As nonprofits continue to move to the suburbs, for profits are filing suits to put a stop to what they consider unfair competition.
A year after Eric Duckworth built his health club in the fastest-growing community in Pennsylvania, the YMCA announced plans to build a 77,000-square-foot facility, complete with a full-service fitness center, just five miles away. Duckworth filed suit against the Y. That was seven years ago. Today, the owner of the Fitness Factory in Cranberry Township, PA, is still fighting the Y in the courts, but the Y has forged ahead with plans to build the multi-million dollar fitness facility.
The Fitness Factory is not alone. Other Pennsylvania health clubs have also sued YMCAs in attempts to block construction of new fitness facilities in their markets. The state's 1998 statute, the Institutions of Purely Public Charity Act, prohibits charitable institutions such as Ys from using their tax-exempt status to compete unfairly against small businesses such as health clubs. Lawyer Fred Greenburg, who has represented several clubs in cases against the Ys, remembers only one Pennsylvania court case in which a for-profit club sued a Y and won. A court ruled the Sewickley Family YMCA had to pay taxes on its steam room, sauna and leased physical therapy practice, but its Nautilus equipment and weight rooms, swimming pool and gymnasium remained tax-exempt.
For the last several years, Ys have been building multi-million-dollar facilities in markets traditionally served by for-profits — the suburbs. Thus the issue becomes two-fold — these nonprofits not only have a tax advantage, but they also have moved into lucrative markets previously left to for-profit health clubs.
Competition doesn't come just from the Ys. Tax-exempt nonprofits such as hospitals, churches and Jewish Community Centers (JCCs) also are building state-of-the-art, multi-million dollar fitness centers in suburban communities. Roughly 60 percent of the 250 JCCs are located in suburban communities, and 175 to 200 of the JCCs have fitness centers. Alan Mann, executive director of the JCC, says fitness centers are integral to JCC's tri-fold mission of education, service and community building.
“There's an old Jewish adage — the body is the temple of the soul,” Mann says. “In order for the soul to be healthy, the body must be healthy. We fulfill the Jewish purpose by helping people to be as fit as they can be so they can be as productive as possible.”
While the JCCs have been building fitness facilities in the suburbs for decades, no JCC fitness center has been sued by a for-profit club for unfair competition, Mann says. The reason Ys may be taking the hit, and JCCs are on the sidelines, may stem from the number of Ys as compared to the number of JCCs. According to the 2004 Health Club Trend Report by the International Health, Racquet and Sportsclub Association and American Sports Data, only 1 percent of the more than 41 million U.S. health club members belong to JCCs or Young Men Hebrew Associations (YMHAs) while 19 percent are members of YMCAs or YWCAs (see chart on page 40).
JCCs not only operate fitness facilities in the suburbs but also serve the urban populations and provide help to new immigrants, who may not otherwise be able to afford a fitness center membership.
Likewise, the YMCA continues to operate many of its fitness facilities in urban areas. For example, when its 60-year-old downtown facility fell into disrepair, the YMCA of the Sierra moved to another location in downtown Reno, NV, rather than moving to the suburbs.
While the YMCA may have the reputation of only serving the less fortunate, its mission is to serve everyone in the community, says Larry Lutz, an attorney representing the YMCA in the case brought against it by the Fitness Factory (see case study on page 36). Children in suburban communities may wrestle with issues such as drug abuse, divorce and other problems, and the YMCA can help them grow spiritually as well as physically as part of its mission of building strong kids, strong families and strong communities.
“It's crazy to say the only place the Ys should be is in the downtown areas,” Lutz says. “You're naïve if you think that just because kids live in suburbs, they don't have issues that Ys can help them with. Some may think that as per capita income increases, health and spiritual problems decrease, but I think you find just the opposite.”
The YMCA has served outlying communities for 150 years, says Arnold Collins of the YMCA of the USA, which is the largest non-profit community service organization in the United States. In addition, the Y's tax exempt status and charitable mission have been affirmed by local courts, taxing agencies, state legislatures, the Internal Revenue Service and the U.S. Congress as well as generations of local volunteer boards, donors, program members and participants, he says.
