Real estate development and construction financing are some of the most risk-heavy industries in America. Risks related to budgets, schedules, regulations and more can spell financial ruin, even for well-run firms.
As a developer and financier of charter schools across the country, one of the best tools I’ve found for managing these risks is microcaptive insurance, sometimes known as an 831(b) microcaptive.
Put simply, a microcaptive is a small insurance company owned and operated by a parent company to insure the parent against particular risks. They allow business owners to set aside funds and protect themselves, especially for coverage that is prohibitively expensive or even unavailable through commercial markets.
In the nearly 40 years since its inception, Congress has repeatedly reiterated its support for these plans, most recently in the 2015 PATH Act, which increased the premium amount to $2.3 million with an annual increase indexed to inflation.
These plans have been a fantastic tool in our business’s tool belt. Being able to build up reserves should a development fall through due to an unforeseen event — putting our company’s financial health at risk — is incredibly reassuring.
While I’m passionate about empowering parents to choose where their child gets an education, there are definitely risks as well.
Our business model relies on the school succeeding to help recover our costs. But the reality is that the nonprofits typically involved in starting charter schools have a higher failure rate than credit tenants.
We’ve also depended on these funds to weather recent turmoil in our industry. The pandemic, supply chain problems and other unforeseen issues in education more broadly all presented serious potential risks for us.
However, I’m proud to say we’re in a strong financial position today. This is unquestionably due, in part, to our ability to make claims against our microcaptive.
Given the tremendous benefits I’ve seen from our policy, the last few years have been concerning for me. The federal government no longer seems to fully appreciate the security these plans can bring to a business.
In particular, I’m worried about some of the regulations the IRS has issued in response to concerns about abusive tax arrangements disguised as microcaptives.
I truly believe there is a middle ground that addresses the government’s concerns yet also leaves room for honest small- and mid-sized businesses to protect themselves from unforeseen risks. Clear, fair guidelines to follow would be extremely helpful.
Dialogue and compromise are usually the best way forward in life. It is my hope that the IRS will sit down with interested members of Congress, industry experts and microcaptive owners to develop a long-term solution to this problem that works for everyone.
Mike Morley is a former Utah state representative and the founder and CEO of American Charter Development, a charter school financing and development firm based in Springville. Over the course of his career, Mike has helped finance over $400 million of educational space, benefiting tens of thousands of students across the country.