On-Demand: Bracing for the New Year

January 13, 2021

EisnerAmper and City National Bank provided West Coast perspectives on sustainability, tax implications, and how not-for-profit organizations can put their assets to work in 2021.

 


Transcript

Hello, everybody, and welcome to today's not-for-profit webcast co-sponsored by City National Bank and EisnerAmper. We're delighted that you could join us today for this session, Bracing for the New Year, and quite a year it's going to be after last year. Just a reminder that we're having a networking session after this via webcast. My name is Michael Morris with EisnerAmper and we've got a great lineup here that was mentioned earlier, and our discussion is going to be on sustainability, tax and investment considerations for not-for-profit organizations in the new year. I want to take a moment now to have each panelist introduce themselves.

William Epstein:Hi, everybody. My name is Bill Epstein, and I am a partner in the national not-for-profit niche of EisnerAmper. Thank you for being here with me today.

Marie Arrigo:Hello, everyone. I am Marie Arrigo. I am a tax partner, and I lead the firm's tax not-for-profit practice. I also am co-leader of the firm's Family Office Services Practice, and I look forward to chatting with you on tax issues a little later.

Tom Galvin:Hello, everyone. This is Tom Galvin. My apologies for having video issues today. It is a pleasure to be here with you. I am the Chief Investment Officer at City National Rochdale and also manage one of our equity strategies as well.

Michael Morris:And Tom has ensured me that he's dressed very nicely for this event. Bill Epstein, we're going to start with you and then we'll go down the list. Bill, take it away, buddy.

William Epstein:Great. Thank you, Mike. And pleased to be here, and again, thank you again for being with us today. So, in the short time that I get to spend with you, we're going to discuss organizational sustainability during the pandemic, and hopefully give you a few things that you haven't already thought about. So, when we used to speak about sustainability issues and strategies pre-COVID, we would touch on subjects such as five-year, 10 year 15 year goals and what the strategy may be for achieving those long range goals or actually sitting in an actual office with management or the board and plotting mission impact versus dollars on scatter graphs, or even creating profitabilities versus impact charts, listing out current models and forecasting how those models would work with potential developments and technologies or changes in laws and regulations and so on.

And honestly, those really do seem like the good old days is business as usual. And I really do miss it a lot. I really wish I was in a room with you all today, getting to know you and having this discussion with you in person. So here we are today, everyone is facing crushing blows, left, right, center, from every other direction. And just from a plain fear of being in a pandemic and getting infected with this virus to worrying about health issues and staffing levels and when the next donor may pull out of a pledge because of their own financial impact or just even most of the recent political turmoil. I mean, so what are we going to do here? And so more importantly, what is your organization doing during these uncertain times? And so luckily, we have a vast collective experience here and we've been keeping our eyes open, our ears to the ground, seeing and listening to what is really happening to the organizations we've been working with and leveraging all of those experiences to help others like you all where we can.

So, what I want to do today is share with you a few examples of what just seems like simple solutions to just very real problems. And so maybe some things you've heard of and hopefully some things you haven't thought of yet. The first thing I want to talk about is ask. Ask your donors if you can release a change or restriction, if your organization has resources, but really can't access them. For instance, we had this one organization, and there's actually has become a couple of examples now, but for this one, we have this one organization that didn't, or really couldn't qualify for additional government assistance. And they were just really having extreme trouble keeping the lights on. But they also had an endowment. It was an untouchable sum of money sitting there, but they just really couldn't access it because of the restrictions associated with it.

Oddly, no one had really thought to reach out to this donor. And even though this donor wasn't the most pleasant of personalities they never thought to reach out to them and see if they could get this restriction changed. But honestly, in this time of need, who cares what the guy's personality is? Let's ask if they would consider releasing all or even a portion of the endowment restriction. And so they did that, they reached out to this donor and it was a organizational lifesaving change. The donor didn't release the endowment, but what they did do is because they reached out, the donor matched the endowment funds dollar for dollar with general operating support. And we're talking like tens of millions of dollars here. I mean, organization life saving change.

And another situation, there was an organization or organizations that we've had now where they had other significant restricted funding for projects and things like that, or funding to be used for future years, and the same outcome. They reached out to these respective donors, had these restrictions released and then also had some accelerated pledge payments. So they're getting the funding even in advance of when it was even due to them. So honestly, the lesson here really is don't wait to ask. Donors have been very forgiving in these times and they would rather you continue to exist so that your mission can be carried on once this is all passed us. Another example is seeking grants from organizations that typically don't give unrestricted funds or just general operating support. We have a few larger private foundations that have historically only given restricted project related type funding. And those foundations have actually started to change course for the time being to give operational support, and to give operational support even to organizations that they really hadn't given to before.

