankruptcy with $16.6 million in debts. One lender accused Johnson of demolishing an Illinois factory, selling the scrap metal for $370,000 and improperly pocketing money that should have gone to creditors. A bankruptcy judge ordered a U.S. marshal to retrieve more than $100,000 in cash from Johnson's Apollo Beach home.

Within two years of Seed America's collapse, Johnson bought Get Motivated Seminars, a Tampa company that hired notable speakers such as Bill Cosby, former first lady Laura Bush and former New York Mayor Rudy Giuliani for motivational events. As Bloomberg News reported, the daylong seminars were actually vehicles for investment firms to sell courses in stock options and other risky trading tactics.

Get Motivated shut down in mid 2012, throwing dozens of people out of work and leaving millions in unpaid bills, records show.

That left Johnson with his Mercy Foundation. According to its IRS filing, it has just four officers and directors: Johnson, his wife, Lindsay, Dave Murphy and Michael Pink.

Murphy is a pastor in Brandon. Pink, who lives in Sarasota, is described on his website as an author, a speaker and a corporate sales trainer known for "teaching biblical models for the sales process."

That Mercy has only four board members and that only two, Murphy and Pink, could be considered independent, is a "red flag right off the bat," said Miniutti of Charity Navigator.

"You're talking about a lot of money here, at least on this (IRS form) and not to have a more diverse board is troublesome," she said. "There's a definite lack of oversight."

Johnson said he and his wife get no salary from Mercy. The IRS filing shows that the couple deferred $290,000 in compensation and loaned Mercy $852,767, which was used to buy distressed properties, Johnson said.

"When we started, no one was willing to loan money to do these types of deals. It just required a commitment from people within the company to really get it going."

Johnson, who is still trying to settle a $11 million lawsuit against him stemming from Get Motivated's demise, is vague about where he and his wife got the money to loan to Mercy. "I've acquired companies and done well with some, done poor with some" is all he would say.

Miniutti said loaning to a nonprofit is not unheard of, especially with a new organization, but is still unusual.

"There is just the concern that without a diverse board, what is going on?" she said. "Are they going to be funneling money back out of the charity? Is there oversight? What's really going on here?"

Johnson knows there might be skepticism about Mercy given the problems with Seed America. But he said there is a key difference between the two organizations.

"Seed America relied a lot on bank financing and it was very heavily leveraged, and that was a huge mistake," he said. "Mercy is not in that position."

Wouldn't it be easier to raise money for microloans some way other than through a highly unusual and complex type of real estate transaction?

"We could have done like everyone else, just raise cash through donations, but we just thought that approach was very competitive," Johnson said. "This does require a special set of skills, but the objective over the long term is to be a very effective process."

Times researchers Carolyn Edds and Caryn Baird contributed to this report. Contact Susan Taylor Martin at smartin@tampabay.com or (727) 893-8642. Follow @susanskate.