Magazine article Journal of Property Management

Employee Stock Ownership Plans

Magazine article Journal of Property Management

Employee Stock Ownership Plans

Article excerpt

When big corporate names like United and Avis began implementing Employee Stock Ownership Plans (ESOPs) recently, these plans jumped from obscurity into the limelight. According to the National Center for Employee Ownership, the number of ESOPs rose from 7,000 in 1985, to 10,000 today.

John D. Menke, president of Menke and Associates, helps approximately 35 percent more clients form ESOPs than he did two years ago. According to Menke, ESOPs are well-suited to property management firms (and in fact, to most service industries) because of the reliance that these firms place on individual productivity.

Two CPM[R]-managed companies, the Huntington Group, and Mathews, Click, Bauman, Inc. have been through the ESOP process with very different results. The Huntington Group formed its ESOP three years ago, while Mathews, Click, Bauman, Inc., just brought its plan back in after forming an ESOP nine years ago. Before considering this type of plan, it may be helpful to learn what executives at these two firms like and do not like about this structure.

Advantages

For the management company, the benefits of ESOPs are realized on several levels. First, Menke says, the ESOP creates a market for the stock and at the same time a vehicle for transfers of ownership. Since property management firms are often small, privately held companies, it can be problematic when the owner, founder, or one of the principals wants to retire or to cash in his or her shares.

"In an ESOP, an owner can sell either part of his stock or all of it. There is much more flexibility as opposed to selling it all out to a third party." In addition, when the shares are sold into an ESOP, the owner or principal becomes eligible for a tax-deferred rollover as long as over 30 percent of the total shares of stock are held by the ESOP.

If an owner is interested in taking [TABULAR DATA FOR FIGURE 1 OMITTED] advantage of the tax benefits, neither the owner, his ancestors, nor any of his relatives can participate in the plan. The owner must then transfer his or her investment to a replacement investment within 12 months after the plan takes effect.

Lee Corbin, CPM, president of the Huntington Group, saw the plan as an excellent exit strategy, as well as a benefit to his employees.

On the other side of the fence is Robert O. Click, CPM, executive vice president with Mathews, Click, Bauman, Inc. His firm completed its leveraged ESOP about nine years ago and just bought it back in again this year. "The plan did not perform the way we hoped it would," he says. The firm's ESOP was also created as an exit strategy for one of its principals.

An additional benefit of the ESOP is the pride of ownership that it affords employees. "If you sell some of your stock to your employees, you make them partners in your endeavor," Menke says. Since increases in individual productivity are hard to measure, most of the supporting data must be based on the bottom line of the companies involved.

According to the Center for Employee Ownership, revenues at employee-owned companies tend to grow 6 percent to 11 percent faster then you would have expected them to grow otherwise. The center bases its statistics on comparisons of how companies with ESOPs performed over the five years before becoming an ESOP, compared with after.

However, the center does add one caveat. Menke explains, "Productivity will depend on whether the ESOP is supported with an employee participation program. By and large, the companies that succeed have a culture that is participative - letting the employees take part in day-to-day decision making."

From the owner's standpoint, Corbin says that becoming an ESOP requires a certain philosophical mindset. "You have to be willing to share and really accept the ideas of empowerment and trust in the fact that these individuals are your most precious resource."

In addition, he also says it is very important to get your employees to buy-in to the plan. …

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