Let’s Talk ESOP’s

Let’s Talk ESOP’s

The ESOP is like a Real Estate Investment Trust, (REIT) with a couple of variances.

There are “ESOP’s”, and then there are “Employee owned ESOP”, and then there are “100% Employee Owned ESOP”. Here are the distinctions between them.


Any company can have an ESOP, which is a small sliver of the company of less than 51%.

ESOP’s are 401a ERISA qualified retirement plans, (Employee Retirement Income Security Act).

They follow all the same ERISA rules that a 401k follows, so you could have 5% of your company be an ESOP. There are a lot of the big, big companies that have ESOPS, just small little slivers.

Employee Owned ESOP

To be an employee owned ESOP, 51% of the company must be employee owned. A good example of that is the largest ESOP in the country, Publix grocery store chain. They are 51% employee owned and the other 49% is publicly traded on Wall Street. The other 49% can be owned by anybody. It can be owned by private equity, Wall Street, or whoever.

100% ESOP

The 100% Employee Owned ESOP was originally designed for someone that has a pre-existing business and wants to sell it but doesn’t want to take the tax hit.

Example: let’s say I’ve got a company that’s 20 years old that’s worth 100 million dollars? What I would do is set up an ESOP trust, you then sell the company to the ESOP for $100 million. You then “seller finance” the sale and carry back a 30 year note. Then, you can take that note and walk into a bank and you can finance up to 75% of the notes face value.

If I walk into a bank with my note, I can get a $75 million loan and then every month, when the ESOP trust pays me my payment on the note that I’m owed, I turn around and make the payment on the loan that I took out against my note. This gets a lot of cash out without having to pay taxes because now it’s a loan and not the proceeds of a company sale. In addition, you will receive a tax write off because you are paying the interest on the note. In this scenario, this is a way to cash out without having to pay huge amounts of taxes.

What we did

There has to be a documented sales transaction to make it legal. So, what we did is, we self-funded the company. And then sold the company to the ESOP trust for $2,000 and wrote a check back to pay off the whole amount. This way there’s no leveraged debt owed, and we all earn our equity alongside every other employee-owner of the company.

Every year as an ERISA qualified plan, just like a 401K, we have to follow the same rules.

We get our financial audits done, and then that goes over to a third party evaluation firm, Cabrillo Advisors.

Cabrillo Advisors does a third party evaluation: we have to get an appraisal of the company every year that is required by the IRS. That appraisal then goes over to the third party administrator.

Just like a 401k has Vanguard or Fidelity, as a third party administrator, we have to use administrators for our 401a plan as well. We use Blueridge ESOP Associates as our third party administrator. They’re the largest in the country. Blueridge takes the evaluation, along with the payroll records, and then they do a share allocation based off people’s W2 earnings: They go through the payroll census, and then, based on what people earned on their W2, they allocated X amount of shares based on how many people participate and how many shares are available.

Just like a 401k has ERISA qualifications, the 401a does as well, so part of that qualification requires you to have a balanced ecosystem just like a 401k. If someone makes a million dollars, they don’t get the majority of the shares.

There’s actually a cap on how much income qualifies for shared distribution. And that goes up every year about $5,000 based of inflation. When we first started it was like $280,000 a year. I think it’s up to like $295,000 now.

If someone makes $400,000, $295,000 of their income goes to urning them shares, they still earn their $400,000 but they cap out the amount of shares they earn per year once they exceed that number and that number obviously goes up each year because of inflation, so it’s a nice ecosystem because sales and operations, pretty much own the majority of the company. It’s also great because lower level positions, even entry level positions are getting a decent number of shares. I’ve watched peoples retirement accounts grow from $7,000 up to $183,000.

Real Estate Assets

A really cool thing about what we’re doing is, instead of retaining servicing rights on loans, we’re buying real estate assets. We’re using the real estate asset class to stabilize the share value, so our share value is going to consistently go up.

The mortgage bank is growing, and stock price will continue to grow even once we get to the point where we’re fully built out and the mortgage bank is just operating. The way I explain it to people is: we are a real estate retirement trust that owns a mortgage bank for cashflow: As a real estate retirement fund that is using the cash flow of the mortgage bank to buy real estate assets to build up the trust.