“All YMCA programs, including adult fitness, which makes up one-third of our vast array of YMCA programs and activities, are part of our historical, charitable purpose and meet the definition of chairity because of the benefit they provide to the entire community,” Collins says.
As a tax-exempt nonprofit, the JCC also operates under both government and self-imposed restrictions, Mann says. To maintain its nonprofit status, the JCC must submit filings to the federal government and show that it is providing a charitable service to the community. The JCCs must also pay taxes on unrelated business income as required by law and pay royalty fees for the music used during the group exercise programs. State and federal laws governing a nonprofit vary from state to state (see table on facing page).
Leveling the Playing Field
Nonprofits such as Ys and JCCs may comply with the necessary regulations to maintain their tax-exempt status, but some for-profit clubs still feel they are competing unfairly. When nonprofits directly compete against for profit health clubs — by offering the same services and marketing to the same potential members — they should become commercial entities, pay taxes and abide by the same laws as other businesses, says Scott Gillespie, president of Saco Sport & Fitness in Saco, ME.
“These multi-million dollar castles that the YMCA is now putting up are clearly for the masses and clearly meant to compete against commercial fitness centers and athletic clubs,” he says. “In numerous cases, these charitable entities have put commercial clubs out of business.”
YMCA facilities have included gyms since 1869 (see timeline on page 42), and as fitness equipment has evolved over the years, the YMCA has also changed with the times, Lutz says.
“When we put elliptical trainers, stairmasters and treadmills in a new facility, it's an evolution of what we did 100 years ago,” Lutz says. “Are we supposed to sit back and say, ‘You put all this stuff in your facility, and we'll put some medicine balls in a room and see if the members use it?’ That would be wrecking our mission.”
Some for-profit clubs are unable to compete with tax-exempt nonprofit fitness facilities, which have a 30 percent to 40 percent advantage over the same club built and operated commercially, Greenburg says. For example, growing competition from nonprofit fitness facilities forced the 100,000-square-foot Deerfield Multiplex in Deerfield, IL, to close its doors two months ago after celebrating 25 years in the business.
Recent nonprofit clubs have been built on budgets that would make some of the best for-profit clubs drool, and it is time that this issue be addressed, says Joel Potter, chief enlightenment officer for the Gold's Gym in Omaha, NE; Lincoln, NE; and Battle Creek, MI.
“The public should be outraged,” Potter says. “Not only are these companies violating the spirit of what a nonprofit organization means to the average taxpayer, but they are also violating public trust and consuming limited resources to aid the truly needy. Our government is collecting tax dollars from the average taxpayer that the fitness industry could provide were the playing field leveled.”
Rather than fighting nonprofits, however, for-profit clubs should instead focus their efforts on better serving the millions of unfit and sedentary adults who don't find traditional health clubs appealing, says Leslie Nolan of the Radial Group.
“Many [nonprofits] have prices in line with commercial clubs, so when customers choose non-profits, it's often because the commercial clubs turn off those customers,” Nolan says. “The health club industry lost this battle on the legislative front years ago, and it's a waste of time and money to keep beating a dead horse.”
Not everyone agrees with Nolan. Chad Potter, owner of the Danville Health Club in Danville, IL, says while nonprofits provide many valuable services to the community, they often offer services well beyond their boundaries and directly compete with for-profit clubs. A hospital opened a wellness center five miles from his club, and he says that financially, he can't compete with the center's higher staff count or their marketing efforts.
“One full-page ad in our Sunday paper is my monthly budget, and they have two or three [ads] a week in our local papers,” he says.
Kevin McCauley, co-owner of The Workout Co. in St. Louis, says nonprofits advertise their services on television, radio and in the newspapers without ever mentioning their charitable purpose, and they directly compete against his club in a host of other ways.
“They offer discounts on their enrollment fees and member referral promotions at strategic times of the year similar to many for-profit centers,” he says. “They open new facilities in affluent areas because they are focused on the bottom line and their return on investment. Rarely do these nonprofit fitness centers open in areas where people can least afford it.”
The Ys are also directly competing against for-profit clubs when it comes to pricing their memberships, Greenburg says, recalling a chart he saw in a YMCA comparing the cost of Y memberships with local clubs' dues.