Again, here, the lesson being that there are so many organizations out there that are opening up their wallets to support the not-for-profit community, that funding may be available where it wasn't before. So really just honestly leave no stone unturned. Another big thing, a lot of our clients and client colleagues live and die by special event, the dinner, the gala, things like that, where a lot of our clients had already had pre-planned special events, where their year really was make or break from them. And due to the circumstances of the pandemic the events were canceled or to be canceled or postponed indefinitely. And so what do you do in that circumstance? And so a lot of our organizations have turned to the virtual event. Many of the donors who had already given towards the pre-planned event had already given their money.

So, the organizations were going to start to host these virtual events, and they needed to do this because they needed to speak to their constituents about how well their organization is accomplishing their mission, or even saying, "Hey, we really need your support here." And those things needed to happen. Organizations are going to fail. So, the virtual events have been a huge success, with many, and I would say most actually having better attendance and higher realization than they ever had before. What's the difference? Well, other than attending like via Zoom or something like that, those big event cost drivers such as the meals, the drinks, the venues, the giveaways, et cetera, went directly to the bottom line to support the mission. And even with some of these events, I've even seen some of them have the virtual online auction being hosted as part of these events too, which is working out tremendously.

Lesson here is, don't assume your year is crushed because your event didn't happen. Reinvent your special event. Speaking of event revenues, we had one scientific industry organization that really needed to pivot very quickly. 90% of their revenues were derived from in-person scientific conferences in their very large and very expensive conference center. So what did they do? They were actually on top of this process pretty early on, and they saw the writing on the wall, what was really happening and what could possibly happen? And so at kind of the middle of February 2020, the end of February 2020, they really started to ramp up the ability to host these virtual conferences. And so when they started to advertise a virtual conference possibility, their virtual comp conference attendance actually started to skyrocket. They were getting the participants who would have common person, as well as the people who wouldn't have come because they would have had the travel.

Now, they're getting the double the capacity. So, it's been working out very well. Now, one of the other things here is that they were already starting to change their business model before the pandemic and thinking about how they wanted to structure their conference space and things like that. And so they were negotiating with their landlord to get out of their space. So, another example for maybe an organization is to think about your space usage. Are you using the space efficiently and cost productively or are you just have the rental expense? So, what these guys did is that they were speaking with their landlords and the landlord actually just happened to also have someone who was looking for similar space in a footprint like theirs. So, this particular organization was able to reduce a significant overhead cost.

They moved their offices to incorporate a virtual work environment with enough room and things like that for people who wish to come in. And as crazy as it may seem for this particular organization, it will probably be one of their best years because they were starting to reinvent what they did very quickly. Something else to think about, look for ways to collaborate or even merge with organizations performing similar missions. So, we currently have in the works, a few organizations that are pursuing a collaboration of resources and they may merge at the end of all this. They may not. We'll see. But what they're doing is that they've combined a similar mission to show that strengthened numbers. Their collaboration is really going to increase or is already increasing their ability to serve their constituents tenfold.

And actually they're doing it in a more efficient and cost-effective way. If they did merge, it would really be quite the partnership because the strengths of both organizations outweigh the weaknesses between the two, and it would really quite a powerhouse organization. So, one last example before my time is up. Your organization may also have value that is yet to be monetized. So I have a healthcare related organization that was treating mental health issues, and they were very, very good at it, where they had some of the best clinicians working for them. Year over year, patient service revenue has been increasing, but they're really just treating their patients and they weren't really thinking bigger than that. But what they also had was a gold mind relating to a clinical treatment process that they developed that really worked miracles, but it was just really being kept in house because they were just keeping it for their own internal use.

So, at the onset of the pandemic, patient service revenue, oddly enough in the mental health care industry started to decline for these guys, even with telehealth options. Although, tele-health for them was also a lifesaver, but the patient service revenue was really starting to decline because people were free to go out and go into the office or whatever it might be. So, what they realized is that they were treating patients using a process that could be packaged in a way to be sold as a subscription service for other providers to adopt their model. So, not only are they now able to support their mission in general, but now they can do so almost on a global level because they were forced to think and reinvent. So, for this organization, the pandemic was actually a catalyst for this organization to accelerate, which was whisperings at board meetings about what they may want to do to a whole new revenue generating model years faster than it would have been.