The ESOP currently has nine properties: 7 single family homes in Delaware, 2 single family homes on one lot in Phoenix, and a one acre plot of raw land in downtown Phoenix that we are just about to finish. Our plans are done, and we are in the final stages getting permits to build 12 to 14 units on that property. The goal is to keep adding real estate assets to the retirement plan so at the end of this it will spin off residual cash flow for everybody’s retirement so everybody will get a residual check for the rest of their lives.

Similarly, if you were to take money and go to Wall Street and invest money in a REIT, you just get a dividend. This is just a bigger piece of the pie without having to put your own money in, your earning your equity, just off of coming to work and doing a great job.

So that’s pretty much the ESOP in a nutshell.

No Income Taxes

Another big benefit because we are 100% risk qualified retirement plan. The company doesn’t pay any federal or state and income taxes. We are then able to take all the profits that we would have paid in taxes and use that to buy more property. That’s how we were able to buy that piece of land in Phoenix.

Last year we saved almost a million dollars in taxes. We took that savings on income tax, and invested in real estate, to expand the trust value, and the profit of the company so we’re leaving enough in the company to keep it up and running, but we take out what we can to keep buying real estate assets. If we have really good month and we’ve got the ability to go buy. Our goals is to keep buying properties every month. Right now, we’re buying about one per quarter, but we’re going to speed that up.

Example: Let’s say we buy a commercial building for $5 million, it’s a C class building, and we pump $5 million into it to turn it into an A Class building and sell it for $20 million. We don’t pay any capital gains on the $10 million. Think about that for a second.

Let’s just use 17%, that’s 1.7 million that we wouldn’t have to pay in taxes that we can take and go buy another building. If you look at the compound effect of how fast the money will grow. We’re going to be like tripping over money pretty much.

No more Ops -vs- Sales

Everybody is on a variable like sales employees. The way that we designed the company is to withstand a recession. I didn’t want to cap people’s income potential because loan officers can make unlimited income where operations, typically cannot.

Example: Let’s say you’ve got an underwriter that makes $90,000 a year. That’s their ceiling, they’re making $90,000 a year. What I wanted to do is create a variable model to not only protect the company from a recession, but also give the employee the benefit of having upside potential where they can earn more money.

What I’ve noticed is that this process weeds out, people that can’t get the job done because no one is going take performance based pay scale, unless they can do the job. In our environment an underwriter can make upwards of $220,000 a year, if they do more files, right? so it doesn’t cap their income.

In the case of the underwriter that makes $90,000 a year. They have no potential to earn more shares and they’re basically capped. But if I say okay, now you’re on a variable, what it does is it gets everybody to work together. Everybody’s on a variable so it gets sales to work with executives, and sales to work with operations, and vice versa.


We designed a plan where executives get paid $15 an hour, and then the variable is based on volume instead of profitability. It doesn’t help me to pad pricing, our goal is to put the best pricing on the street that we possibly can to keep the company profitable, and keep building up this retirement fund for everyone, but we want people to win loans, right? we don’t want to lose deals and I’ll give you an example:

Example: one of our top producers was at another company where he bring in 10 loans, and he found 3 out of 10 because the pricing was so bad that he would lose seven or eight loans. Not only that, they got a cap. I think the max he was able to make was like $6500 a loan.

We don’t have a cap on our loans, that’s number one. Number two, we have better pricing so instead of closing 3 out of 10 loans, now he’s closing 8 out of 10. He’s making more per loan, our comp is higher and he’s closing more loans. That particular LO went from making $300,000 a year to making 1.2 million a year.

The sales process has gotten much easier to close more loans, that’s number one. Number two is looking at ops and if ops is on a variable now they’re incentivized to help you get your loans closed because the more loans they close the more money they make.

Culture Impact

Now it’s creating a unity between sales & ops and sales & executives. That’s why I designed the model like that. All the ops people are being paid $16 an hour, and they’re all on a variable base performance pay plan. Whether that be per unit or whether that be per volume, per decision, it just depends on the position, but it enabled us to create a unified system to get everybody to really work together, which I think is a fundamental problem in our industry as a whole: that ops and sales and executives and sales don’t get along, and we can virtually eliminate that.

Now we’ve got an opportunity where operations people can earn more, but they can also get more shares in the company, because they’re not salary capped and they want to work more and do a good job. We also believe in work life balance. So, we have an unlimited paid time off policy, obviously it’s got to be approved by manager, not everybody can take off the last day of the month, but within reason.

But the nice part about that is that people can work as much or as little as they want. The more you work the more you earn. That’s why I created the model like that.

Joseph Restivo-