A Short Primer on Borrowing Money to Fix a Political Party

An Analysis by Nicholas Sarwark

Libertarian Party Reconstruction — The Libertarian National Committee is considering a $250K line of credit secured by the national headquarters to avoid insolvency before convention. There are some differences between 2022 and 2024.

Dear Friends,

It’s fifty-two days until the opening gavel of the 2024 Libertarian National Convention, and even though we sent out a long essay yesterday recounting all of the things that had occurred in the past two weeks, there’s more. Now they are talking about borrowing $250K against the headquarters building to cover expenses through convention.

Is this a good idea? What concerns should the LNC members be discussing on April 7 at the next LNC meeting? Let’s break it down for those who care about the long-term future of the Libertarian Party.

There are many ways to accomplish the operations of a political party.

You can recruit volunteers to do the majority of the work, eschewing fundraising as grubby. The Greens and the Communists do it this way.

You can raise money to hire professional staff to apply focused effort and be accountable for performance. The Democrats and the Republicans do it this way.

If you are unable to get volunteers or raise money, you need to find a solution. For a short-term problem with volunteers or money, a loan (fixed amount) or line of credit (variable amount) can address that problem.

There are two kinds of loans, secured and unsecured.

An unsecured loan is one where if the borrower doesn’t pay, you can try to use the courts to make them pay, but there is no way to compel payment. Credit cards are unsecured. Unsecured loans typically carry higher interest rates to reflect the risk of default.

A secured loan is one that has collateral backstopping repayment. If the borrower doesn’t pay, you can take the collateral as repayment in lieu of the money. Home mortgages and car loans are secured. If you don’t pay, the bank gets your house or your car instead. Secured loans carry somewhat lower rates than unsecured loans.

The general rule in providing secured loans is that the lender should only take collateral that they want in the case of default (most lenders won’t take your baseball card collection as collateral) and that it should be easy to take possession in the case of default (most lenders won’t take collateral that has other claims against it that might be in conflict if default occurs).

The Libertarian Party voted to purchase a headquarters in 2014 at the end of Geoff Neale’s term with a listing price of approximately $850K. Over the course of 2014-2020, the entire mortgage was paid off through earmarked fundraising for the building fund.

Building fund donations are not subject to the same limits as regular donations to a political party, with an annual limit in excess of $100K per individual donor. Building fund donors were promised room naming rights and various other recognition for their support of the party’s long-term operations.

The last time the LNC took a line of credit was in early 2022. When they did so, it was secured by all business assets except for the headquarters building. A UCC security interest in business assets was sufficient because it’s (a) easy to file for the lender and (b) a restricted bank account contained as much or more cash than was borrowed. This kind of loan for a short-term cash flow problem is known as bridge or mezzanine financing.

This time the LNC is looking down the barrel of a convention that will be under the revenue target and over the expense target. There is not more cash in the bank than they are looking to borrow. That’s why they are exploring putting up the approximately $1MM headquarters to secure the line of credit, in addition to all of the business assets.

If the financial picture doesn’t get better after convention, the lender will be able to foreclose on the headquarters with a first position lien and the headquarters will become the property of the lender.

In the January and February financials, it appears that there is a monthly structural shortfall of ~$45K. The last development staffer was fired by Angela McArdle just before the end of March for poor performance and failure to meet her goals. There is no Executive Director, with the Chair unilaterally placing herself in an unpaid internship program to learn how to be an Executive Director of a political party instead of starting a search for a professional and experienced Executive Director.

Any lender is going to want to look at the books, see what the trends are, and evaluate the likelihood of repayment and the likelihood of default. Most lenders will not secure a loan against property that is not being occupied and used for business operations and will not secure against property with any kind of long-term lease that would make it more difficult to foreclose.

The legal questions over whether a foreclosure could occur without the FEC and/or building fund donors having a claim on some or all of the proceeds of the sale is also a red flag for an underwriter. Banks don’t like to deal with uncertainty.

That would mean that the LNC may need to go to what is known as a “hard money” lender, one who will lend at higher rates and lower ratios against speculative collateral. These are the kind of lenders who will float $200K against a $100K piece of property with an after-repair value of $400K, because they know how to seize it quickly in the case of default and can hire contractors to get their value back out. Not all hard money lenders want the borrower to default, but all the ones still in business have a plan for that default.

Any plan for covering the short-term or long-term finances of the Libertarian Party that doesn’t involve leadership and management changes to put the party on a path to bring volunteers and money back in is doomed to failure and default. It is clear, 22 months into a 24 month term, that the officers of the LNC elected at the 2022 Libertarian National Convention cannot or will not change leadership or management to address the structural problem of alienating historical volunteer and donors and failing to recruit new ones.

No lender should extend credit to the LNC unless or until there is a professional Executive Director brought in to right the ship. No professional Executive Director is likely to take a role answering to a lame duck LNC that has a track record of failure, blame shifting, and firings.

There’s a path out of this for the Libertarian Party, but it’s going to require accountability for the people who put the party in this position.

Yours truly,

Nick

P.S. One creative solution would be for one or more wealthy building fund donors to create an LLC to offer a line of credit to the LNC to cover operations through the end of the 2024 election. That way, if there was a default, donors who contributed to purchase the building end up in possession in the building.

Of course, most of these donors are not going to be interested in funding the operations under the current LNC leadership and would be demanding changes in management.