For the past 15 years, John Rowe has owned a duplex penthouse apartment that offers a view of Manhattan from its perch 29 stories above Central Park.
Dr. Rowe bought the apartment in 1989 using a $2.25-million, interest-free loan from the nonprofit Mount Sinai Hospital and School of Medicine, which made the deal as part of an effort to recruit him as president. Dr. Rowe repaid the loan after he left Mount Sinai in 2000 to become CEO of the Aetna insurance company, but he still owns the apartment. That means he can pocket any profit should he ever sell it. Late in 2002 one of his neighbors, the actress Tatum O’Neal, offered her apartment, 13 floors below Dr. Rowe’s, for $4.5-million.
Not only does Dr. Rowe stand to make several million dollars should he ever sell the apartment, but -- thanks to inflation -- he actually ended up paying Mount Sinai back less money than he borrowed. When he repaid the loan in 2001, the $2.25-million he borrowed in 1989 was worth $3.12-million in 2001 dollars. By not charging him interest, Mount Sinai lost $870,000 on the loan.
In most cases, federal tax law would require Dr. Rowe to pay taxes on the amount of money the IRS calculated he should have paid in interest. But because Dr. Rowe, who moved to New York from the Boston area, used the loan to buy a home when relocating from one part of the country to another, he was exempt from paying those taxes.
As for Mount Sinai, which has struggled financially for the past five years, had it put the $2.25-million into a stock fund indexed to the Standard & Poor’s 500 when it lent the money to Dr. Rowe, it would have earned about $9-million in profit by the time he left.
Mount Sinai’s deal with Dr. Rowe typifies a broader practice in the nonprofit world: using charitable assets to offer mortgage loans to recruit high-level executives. In an analysis of Form 990 informational tax returns filed by 10,700 nonprofit groups from 1998 through 2001, The Chronicle found that at least 140 groups had interest-free loans outstanding to officers or directors. The groups include the Solomon R. Guggenheim Foundation, in New York; the National Geographic Society, in Washington; the Dana-Farber Cancer Institute, in Boston; and the San Francisco Museum of Modern Art. Also among the groups is Catholic Healthcare West, in San Francisco.
Recruiting Leaders
Dana-Farber gave its president, Edward J. Benz Jr., a $600,000 interest-free mortgage in 2000, along with annual compensation of $547,899. By 2002, Dr. Benz’s compensation had reached $735,268.
Dr. Benz referred questions about the mortgage to Bill Schaller, a Dana-Farber spokesman, who said the organization provides interest-free loans “on a very limited basis from time to time. Typically it’s used as a recruitment and retention tool, in order to get some top senior faculty.” To take the Dana-Farber job in Boston, Dr. Benz left the Johns Hopkins University School of Medicine in Baltimore, a community with a lower cost of living.
Indeed, advocates of interest-free loans say such perquisites are necessary to compete with for-profit companies for executive talent capable of running complex organizations.
“You are trying to compete in the marketplace to get the best person you can,” said B. Francis Saul II, a prominent Washington-area mortgage banker and real-estate developer who sits on the board of the National Geographic Society. “This is just a straightforward business thing. You make the best judgment that you can to get the best person you possibly can.”
In October 2001, the society gave John Q. Griffin, the chief operating officer at Hearst Magazines International, an $800,000 interest-free mortgage, in addition to a $289,163 annual compensation package, when he left Hearst to become president of the society’s magazine group. National Geographic agreed to forgive $50,000 of the loan annually for five years as long as Mr. Griffin remains on the job. The mortgage note says the loan must be repaid in full by the end of those five years.
Betty Hudson, a spokeswoman for the society, said that at first the organization did not include such a housing loan in the package it offered prospective applicants for the job, but no qualified publishing executives would even consider the position unless the group helped defray the cost of buying a home in the Washington area, which is more expensive than most of the rest of the nation. Mr. Griffin formerly lived in Allentown, Pa., where housing generally is far cheaper than in Washington.
The San Francisco Museum of Modern Art gave its new chief executive, Neal Benezra, a 10-year, no-interest mortgage of $801,900 in 2002 when he moved from Chicago, where he was a deputy director of the Art Institute of Chicago. The San Francisco museum last year also paid him $384,583 in compensation.
Mr. Benezra referred questions about the loan to Katie Koch, deputy director of administration and finance at the museum. Ms. Koch said that because San Francisco has the most expensive housing prices in the nation, “trying to get anyone to come into the Bay Area and buy a house that the director of a museum like this would expect to live in was going to require some help.”
Charges of Favoritism
Such explanations do little to persuade critics of no-interest loans. They see such perquisites as hallmarks of inappropriate favoritism and misuse of charitable assets.
Rikki Abzug, a professor of nonprofit management at New School University’s Milano Graduate School of Management and Urban Policy, in New York City, said that organizations do not need to offer lavish loan deals to find qualified executives.