The Ys build new branches to serve the community's needs, not to turn a big profit, Lutz says. Case in point: the Y doesn't turn anyone away because of an inability to pay.
“We go where the people are and where Ys are necessary,” he says. “We don't sit down and say, ‘This is a place where we can make money.’”
While this may be the case, the Ys aren't the only ones giving away memberships. For-profit club owner McCauley donates 100 memberships per year to schools, churches and various nonprofit organizations for their fundraising activities.
Blending Faith and Fitness
While some for-profit health clubs struggle to compete against the tax-exempt Ys and JCCs, others face a new breed of competition — church fitness facilities. David Smith, general manager of Paradise Fitness for Women, says in his area, three local churches within two miles of his club have built full-service fitness facilities. These facilities have the same commercial equipment as his club, pay no taxes, pay no business license fees, market to both their members and non-church members and charge only $50 a year for members and $90 per year for non-members.
“All of this is classified as a form of ministry,” he says. “I've contacted local government and these churches personally to let them know of the unfairness in their practices and that they're running a business by marketing to the same people we do without the added costs.”
Church fitness facilities, however, aren't going away anytime soon. In fact, these “family fitness centers” top the list of some architectural design firms' church-related projects, says Brad Bloom, editor of Faith and Fitness magazine. As he's traveled to church fitness facilities nationwide, he's noticed that some consist of small fitness rooms with a limited amount of equipment, while others are multi-million dollar, 60,000-square-foot to 90,000-square-foot facilities that rival area for-profit clubs.
While some church fitness facilities only serve their own congregation, the majority are open to the community and have an aggressive outreach campaign, Bloom says. For example, 80 percent of the members of the Family Lifestyle Center at North Phoenix Baptist Church are not part of the church's congregation. Twenty years ago, the church's fitness center started as a 20-foot by 17-foot room with two stationary bikes and some hand weights, and now the fitness center spans 93,000 square feet and features a basketball court, six racquetball courts, a skating rink, 26 group exercise classes a week, a Jacuzzi, a sauna, a game room and a full-service snack bar. For all of these amenities, the church members pay a quarterly fee of $40 for an individual, $50 for a couple and $60 for a family. Community members pay $70 as an individual, $85 for a couple and $110 for a family quarterly. Each time a new member joins the fitness center, Dan Geer, the church's fitness director, calls to welcome them. Last year, he estimated he made more than 1,400 phone calls.
As a non-profit, the Family Lifestyle Center saves about $300,000 to $400,000 in operating costs with its tax-exempt status, Geer says. The church uses the money from the membership fees to cover the costs of operating the large fitness facility.
“We generate the fees, and it makes enough for us to keep it open,” he says. “That way we're not a burden on the church.”
The fitness center is located about a mile from a full-service YMCA and is surrounded by a number of for-profit clubs, but Geer doesn't think the clubs view his fitness center as competition.
“I don't think we're hurting anyone,” he says.
About 20,000 Baptist churches have recreation programs, and the number is growing, says John Garner, consultant in recreation and sports ministry for LifeWay Christian Resources in Nashville. Church fitness centers have a different mission from for-profit health clubs and therefore don't compete directly with them, he says.
“The reason we exist is so different,” he says. “In the secular world, gyms' primary mission is to get people to look and feel better, and the church goes much deeper by also sharing the gospel with them.”
Rec Center Competition
For-profit health clubs also face competition from university recreation centers, which comprise 5 percent of U.S. health club memberships. More than 650 National Intramural-Recreational Sports Association (NIRSA) member institutions provide programs, facilities and services to their constituents in all 50 states, says Gregory Jordan, NIRSA president. These recreation centers have a ready-made customer base of faculty, staff and students, who are usually more affluent than the general population, says Nolan of the Radial Group. For example, Boston University's fitness center set aside 20,000 square feet just for weights and cardio equipment, plus an aquatic facility, climbing wall, indoor track, basketball, racquetball and squash courts and fitness studios for yoga, Pilates and spinning. They also often charge low prices for services such as personal training, Nolan says.
“Competition for new enrollment is red-hot, so there's a trend towards top-notch equipment and facilities to help attract students to universities,” she says.
