The following two case studies explore the decision process that the founders of Evergreen Lodge and Rush Creek Lodge took when deciding on a legal structure for these social enterprises, and the implications that decision has had on raising capital and corporate governance. REDF would like to thank Esther Kim of Esther Kim Consulting for leading the research and development of these case studies.
About Evergreen Lodge
The Evergreen Lodge, founded in 1921, is a destination resort located on the edge of Yosemite National Park. In 2001, Lee Zimmerman and Brian Anderluh, friends from Stanford Business School, along with another friend, Dan Braun, decided to purchase Evergreen Lodge with both profit and social mission goals in mind. Having both business training and social sector experience, the entrepreneurs wanted to create a business that would serve at-risk young adults while delivering high-quality service to visitors and meaningful returns to investors.
Since then, they have delivered on both fronts. Over the years they renovated the aging, small, seasonal property, added many new cabins and amenities, and won accolades and excellent reviews, resulting in double-digit financial returns. They also created a Youth Employment Program in which high-potential young adults from the Bay Area work as paid interns while receiving career and life counseling. The youth employment program is staffed and funded internally, and receives no outside financial support.
Hundreds of young adults have participated in the program over the years, and former participants have noted the positive impact it has since had on their lives and careers.
The program was designed in partnership with Juma Ventures, a Bay-Area-based youth-focused nonprofit where Zimmerman and Anderluh had been one-year MBA Fellows through REDF. The close relationship with Juma Ventures continues to this day – one Evergreen Board seat is always reserved for the CEO of Juma Ventures.
Deciding on a Legal Structure
The owners initially debated the choice of legal structure for Evergreen Lodge, and they settled on a for-profit structure for several reasons:
- Financing. “We really needed to look like a business in order to quickly attract the level of financing we needed to get the initial acquisition done and get started,” said Anderluh. “It’s a very capital-intensive business with a significant real estate component, which meant we needed debt financing, which at the time required that we be a for-profit business.”
- Perception. “From the beginning, we wanted to approach it as a real business, to not feel bad about making profits” said Anderluh. Added Zimmerman, “We felt it was also helpful from a hiring and marketing perspective to be seen as a real business in order to hire top quality managers and sell hotel rooms to the general public.”
- Revenue model. “At Juma Ventures, we saw how much time and effort went into raising and reporting on grant funding on an ongoing basis, and we wanted to avoid that if possible,” said Zimmerman. “We loved that if we could structure the business to fully self-fund the social program, we just needed to raise money once, then focus on growing the business and program.”
- Social mission. “We are working with an older population of youth who have likely already been through one or more social programs,” noted Zimmerman. “Working at Evergreen signals a transition to adulthood. Being a for-profit business means we have to hold their feet to the fire around job performance. While we do consider ourselves a work training program, it’s a real-world setting and they can see how a real business works and clearly feel the associated expectations.”
- Demonstrating the model. “We wanted to prove that it was possible to create a fully functional and fully self-funding social program within a traditional business. But it meant that ensuring profitability was that much more important,” notes Anderluh. “We believe this model can be applied to many different types of businesses, and we would love to see this happen.”
The owners decided on a Limited Liability Company (LLC) structure, which is common in businesses involving real estate. They briefly considered a C Corporation structure (C-Corp), but decided to go with an LLC instead for several reasons:
- Taxation. With a C-Corp structure, the owners would have faced double taxation on net income (both at the corporate and personal level). With an LLC, they would only be taxed once, since the taxation of income “passes through” to each of the owners’ personal income tax return based on ownership share.
- Flexibility. An LLC allowed the owners more flexibility than a C-Corp in structuring the ownership share, management, and profit/loss distribution of the enterprise.
- Exit strategy. “We knew from the beginning that we were in it for the long haul, but we also wanted to ensure the investment provided needed liquidity for investors,” said Zimmerman. “A C-corp might be better from a strict sale standpoint. But an LLC gave us the structural creativity we needed to address liquidity without having to sell. We deliberately chose investors who understood that we were committed to the business and the mission long-term. Then we structured the investment to provide them with return of all invested capital via refinancing, combined with ongoing dividends before and after refinancing. This combination has worked out great for investors while allowing us to keep the property and run our youth program long term.”
Balancing Financial and Social Goals
In 2007, Evergreen Lodge was certified as a founding B Corporation – not a separate legal structure per se, but a rigorous set of standards distinguishing businesses that explicitly commit to greater social and environmental impact. “From the moment we met with the B Corporation founders, we loved what they were creating. We believe in the power of codifying and promoting a sector of business designed to balance profit with social, environmental and community impact,” said Zimmerman.
Since then, Evergreen Lodge has maintained B Corp certification, and in 2015 was named on the B Corp “Best for the World” List, reserved for the top 10% of scorers on the B Impact Assessment. Has it been worth the effort to participate? For Evergreen, the answer is yes. “We feel the certification provides a sort of Good Housekeeping seal of approval, separating us from others with less significant commitment,” says Zimmerman. “We maintain certification in support of the field, not for a specific marketing benefit. That said, we do feel our certification and social priorities resonate with our guests, and we proudly introduce our B Corp status and B Corps in general to our guests in our materials.”
“Our contribution to the B Corp community has been to be an example of what’s possible,” adds Zimmerman. “It’s been really exciting to see the B Corporation community grow, and that the concept of a more holistic approach to business is catching on with both entrepreneurs and investors.”
Evergreen Lodge has been effective as a for-profit business with a social mission because it has been able to balance dual bottom lines. It generates enough revenue and profit margins to satisfy investors and to cover the programmatic and staff costs of the youth employment program. “After fifteen years, we have not received a dollar of charitable support,” according to Anderluh. “Our youth program is completely self-funded.”