And this particular revenue model is going to support this organization for years to come. One other quick example that I wanted to talk about, also with the lease space, we've had some organizations rethinking their use of their lease space. And as some organizations are really taking on the virtual work environment, there are some other organizations out in the world that really do need it to be in an office. And so some organizations are actually taking their excess capacity for lease space and bringing in subleases to just sublet, and get that extra bit of cash to support the organization.

Before I hand it off to Marie, I will leave you with this, the wait and see approach is very much over. It's been over for a long time. Don't wait to think outside the box. Now is the time for radical critical thinking on survival. Get your boards actively and intimately involved in helping out where possible and get as many ideas on the table as you can. This is really what these people signed up for, and use this crisis as an opportunity to reinvent yourselves and position your organization for future success. With that, I will hand it over to Marie and I hope to see you all in the breakout session after. So, Marie, it's all yours.

Marie Arrigo:Thank you, Bill. I will pick up where Bill left off. Focusing on sustainability is a critical strategy and re-imagining revenue streams is certainly part of assuring sustainability. I would like to spend some time discussing the tax implications of some of those alternative revenue streams. And one major consideration is unrelated business income tax, otherwise known as UBIT, U-B-I-T. UBIT is a tax on unrelated business income, which comes from an activity engaged by a tax- exempt organization that is not substantially related to the charitable educational or other purpose that is the basis of the organization’s exemption. It's a trade or business that conducts its activity similar to a comparable commercial enterprise, and it is regularly carried on, and that's an important consideration, frequency does matter. Organizations who conduct UBIT activities are taxed at the same federal tax rate as the for-profits are subject too.

So, if your entity is structured as a corporation, the income that would be considered UBIT would be taxed at the applicable tax rate for corporations, which is currently at 21%. That's the top rate. If the entity is structured as a trust, somewhat most not-for-profit organizations are set up as corporations, but some are set up as trusts. Then you get to follow the trust rules.  And the rates for trusts .The top rate is currently at 37%. In addition, many states impose tax on UBIT activities. So, you really actually need to understand what your tax implications potentially can be. And it may not be just the federal, there could be some state taxes that you would have to deal with. Now, having some activity subject to UBIT, end of itself, is not an issue.

It will not cause a loss of exemption, except if the UBIT activity is at a substantial level, that it basically overarches the related, exempt activities of the organization. And so you do want to understand what that is, and you do want to be careful that it's not all that the organization is doing.

So, let's focus on the impact of UBIT rules on rental income from real property, which is land and buildings and other structures permanently attached to land. As Bill mentioned, an idea with respect to that, leasing out property is something that will create a revenue stream. Now, the good news is that generally, this type of income is not subject to UBIT. However, as you can imagine, there are many exceptions to this rule, and it's important that you know what activities will trigger UBIT so that you can structure your activities accordingly to minimize or even avoid it.

So, understand that rent from mixed leases can be an issue. That's when rent from a lease, where more than 50% of the total rent is attributable to personal property(now, that would be furniture and equipment, for instance), would not be excluded from UBIT. Rent from net profits leases could be an issue, where the rental income is based on a percentage of the lessee’s sales or profits, the rental income will not qualify for a exclusion either because it looks a little bit too much like a commercial enterprise. If the rental of the facilities includes providing services such as food and beverage sales, rental payments for the use of rooms or space, where there are services also provided to the occupants, and perhaps therefore the convenience of the occupants, all of that is going to be problematic.

And so, for instance, if the not-for-profit rents space and provides no other services, other than cleaning, maintenance, repairs, all that stuff, which you're certainly you're allowed to do that.

You have to keep your space in good order. Then you're not going to have a UBIT issue. But if in fact you're offering, in addition to the rental lease space other things like catering or food service, or audio-visual capabilities, when we finally get back to doing live presentations and things of that sort. That stuff will end up being subject to UBIT. Unrelated income from debt- financed property nearly always triggers UBIT. That's when you have a mortgage on the property, and is acquisition indebtedness.  Thisis UBIT unless substantially all, which is defined to be more than 85% of the use of the property, is substantially related to exempt purposes. So for instance, if you're a school and your whole building is dedicated to fulfilling your exempt purpose, even though you have a mortgage, that's not UBIT, because you're using the property for its related purpose.