While tax-exempt university recs, church fitness centers, Ys and JCCs may pose competition to for-profit clubs, all fitness facilities need to work together in communities nationwide to fight the growing obesity epidemic, Bloom says.
“If nonprofits and for-profits could come together in a spirit of cooperation, the bottom line is that the memberships would grow all the way around,” Bloom says.
Case Study: Fitness Factory Sues Y For Unfair Competition
When the YMCA announced plans to replace its 5,000-square-foot building with a 77,000-square-foot facility, Eric Duckworth, the founder and owner of the Fitness Factory in Cranberry Township, PA, sent the Y a letter asking if they could sit down and talk about peacefully coexisting.
“They replied with a terse response from their attorney that they don't compete,” says Duckworth, a former Carnegie Mellon professor. “That's when the legal process began.”
Seven years later, the club is still fighting the Y in the local courts. Despite the pending lawsuit, the Y broke ground on the multi-million dollar facility, and construction is underway. The Y's new fitness center will feature the latest aerobic and selectorized strength-training equipment, an indoor aquatic center, a gymnasium, climbing wall, indoor track, community meeting rooms and child care center.
The YMCA contended that since it first started renting space in a building in Jackson Township, PA, in 1993, it planned to construct a new building. The Y purchased 20 acres of land in February 2003 for $960,000 and received $11.5 million in tax-exempt, low-interest financing from the county's Industrial Development Authority to cover the cost of construction as well as the furnishings and equipment.
“In 1997, the Fitness Factory came in knowing we were there and built a private health club,” says Larry Lutz, a lawyer who is representing the Butler County YMCA in the case. “When we started to make plans to build our building, they filed a lawsuit against us. We were already there and thought that was very unfair.”
While Duckworth doesn't expect his lawsuit to halt construction, he hopes he will be able to prevent the Y from significantly expanding its current fitness services when it opens the new building. As a business owner in Pennsylvania, he sued the Y under the state's 1998 statute called The Institutions of Purely Public Charity Act. The act specifically states that tax-exempt institutions may not fund or capitalize lease obligations or subsidize a commercial business that is unrelated to the institution's charitable purpose. The legislation defines a commercial business as the sale of products or services that are principally the same as those offered by an existing small business in the same community.
Some health clubs sued nonprofits under this statute, not to seek monetary damages but rather to stop them from competing unfairly, says Fred Greenburg, Duckworth's attorney. For example, the Windwood Health and Sports Club sued the YMCA to prevent it from building a new fitness facility in Franklin Park, PA, but later dropped the lawsuit. So far, no for-profit clubs have won cases against the Ys under the state statute, but Greenburg hasn't given up yet.
“It's a tough battle, but I'm optimistic that either through court decisions or legislative actions, the playing field will be leveled, but it will take a lot of work,” Greenburg says. “I think the Y health club business is nothing more than a commercial business and doesn't deserve special treatment. The Y does many wonderful things as an organization, but right now it's operating as a commercial health club under the guise of being a public charity.”
|State and federal income taxes on annual profits||State and municipal taxes on land, buildings and equipment||Business permits, licenses and other taxes||Sales tax on the products they use for the business (office supplies)||Employer taxes like Social Security for eligible employees|
|For-profit health clubs||Pay||Pay||Pay||Pay||Pay|
|YMCAs||Exempt from federal taxes as public charities||Depends on state law requirements||Depends on state law requirements||Depends on state law requirements||Depends on state law requirements|
|JCCs||Don't Pay||Don't Pay||Pay||Don't Pay||Pay|
|Hospital wellness centers||Differs by state||Differs by state||Differs by state||Differs by state||Differs by state|
|Church fitness centers||Differs by state||Most don't pay these taxes||Pay||Differs by state||Pay|
|University recreation centers||Depends on the policies and procedures applicable to a certain institution||Depends on the policies and procedures applicable to a certain institution||Depends on the policies and procedures applicable to a certain institution||Depends on the policies and procedures applicable to a certain institution||Depends on the policies and procedures applicable to a certain institution|
|Source: YMCA of the USA, JCC Association, Medical Fitness Association, LifeWay Christian Resources and the National Intramural-Recreational Sports Association|
What Is a Nonprofit?