Not only did Evergreen’s investors receive promised returns over time, but their initial capital was returned in full after 8 years and they continue to receive cash distributions. “It was an education process for us to figure out how to talk about the mission to investors, and to find the right fit,” said Zimmerman. “Many people we spoke with weren’t interested in or couldn’t make the leap of merging their charitable and investment hats. But we didn’t compromise, and we eventually found people interested in both goals, and excited about making an impact with their investment dollars.” Banks, however, were a different story. “For banks, we basically had to bury the youth program cost into overhead. It was too confusing for them, and it raised questions about whether we were a business or a social program,” noted Zimmerman.
It is important to note a key limitation of the for-profit structure: Evergreen Lodge’s Youth Employment Program tends to focus on more work-ready young adults. “Providing a program for significantly more needy youth could consume all profits and make it impossible to deliver the required hospitality standard,” according to Zimmerman. Over time, as the business became more profitable, they were able to invest in additional staff and support to be able to serve a broader range of youth. However, Zimmerman acknowledges, “a nonprofit model is clearly most appropriate when the social mission goals require ongoing investment beyond the profit potential and service demands of the enterprise.”
Sunset over the pool area at Rush Creek Lodge
Rush Creek Lodge
Limits to Growth, and an Opportunity
With the success of Evergreen Lodge, Zimmerman and Anderluh started looking for ways to expand and scale both their business and social impact. The demand for their internships continued to be strong, and they wanted to be able to serve more young adults and diversify the types of opportunities offered. They were also concerned about staff retention. “One of the things we liked about the youth program was that it created a positive corporate culture, leading to very high staff retention especially for the tourism industry,” said Zimmerman. “Some of our staff have been with us a very long time, but we had run out of places for them to grow. We were in danger of losing them.” Zimmerman and Anderluh were also as committed as ever to demonstrating the potential replicability of their social enterprise model.
After looking all across California for potential expansion sites, they got lucky with a golden opportunity right in their backyard. One day, while driving towards Evergreen Lodge, they saw a “For Sale” sign on a vacant property along the highway just outside the west entrance of Yosemite Park. Located in a prime spot just 15 minutes away from Evergreen Lodge, it had been owned for many years by another developer, with all the necessary approvals and permits already in place, but the developer ultimately decided to sell rather than move forward.
Thus began six years of blood, sweat, and tears leading up to the June 2016 launch of their second location, Rush Creek Lodge. A beautiful 143-room resort on 20 acres with salt water pool, onsite dining, general store and recreation options, it is the first new Yosemite-area tourist development in over 25 years. Both Evergreen Lodge and Rush Creek Lodge are managed as a single social enterprise, with staff and interns moving freely between the two. Operations and management are centralized, as is the Youth Employment Program. With Rush Creek Lodge, they were able to more than double the number of program staff and youth jobs available, and with a more complex set of operations spanning two sites, there was now enough room for staff career growth and a greater variety of program opportunities for youth.
A New Corporate Structure
With a multi-site, real-estate-intensive social enterprise, the ensuing capital and legal structuring requirements became more complex. Like Evergreen, Rush Creek Lodge also required large amounts of debt and equity financing in a relatively short time, but at an even bigger scale. Fortunately, they were able to go back to many of the same Evergreen investors, this time with a solid track record of experience and investor returns. In addition, the rise in popularity of impact investing attracted new individual investors to the table that resonated with their social mission and understood their need for long-term committed capital.
Given the success of Evergreen Lodge and the similar capital raise requirements, the owners decided to continue as a for-profit social enterprise. However, the increased legal and management complexity of two separate lodges caused the owners to reevaluate their corporate structure to better meet their growing needs. They decided to stay with a Limited Liability Company (LLC) structure, but to create separate entities as follows:
- Each property is now held in its own LLC (the “holding company”) and managed by a different LLC (the “management company”) in order to protect the assets from management liability exposure and establish management responsibilities separate from assets/operations.
- A new LLC was created called First Light Resorts to centralize employment and management of staff and youth. All employees of both properties are now employed by First Light Resorts, which also manages staff housing (most of the employees live onsite). They did this to further separate the assets from employment liability exposure, and to simplify the management of employment across two sites from an overtime and insurance perspective.
While the owners ultimately decided to keep a for-profit legal structure, they remain committed to the business/social impact hybrid model for both resorts and are planning to pursue B-Corp certification for Rush Creek Lodge once operations are more established.
Looking to the Future
Although Zimmerman and Anderluh are committed to a for-profit social enterprise structure for the near term, they don’t rule out changes in the future as their business and social model continues to evolve.
A recent expansion of the “social” side of their social enterprise is an example. Through an innovative partnership with a local community college, Rush Creek Lodge is now the pilot site of an Associate’s Degree Program in Hospitality, offering another path beyond onsite employment. Both staff and youth from both resorts are eligible to apply, and many of the college courses will be taught onsite during evenings and weekends, with some of the Evergreen and Rush Creek managers themselves becoming certified as instructors.
“We are tremendously excited about this new program and what it could offer to our staff and youth,” says Zimmerman. The program’s educational component is primarily grant funded through the community college, with Rush Creek providing infrastructure and personnel and covering the labor costs of the participants. They already know that demand will be high for graduates, especially in local Tuolumne County, an economically depressed area dependent on Yosemite tourism.
Zimmerman has high hopes for successful outcomes from this program, including fostering a stronger hospitality culture and workforce in the area. “After 15 years of operating our Youth Employment Program, the Associates Degree Program is the perfect evolution of our social enterprise, as we look to deepen our impact on those we serve while making our lodges even more special for our staff and guests.”
“I have gotten less sleep and more gray hair in the past few years than in my entire life,” notes Zimmerman with a smile. “But so far, it’s all been worth it. We are really excited about the future and what comes next.”