But if you don't meet the substantially more than 85% requirement, then you could potentially have an issue. And in fact, if the percentage is less than 85% of the use of any property you would prorate between unrelated and related activities. And only that portion would be exempt from UBIT. So again, you have to watch that particular situation. So let's talk about some unusual yet creative revenue streams. Let's say the organization has a parking lot and decides to sell parking spots, is that subject to UBIT? The tax court has ruled that revenue received by an exempt organization for the operation of the parking lot is not real property and would be subject to UBIT.

You're operating a business now, you're selling parking spots for periods of time. But if the organization has a parking lot and rents it to a third party, and is only receiving rental income from that third party, but that third party then operates it like a garage or a parking lot where they're selling spots, then the not-for-profit’s rental income can be excluded from UBIT provided that the rental payments are not contingent on the income that comes in from the operation of the parking lot. So again, here's where structuring matters in terms of avoiding a tax problem and creating a revenue stream.

So, what if you sell real estate where, let's say the underlying rental activity is subject to UBIT—is the gain subject to UBIT? The good news is that gains and losses from the sale exchange or disposition of property are excluded from UBIT.

And this is because the activity must be regularly carried on in order to be considered UBIT, so if you're just selling a building as a one-off activity, and it just happened once, not doing it again, don't have anything else to sell, that frequency test that I was mentioning earlier is not met, and therefore the gain is excluded. And this is notwithstanding the fact that the property itself was generating unrelated business income. If on the other hand, let's say the not-for-profit is buying buildings and then selling buildings, so they're flipping them. They are renovating them and flipping them just like some of the HDTV shows that are on TV. Now you're in the business and that's going to be subject to UBIT, and of course there's an exception to the exception. You need a flow chart in order to figure this out!

The exclusion for unrelated business income tax will not apply   if in fact you have debt-financed property, then it's going to be included to the extent that the investment income (capital gain income) will be included to the extent of investment income. And the amount of income is proportionate to the debt on the property. Now, there are a couple of different calculations which I'm not going to take you through , depending on what you're selling, if it's for one particular percentage. But again, you have to keep in mind that there could be a portion of that gain that will be taxed if you have unrelated business, if you have debt finance property. Of course, the exception is that if your building, again, is used solely for exempt purposes, then you have no UBIT to worry that even if the property is debt- financed.

So what about selling air rights? So, what are air rights? They are the property interest in this space above the earth's surface. So, owning o renting land or a building includes the right to use or develop this space above the land without interference by others. So, you have a legal right to build, it has to do with zoning rights obviously, and the development rights, and it's transferable. This is actually something that can be sold and has value. So, let's say you have a 50,000 square foot building and you sell 50,000 square feet in air rights. Perhaps the owner of the building adjacent to your building may be interested in buying those air rights, because maybe they want to preserve the view that's coming from their building. And if you extend your building high, then you're going to interfere with their view and it's going to impact their value.

That's something else to consider. And the tax treatment for air rights is treated the same as land. So, all the rules that I just described to you from big picture-wise is in fact, applicable for air rights.

Now, I'd be remissed if I didn't mention the SILO rules and these happened as a result of the Tax Cuts and Jobs Act of 2017, which required exempt organizations to calculate their unrelated business income tax separately for each trade or business activity. So, your organization may have a couple of different UBIT type activities, and this provision prevents the organization from using losses from one activity against income to offset income on another activity. And this actually puts exempt organizations at a disadvantage since the for-profit businesses are able to offset losses of one activity against income of the other activity.

And so the final regulations were issued on these SILO rules in November 19, 2020,  and are applicable for tax years beginning on or after December 2, 2020. And what they talked about was clarifying the allocation of expenses on a reasonable cause indicating that you couldn't allocate differently for related purposes as opposed to unrelated purposes. And it also talks a little bit about using the North American Industry Classification System, the two-digit code system for classifying types of businesses. And it also talked a little bit about partnership interests. If your entity has investments in alternative investments in limited partnerships, you have to look at those also as they can also have  unrelated business income tax. So, the good news is you can aggregate partnership interests and activities, and be able to consider it as one activity provided you meet some requirements and your qualified partnership interests, which is basically looking at a passive investment directly not holding more than 20% of the capital interest in the partnership, not having control over the partnership, not significantly participating.

