Cautionary tale for nonprofit associations

There’s a plague of internal strife and power struggles affecting the management of many condominiums, subdivisions, sports clubs and other nonprofit associations nowadays. The common reasons for the squabbles are lack of transparency in management affairs, indifference of members, clash of personalities among members and, in worse cases, outright irregularities. These institutions’ officers are prohibited from earning salaries, but because they approve business contracts, unsavory suspicions of anomalies arise when nontransparent actions are taken.

An emerging controversy at Makati Sports Club Inc. (MSCI) may turn into an example of nasty strife involving a nonprofit association.

MSCI sits on 13,000 square meters of prime land in the heart of Makati City. It has various sports facilities and dining amenities for its members. It’s the only horizontal structure of its kind in the area, giving precious breathing space in a forest of tall buildings.

Ayala Land Inc. offered to buy 7,000 sq m of the club’s property at P571,428 per sq m, for a total price of P4 billion. Land values in Makati, though, are estimated by some quarters at P1 million per sq m. The club’s board accepted the offer, subject to the approval of members in a future meeting.

Despite Ayala’s outright purchase offer, false rumors are circulating that: Ayala will compensate club members with condominium units in the building it will erect on the purchased lot, or; club members will receive up to P5 million in dividends because of the land sale, at a time when the selling price is only P600,000 per share.

Both are fake news, because the first one will result in making Ayala pay twice for the land, while the second one is a legal impossibility because MSCI is prohibited from distributing dividends as a nonprofit association.

The effect of these false rumors is to make poorly informed club members agree to the land sale. If they do, they will belatedly find out that they had relied on false expectations.

The MSCI board has agreed to the Ayala offer because it will give the club “enough funds to build [a] modern high-rise club.” This reasoning has many active members up in arms.

Why should MSCI sell land, which is a perpetually appreciating asset, and construct a building that is a perpetually depreciating asset? If you have a house sprawled horizontally on spacious land, why would you sell half of the land to build a six-story house, with the same amenities, but which will enslave you to huge building maintenance costs?

Instead of looking at selling the club’s crown jewel as the only option, why are alternatives like special assessments, financing or long-term lease not being studied and presented to members? Why not just use the club’s P77-million retained earnings to renovate existing facilities?

With the right financing, MSCI’s precious land can generate perpetual revenues, instead of a one-off asset liquidation, if it builds a multilevel basement parking space to serve the parking-starved Makati area, and construct commercial spaces on the club’s three-street frontages.

If the board will use old proxies to ram the sale approval, it risks getting embroiled in multiple suits, dragging Ayala along. Proxies given for acts of administration in the past will not suffice as blanket power to approve the sale of a legacy asset.

The board may be overlooking the fact that dissenting members will have equitable grounds to demand appraisal rights. If the court grants the demand and uses Ayala’s valuation, a dissenting member will get P5 million for his share. If that happens, it pays better to dissent than to consent.

As a member, I requested from the club various information such as a list of club officers who are present or past officers of the Ayala companies, in order to write off any conflict issues. Ten days into my written request, I have not received a formal response.

The Makati Sports Club controversy may end up as a cautionary tale for nonprofit associations, to observe faithfully their obligation to full transparency.

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