June 25, 2008
Here are details of MAPE's building payoff proposal
Dear MAPE Member:
I am writing you today concerning a proposal from the MAPE Finance Committee. They are proposing that MAPE use a portion of the Crisis Fund (our strike fund) to pay off the mortgage for the MAPE building. There is currently more than $3.2 million in the Crisis Fund. The payoff amount would be approximately $2.3 million. By doing this, MAPE would save approximately $60,000 per year in interest payments alone. A minimum of $1 million will remain in the Crisis Fund, after paying off the mortgage. In addition, more than $3 million would still be available from other accounts and a letter of credit on the building for any possible strike in 2009. In essence, more than two times the amount incurred in the 2001 strike will be available after paying off the building.
The MAPE Finance Committee is made up of MAPE members, and it is tasked with monitoring the finances of MAPE, and preparing the MAPE budget for presentation to the MAPE Board of Directors and Delegate Assembly. The Delegate Assembly is MAPE’s highest ruling body and it meets once a year. The Crisis Fund is money we hold in case of a strike. In our last strike, we spent less than $1.5 million.
Changes that have been made in the MAPE investment strategy over the last four years have more than doubled the rate of return. That additional revenue has been invested in the Crisis Fund.
The MAPE Building Corporation owns the MAPE building because the MAPE Union cannot legally own property. The actual transaction would be a loan from the Union to the MAPE Building Corporation. The officers and shareholders of the Building Corporation are the MAPE Board of Directors. Both our legal counsel and our auditor suggested this structure. This transaction has been reviewed by the independent auditor MAPE uses. In a letter to MAPE, he said, “… My simple answer would be ‘yes, do it.’ ” The full text of the letter can be found on the MAPE website at the folowing link: Letter from auditor (PDF).
The $60,000 per year savings to MAPE comes from not paying interest on the mortgage with a balloon payment in 2010. Currently, MAPE pays approximately 6.5 percent per year on the mortgage. That rate can float with the prime rate. For commercial properties, a fixed rate loan is not an option. We currently earn about 3 percent per year on investing the cash in the Crisis Fund. By borrowing a portion of the Crisis Fund, we lose the income but save the interest being paid on the mortgage. It is proposed that the Delegate Assembly approve this transaction at its meeting this September.
I would also like to take this opportunity to answer some questions that members have had about this transaction:
1. When was the building purchased and for what amount? It was bought in 2003 for $1.2 million plus the remodeling cost of approximately $1 million – the building had been a doctors’ clinic. The total amount we have invested in the building is $2.2 million. The purchase was approved by the delegates to the 2002 Delegate Assembly.
2. What is the current value of the building? An independent real estate agent did a market analysis of the building. This person estimated the value at $1.9 to $2 million in this market.
3. What is the current interest rate and payment? The interest rate floats and is currently at 6.5 percent. The payment is $15,039.78 per month.
4. Where is the building? The building is at 3460 Lexington Ave. North in Shoreview. It is a three-story building. MAPE occupies two floors with the first floor available for rent.
6. Why did MAPE buy a building? MAPE had outgrown its space due to membership growth and the resulting increased staff, and would have experienced additional rental costs. The rental income from the first floor was to be used to offset part of the mortgage payment. By being a landlord, it was hoped that MAPE would pay less for a mortgage payment than it was paying in rent.
7. Is the first floor rented? I am pleased to say that part of the first floor is now rented for five years. With the downturn in the economy, MAPE lost its original renters.
8. How and when will the Crisis Fund be replenished? MAPE will pay the savings from the building payoff back into the Crisis Fund. MAPE will also make its normal payment to the Crisis Fund. In effect, the interest portion of the mortgage payment will be put in the Crisis Fund. The Crisis Fund will be restored to its current balance in about 4½ years.
9. How much are the regular monthly costs of the building? The total costs are about $16,000 per month, which includes expenses such as taxes, energy and insurance, and, in addition, it includes a contribution to a reserve account for maintenance and repairs.
My initial reaction to the proposal was, “We need the Crisis Fund for the next round of negotiations!” I was assured by the Finance Committee that by getting the line of credit, MAPE will have approximately as much money available for a strike as it would have by not paying off the building. Please talk to your Regional Director or a Statewide Officer if you have any more questions or look at our web page. Please also let your Regional Director, Statewide Officers and your Delegate Assembly representatives know your views on this matter.
The Board of Directors and Finance Committee are available to meet with your members at a local meeting to discuss this matter in more detail, if requested.
Sincerely,
Chet Jorgenson
MAPE Statewide President