And there's investments with lower tiered partnerships, such as funds of funds that you have underlying partnerships that are rolling up into your partnership ownership-- if it meets a de minimis rule of no more than 2%, then you have a situation where you can aggregate the partnership's interests into one activity, which means if you have a partnership loss as from one partnership, you can offset against the income of another partnership. And if there is debt-financed income that's associated with all of this, it will in fact, be included as part and parcel of this calculation.

If I may talk a couple of minutes to talk about net operating losses, the Tax Cuts and Jobs Act have limited deductions for net operating losses, for tax years s after December 31, 2017, to the lesser of the aggregate NOL carry-overs for such period and at 80% of taxable income for that year. The CARES Act that was issued last year suspended the 80% income limitation for NOL application and allows entities to carry it back five years. And this applies for net operating losses that a rise in calendar years 2018, '19 and '20.

So, it's a period after 12/31/17 and before 12/31/21 to each of five tax proceeding years. So you may want to take a look at where you are, if you have UBIT losses for those years, you may have an opportunity to file a refund claim with the government and be able to get a refund of taxes back, that's something to consider. And another idea is that the Tax Cuts and Jobs Act had imposed a tax on qualified transportation fringes. Those were things like transit passes and parking facilities for employees and other types of qualified transportation costs. And the Tax Cuts and Jobs Act said that for-profits, those deductions are just disallowed, so you're not going to get a deduction for it. And in fact, if those deductions were applied to an unrelated business income tax activity, they were disallowed also. But in the case of where you had these expenses incurred for employees that all they were doing was fulfilling the mission of the organization so that there was no tax implications of what they were doing, the government had said, "Well, we're going to treat those expenses as unrelated business income, as UBIT."

And boy, was that a surprise to have an expense be treated as income! That was pretty mind boggling at the time. Well, the good news is that this tax has been rescinded. So, it only went through one filing period and it was 2018. So, if you had paid a UBIT tax on these types of expenses on the 2018 year, you can file an amended return or carry back claim to be able to get that money back. There's a couple of opportunities out there where maybe you're sitting on a potential refund that with filing the right forms, you may be able to get some of those tax dollars back. That's what I have at this point. I'd like to turn the program over to Tom, and thank you.

Tom Galvin:Thank you, Marie. Hello, everyone. Once again, my apologies for having video issue today, but look forward to chatting with you, and meeting with you when the world returns to normal. So, for those of you who are not familiar with City National Rochdale, we've been in business for over 30 years, helping manage investments for high net worth individuals and nonprofit organizations. Very experienced managing from bowls and bear markets. We have several unique approaches to solving for the solutions that nonprofit organizations have. We have a 90% plus client retention rates, and growing quickly. So, I think we're doing something right. Having served on several nonprofits over the years, I have focused the few slides I'm going to run through quickly and be more than happy to share them and dive deeper in Q&A.

Two big issues, as Bill touched on having those donors continue to commit fundraising activities, all those challenges on the revenue side, I want to touch on that. I'll touch on our economic outlook, where we have optimism on the economy, and that should translate into optimism looking through the next six to nine months in terms of events, fundraising, et cetera. The other challenge is the expected returns and achieving the returns on the investments that you have to maintain your program focus. The environment's going to become more challenging going forward, but we think it is achievable. It's going to require a little thinking outside of the box, but we think it is achievable. So, let's just dive in here. As you can see on this slide, we are expecting a rebound in economic activity in 2021. We think the combination of vaccines, which was a game-changing event, and unexpectedly positive event for what's been a very challenging year for us all, but the combination of vaccines and more stimulus to come should provide a nice combination to increased confidence by consumers and by corporations in the economic outlook going forward.

So, you can see here where our forecasts are for the full year, 2021, three and a half to five and a half percent growth. We're probably biased to the upper end. At this point. The applications are positive looking at particularly, I think, into the second half of 2021 and going into 2022 for the confidence for individuals and corporations to increase. And at that point, I think the shift will occur in terms of their contributions. Now, driving a lot of the optimism that we see for the economy is the consumer, the consumer mainly thanks to a nice job rebound. And the stimulus package has put in place. They have a high level of excess savings. And that even if in the next few months, the COVID crisis continues to weigh on the economy, the consumer is in good shape to weather the storm.