“A lot of people are dying to get these jobs,” she said. “You have to wonder about the foresight of an executive who either demands or even accepts such a deal, because you have to wonder if that executive is really looking out for the nonprofit first and foremost. You have to wonder about that executive’s commitment to the organization’s mission. If you have to beg somebody to work for your organization, and engage in a practice that may someday hurt the organization in order to recruit him, you have to wonder if that’s the right person for the job.”
Added John Vogel, a professor of nonprofit management at Dartmouth College’s Tuck School of Business: “When you start by saying this person is such a star that we are going to treat him differently than the other people who work here, you go down a road that’s very dangerous. If you are going to be the CEO of a nonprofit, you lead by example. And if the example is, ‘I’m going to get something that none of my employees are going to get,’ there’s a problem with that.”
In Mount Sinai’s case, Mr. Vogel said, “The nurses at that hospital are going to be upset, and you are asking nurses to do heroic stuff.”
Rethinking a Policy
Mount Sinai officials say they would not repeat the loan today because of the public’s mistrust of big-money institutions stemming from the Enron scandal and controversies surrounding several nonprofit groups in the past few years, such as the investigation into executive benefits at the United Way of the National Capital Area, in Washington, and questions about how the American Red Cross used funds donated after the September 11, 2001, terrorist attacks. The public’s “perspective on these issues” has changed, said Gary Rosenberg, executive vice president during the period when Dr. Rowe was president, so that now “Mount Sinai would not do this again.”
Still, Mr. Rosenberg, now a professor of community and preventive medicine at Mount Sinai, said the medical school’s board thought in 1989 that it was necessary to offer the loan to help attract a leader who could improve the school’s national reputation. “It had to do with taking a full professor at Harvard, somebody who brought great luster to Mount Sinai, and getting him to come,” Mr. Rosenberg said.
Under Dr. Rowe’s leadership, Mr. Rosenberg added, the medical school became one of the two dozen top recipients of National Institutes of Health research grants.
“If you want to look at the effect of Dr. Rowe’s presidency on a risk-return basis, I think we’ve done extremely well,” he said.
But Mount Sinai also suffered a string of budget deficits following a merger with New York University Hospitals Center that Dr. Rowe helped to engineer in 1997. In the past three years alone, Mount Sinai’s losses have totaled about $200-million.
Dr. Rowe declined to comment on his loan, but his spokesman at Aetna pointed to another reason for the loan. The Mount Sinai loan was necessary, said Aetna’s Roy E. Clason Jr., to help Dr. Rowe “in obtaining housing suitable to work-related entertaining.”
Museum Chief
A desire for suitable entertainment space is not a unique rationale for giving high-level executives housing loans. The Solomon R. Guggenheim Foundation also cited it in explaining why it lent its top executive, Thomas Krens, not only $1-million to buy an apartment when he first joined the organization in 1988, but also an additional $500,000 in 1999 to purchase a larger condominium.
Mr. Krens, whose compensation in 2001 totaled $481,000, “had outgrown his apartment both in terms of the needs of his family and his need to entertain professionally,” said Anthony Calnek, a spokesman for the foundation, which runs the Guggenheim museum in New York as well as those in Berlin, Las Vegas, Venice, and Bilbao, Spain.
Mr. Krens referred all questions about the loan to Mr. Calnek.
The $1.5-million the foundation lent Mr. Krens is worth $2.1-million today, so that even if Mr. Krens repaid those loans in full tomorrow, after taking inflation into account, the Guggenheim Foundation would lose $615,000 on the loans because it charged no interest.
Alternative Approach
Some nonprofit organizations in high-cost regions of the country, however, have found ways to help executives afford more expensive housing without sacrificing charitable assets.
The Community Foundation Silicon Valley, in San Jose, Calif., devised a different approach when it hired Peter Hero as its president in 1988.
“I’d been a college president in Maine, where the housing was, needless to say, vastly less expensive than it was out here,” said Mr. Hero. “The costs here were a severe sticker shock. When I was offered this job, I said to the board that it would not be possible for me to come without some sort of assistance.”
The foundation gave him a $487,500 mortgage, which he would not have to repay until he sold his house or left the organization. At that point, he would have to pay the foundation 60 percent of any increase in the value of his home.
Housing prices in the region shot up so significantly, in fact, that a few years later the foundation had to restructure the deal to avoid violating state law designed to forbid lenders from charging too much interest.
Had Mr. Hero sold his house under the original terms of the mortgage, his payment to the Silicon Valley Community Foundation would have been equivalent to his having paid more than 20 percent in interest on the loan annually -- and state law bars any interest rate above 10 percent.
Under the new deal, Mr. Hero is paying the foundation 8 percent annually in interest.
“The foundation was using this approach to do two things,” Mr. Hero said. “The first was to enable me to come here. Also, they were investing in something that could eventually produce a return for the foundation. They felt they were being good stewards of the assets.”