To become a nonprofit, a business or organization needs to first form a non-profit corporation at the state level. While the details of the filing process and the fees vary by state, CPA Leslie Nolan estimates that most nonprofits spend $1,000 in filing and legal fees during this process. Then some states require nonprofits to file a request for tax-exempt status at the state level so they're not subject to state-level taxes. To achieve federal tax-exempt status, nonprofits have to file Form 1023 with the IRS pursuant to section 501(c)(3) of the Internal Revenue tax code and pay $500 plus thousands of dollars in legal and accounting fees to prepare the paperwork. The IRS approval process typically takes between four and six months.
More than 600,000 public charities were registered with the IRS in 1997. Charitable nonprofits, with the exception of tax-exempt organizations that make less than $25,000 each year and churches, must file annual information returns with the IRS.
About 6 percent of all businesses in the United States are considered nonprofit. All nonprofits must be governed by a board of directors or trustees.
Nonprofits, unlike for-profit businesses, do not operate in order to generate money for owners and investors. As a result, they must invest surplus revenue back into their organizations or businesses. If the funds can't be used for operating expenses, nonprofits can choose to create an endowment, increase their rainy day reserves or provide services at a lower cost to customers.
Nearly all nonprofits are exempt from state and local property taxes; federal, state, and local income taxes; and state and local sales taxes. However, they are required to pay taxes on income derived from activities that are unrelated to their mission. They also aren't exempt from withholding payroll taxes for employees. The IRS's exempt organizations division ensures that these nonprofits are complying with the requirements for eligibility for tax-exempt status, and IRS auditors investigate the financial status of thousands of nonprofits each year.
Source: Board Source, the Internal Revenue Service and Leslie Nolan of the Radial Group
|1851||First YMCA in the United States is founded in Boston at the Old South Church.|
|1857||The Brooklyn YMCA adds “physical work” to its programs based on the belief that “bodily health is intimately connected with mental and spiritual activity and development.” The YMCA also offers physical work programming to reach young Christian men that it may not otherwise be able to reach. At this time, the Y limited its membership to young men aged 16 to 40.|
|1869||The first YMCA buildings with gymnasiums are constructed in Washington, DC; San Francisco and New York City. Nine years prior, the 205 YMCAs that had been established focused primarily on Bible study, reading and counseling and occupied churches or donated buildings.|
|1881||Robert Roberts of the YMCA coins the term, “body building.”|
|1885||YMCA's School for Christian Workers serves as a training center and innovator of physical education. The Brooklyn YMCA also houses the first reported “swimming bath.” By the end of that year, 17 Ys had pools and by 1900, 100 Ys featured pools. The Y is now the largest operator of swimming pools in the United States.|
|1891||James Naismith, an instructor at YMCA's Springfield College, invents the game of basketball.|
|1895||William Morgan of a Massachussets Y invents volleyball, which was originally called mintonette.|
|1896||“Muscular Christianity” becomes YMCA's slogan. This motto demonstrates that “sound morals and sound body were entirely compatible; that an athlete could lead a team on Saturday and a Bible class on Sunday with equal facility and success.”|
|1917||The YMCA offers recreational services to the military during World War I.|
|1923||The Youngstown Ohio YMCA hosts the first national YMCA basketball championship.|
|1950||A YMCA volunteer invents racquetball at the Greenwich, CT, YMCA.|
|1969||Judi Missett debuts her Jazzercise classes at the McGaw YMCA in Evanston, IL.|
|1970||Jackie Sorenson starts her dance classes at the Townson, MD, YMCA, which leads to the aerobics boom in the United States and Canada.|
|1975||The YMCA and the National Basketball Association create the Youth Basketball Association.|
|1986||The Y introduces its Fitness Leaders course to train and certify teachers for fitness classes.|
|2001||89 percent of the YMCAs report having fitness centers.|
|2006||92.9 percent of the 2,594 YMCA branches have fitness training facilities. In addition, the Ys have 20.1 million members — 9.7 million are under age 18 and 10.3 million are over age 18. About 42 million families and 72 million households are located within three miles of a YMCA.|
|Source: YMCA of the USA|