There'll be more challenges for smaller businesses and we're likely to have more headlines of bankruptcies, and et cetera, but that should be short-lived. And the consumer is in very good shape, a lot of cash on hand and very low debt levels. And the consumer represents two thirds of our economy here in the US, so the consumer is key. Optimism on the economic front, policy, vaccine and confidence for consumers and also corporations. Now, shifting gears should be returned side of the challenges that non profits face. It's coming from several aspects. This chart shows a 10 year treasury yield since the 1960s and the steady decline that has occurred in the late '70s, early '80s, when Paul Volcker slay the inflation dragon. And we'd been on a downward trend since then. We think that over the next two, three, five years. Inflation is likely to stay low. In the short-term, inflation measures could kick up as the economy picks back into gear, as you see an inventory rebuilding cycle occurring.

So, pricing for some goods and services are likely to go up in the short-term, but with capacity utilization where it's after the economy, we do not see inflation being in longer-term risk. So, the 10 year yield outlook is likely to stay lower for longer. And that presents one of the challenges that the returns on fixed income investments is going to remain challenging that it's seen its peak. The other part of your investment portfolio is likely to have exposure to equity markets. We use this slide for the S&P 500 as one of the gauges of stock prices. As you can see on a historical measure, the PE for the S&P 500 based on forward earnings is in the overvalued zone. Now, there's a lot of asterisks next to that overvalued zone, if you will.

There's certain stocks particularly, tech and growth stocks, and they've had a tremendous run and they are making the overall valuation of the market higher. So, companies outside of those sectors are more reasonably a value. But that does make the return challenge particularly, challenging when stocks are high, the historical returns tend to be lower if you look at over several years. So positive returns is what we're expecting but more moderate returns going forward as it relates to stocks because valuations are high. There's challenges on interest rates, there's challenges on equities because of valuations, that all flows into the challenges that nonprofits have faced using, as an example, the traditional 60/40 portfolio allocation approach, which has served investors so well for so long. Equity returns, you could see over this timeframe from the mid '70s and, or since the great financial crisis have been nicely double digit.

Investment grade bonds, as those yields on the 10 year have declined. They've been strongly positive too, so the 60/40 portfolio has produced about a 10% return during these timeframes. Now, longer term, we think the prospects for investment grade bonds is small. The opportunity for price appreciation is lower. So, it's what is left in the coupon, if you will. So, we see returns in investment grade bonds around 2% on a longer-term basis. US stocks expecting positive returns, but more moderate, about 7% or so. So, in that 60/40 construct having a 5% return is where expectations should be set at. Now, many non-profits need a higher rate of return to fund all their programs that they have in place, and don't want to make any adjustments to the beloved charity work that everyone is doing. So, to shoot for a higher expected rate of return requires somewhat thinking out of the out of the box, having more investment approaches to think about.

So, one of the ways we've been structuring our client's portfolios is by looking into some of the other areas outside of your traditional S&P 500 investment grade bond area. So for example, I mentioned that there's a sub-component of the S&P 500, where valuations are more reasonable, and that comes into play very much with the high dividend stocks. We have a nice return forecast of 7%, could be higher. Valuations are lower than the S&P 500. They're the lowest they've ever been, over the last 30 years. And they come with it and is three and a half percent yield. So half of that return that we're forecasting is already in the bank. Dividend's coming through. Emerging market stocks are also likely to have above average returns moving forward because the GDP growth prospects in that part of the world are higher and high yield bonds which sometimes get considered as a more risky asset class because they have high yield in their names formerly called, junk bonds, but that asset class actually does very, very well.

And we see that returning about 5% long-term, and most of that in our suffering is coming from the yield from those high yield bonds. Alternatives aren't for everyone, certain organizations don't like them, as Marie was discussing, there's all these complicated UBIT issues, but alternatives can be a very viable, important component of the repositioning of the portfolio to help you achieve the investment goals. As we see them, returning roughly 8 to 12%. This slide kind of pulls it all together how the traditional 60/40, as you can see on the left of the S&P 500 core fixed income portfolio, has a forecasted return of about 5% as you see it. So, if you're in need of a 6%, 7% type of a return, the optimized way to get to that type of return, we illustrate here.

So, lesser exposure to core equities, more of an exposure to those high dividend equities that I talked about. And then within equities, having a slice in emerging markets. On the fixed income side, opportunistic income, which is our way of describing high yield bonds and other fixed income alternatives, collateralized loan obligations, et cetera. That should be an important component, and having real assets and those alternatives in place is also a very important consideration to have. And this combination produces a forecast return of about six and a half percent or so higher yields over 200 basis points higher at 3.4 versus 1.4 in the traditional 60/40 portfolio.

It'll come with a bit more volatility. It'll come with those moments in time as we experienced in 2020, when it makes you feel uncomfortable, but over a two, three, five year perspective, we think that this Valley that we've been traveling through in the COVID era, there's light at the end of the tunnel, because we have vaccines. We're optimistic about the next several years for the economy and donations. We've probably have passed through the worst part of the volatility component from a diversification approach as we build a straight in here. So with that, why don't I pause and turn it over to Mike for questions. Thank you.

Michael Morris:Tom, thank you so much. That was fantastic. Great to get the economic overview and how the bank's looking at things. And Bill, Marie, thank you so much. Great overviews and very interesting, very sophisticated panel, very grateful to be part of this. Tom, when you were talking, I was thinking to myself, and by the way, the questions are here. If you want to send a question into us, I have a Q&A box here that I can read questions to the panelists. And we'll also be able to talk about it in the networking room after this, which will be virtually live. But what I was thinking is are you advising your clients and the folks on this call to meet up with their investment advisors to get kind of a clear picture of the forecast going forward for them and how their investment strategies laid out?

Tom Galvin:Mike, thank you for that. Yes, absolutely. These times require a real rethink of what your needs are, what your challenges are. We actually did initial Rocco work, 100 to be partnering with EisnerAmper experts in these fields and absolutely positively revisit those five-year plans that you have in place. Tax laws could be changing going forward too. That's another important consideration that we'll need to keep our eyes on going forward, but talk to your trusted advisor. If you need more details from us, we're very happy to give you a view of your investment strategy, if you have it with someone else for your charge, we can look what your holdings are, see if it's right for your goals, and hear what our suggestions might be to help you achieve those goals. So, happy to help, and obvious.

Michael Morris:Thanks for that, Tom. Now, this might be geared towards Marie and Bill, but I'll let everybody decide. Do you foresee charitable giving the state consistent into the new year, or do you foresee a rise as we move towards a hopeful end of this mass that we've been in?

William Epstein:Do you want me to take that, Marie? Okay, that's fine.

Marie Arrigo:Yeah.

William Epstein:So, what we have seen is actually surprisingly, even with the uncertainty of an individual's economic activity, that a lot of organizations have actually seen an increase in giving because of this. They understand that these organizations are suffering and that their typical donors want to see them survive. Donors who have consistently given to organizations in the past, well, they didn't do that expecting that an organization would disappear in a year or two. And so what they're doing is that they're ensuring that this organization is going to continue to fulfill a critical mission. So, I have seen actually giving increase slightly, and I would expect that it's going to continue to do so. And hopefully it continues to go up and up and up for these organizations, they need it.

Marie Arrigo:Yeah, I would add that the CARES Act had provided some incentives for 2020 for individuals to get some tax breaks by increasing their contributions, that they did cash contributions to public charities and private operating foundations, for instance, and it's specifically private operating foundation and not grant-making foundations. That they could deduct up to 100% of their adjusted gross income. And there were some calculations that you have to do to get to that.. My experience is that there it was an interest in this provision if for individuals who are philanthropic in nature.. They got it., that many of the nonprofits were really suffering and that they could use all the help they can get.

Michael Morris:Marie, you mentioned changes in the CARES Act. Are you strategically reaching out to our client base to discuss strategies and of the new year as well? That's for you too, Bill, if you want?

Marie Arrigo:Well, I'll start and Bill can chime in. But yes, I mean, I also work with families, so I'm kind of on both sides, on one  side  for the non-for-profits and the other side with families. And certainly, there has been definitely an interest in increasing charitable giving and providing help, especially there's been a lot of organizations on the past year that focused on actually helping the first responders and providing support in that regard. So, there is definitely an interest and always becomes part of the conversation when you're doing planning last year and certainly into 2021. Bill, do you have any other thoughts?

William Epstein:Yeah. When the CARES Act came out, we received a lot of questions relating to individual giving and how the new laws and regulations would impact their organizations. And so a lot of these questions were based on individual taxation and how that may affect an organization. And I believe that the majority of our organizations are very sophisticated and so they do have a fairly decent grasp of these concepts. But when I've had these conversations with clients, I always say, "Talk to Marie," because she's the tax expert.

Michael Morris:There's 2,000 of us at EisnerAmper, and we always say, "Talk to Marie."

Marie Arrigo:I'm on the phone a lot.

Michael Morris:Another question. And I think some of this has been covered, but I'm going to ask it anyways. I've got them here, I'm just reading them off. So, what's been the most creative new revenue stream you've seen a nonprofit utilize during the pandemic?

William Epstein:I would really go back to my example, relating to the subscription services. It just was this little whisper in the background of, do you think that maybe one day we could do this? And the pandemic really forced them to reinvent what they were going to do as an organization. And so I would say that packaging, a proven model as a subscription service to sell to other organizations, so then you're doing two things. You're expanding your mission and as well as you're able to support yourself. I would think the best, probably the most innovative, or are probably the best use of a non-monetized resource that an organization, and from what I've seen so far has come up with

Michael Morris:Marie, you got anything or covered a lot.

Marie Arrigo:Yeah, no. I thought that was very interesting. And I think that we also have to remember that many organizations also had to do a pivot in order to deliver their programming from in-person to virtual. And so the creativity of being able to accomplish that, I’ve been floored by that, because where there's a will, there's a way kind of thing. That's kind of what I've been seeing.

Michael Morris:Do we foresee this this trend that we're all doing during this shelter in place and virtual reality that we're all in? Do we see that staying the same, or do you think we'll return to normal and go back to the old model that we've been with that everybody's been doing to generate revenue and funds?

Marie Arrigo:I'll start, and then Bill, you can chime in. But I think that use of space is something that may be changing for good to some degree. Maybe it will be somewhere in the middle where employees may come in to the office a couple of days of the week and maybe work remotely the rest. The use of space is very key and certainly finding opportunities to utilize it, whether that's for your own related purpose or to rent it out is something that I think a lot of organizations are looking at. Bill.

William Epstein:I'm sorry, I was muted for a second. Yeah, I think that I would hope that in some way that once this is all past us, that we can get back into the offices and things like that, because honestly I miss you all. I miss seeing you and I miss being involved with just in-person and having that just human contact. And so as organizations are really reinventing themselves to just get through this process the next hurdle is to go back and say, "Well, wow, we've just accelerated our sustainability plan by five years. Now, what are we going to do?" And so then it's going to be, "Well, what are we going to do in this next five years, because now we've done what we were supposed to do in five years?" So, I think that that's going to be the next challenge, but I think that there's always going to be this hybrid kind of virtual work environment. And I think people are going to start to kind of go back in and out, but I can not wait to get into an office and just have some human interaction other than my wife and kids.

Tom Galvin:It's Tom. Yes, I'm looking forward to the day my dog stops stalking me. Definitely, to add on some of the things that we're doing at City National Rochdale. Our optimism has been building because of the vaccines. So, we've even gone so far as to schedule our partner conference that we canceled twice. Now, it's on the calendar for September. Call us the eternal optimist, but we are looking forward to those days, as Mike said so well, getting back into the real world and interacting with the people. So, we're seen as a hybrid kind of environment as Marie described where working from home is going to be a very valued important component of splitting of our time.

Because I think behaviorally, first, we'd have to get the vaccines out there. People have to get comfortable with it. They have to feel comfortable that there's not going to be another big wave coming. And that over time as this kind of starts to recede into our rear view mirror, that we all need to go traveling again, go to our best restaurant, start interacting. People want to get back to normal, but it's going to take time. We'll probably not go 100% back, but hybrid first, and then maybe 85 to 90%, looking out two to three years.

Michael Morris:Well, I couldn't agree more. And I think everybody on this panel, everybody that's logged in feels exactly the same way, and that relationships are gold. And the last time we did this with City National Bank was a couple of years ago in San Francisco. And we had a fantastic turnout and we had a lovely breakfast and everybody got to network in person. And it was really fantastic. But unfortunately, this is all the time we have for this piece, but we're going to be able to segue over to a networking room.

About Michael Morris

Mr. Morris is a Director of Business Development, specializing in accounting, tax, and consulting services across a broad range of industries including financial services, real estate, and family offices.

About Marie Arrigo

Marie Arrigo is a Tax Partner and Co-Leader of the Family Office Services Practice for the Personal Wealth Advisors Group which provides tax consulting and compliance services to family offices, individuals, trusts and estates, and closely held businesses.

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