Initial Reality
When Richard Smart formed the Parker Ranch Foundation Trust, it was funded with land and with $10,000 in cash. Operations of the Ranch continued under the management of the Richard Smart Trust.
At his death in 1992, land rich, cash poor Parker Ranch faced a massive liquidity crisis. Cash requirements to pay for substantial estate taxes, attorney fees and settlement costs associated with family lawsuits, monetary bequests under Richard Smart’s will and additional losses from business operations required millions of dollars.
Four major commercial properties in Waimea were bequeathed to Smart’s family members, which significantly reduced income from commercial leasing. Income generated from cattle operations and a venture into visitor activities did not provide nearly enough income in the years following Richard Smart’s death to repay the Trust’s $26 million debt.
The Trustees were faced with major decisions to produce immediate cash resources. Selected works from Smart’s art collection and certain land parcels were sold to meet the demands for cash. Decisions may have been different had Smart funded the Trust with more cash rather than substantially all land assets. These circumstances made for trying times for the trustees at the time-Warren Gunderson, Richard Henrick and Mel Hewett, and for the entire Parker Ranch ohana.
Assets and operations of Parker Ranch then consisted of an operating but unprofitable ranch with large tracts of pasture lands, commercial leasing operations centered on an aging shopping center and the 2020 town center project that would require substantial development costs.
Parker Ranch trustees continued oversight of Parker Ranch, Inc., as its sole shareholder. Livestock and other operations were the main business of Parker Ranch, Inc.
The effects of a four-year drought, high feed and transportation costs, and falling beef prices troubled Parker Ranch cattle operations, while leasing revenues stagnated in an old shopping center. Visitor operations were devastated during the post-Gulf War era. Smart’s visionary 2020 Plan that included development of residential and commercial real estate made slow progress due to lack of cash for the required infrastructure improvements.
The very survival of this 150+year paniolo legacy was being tested.
Transition from Sole Proprietorship to Managed Trust
Parker Ranch and the Trust also faced enormous transition in organizational structure as the Ranch had operated as a sole proprietorship since its humble beginnings more than 150 years before and later as a Trust with a single dominant manager, Alfred W. Carter. Competing island ranches, including Kahua, incorporated in 1928, and Ponoholo, incorporated in 1979, took different organizational paths.
Its history defined Parker Ranch as a paternalistic business organization instead of a more traditional corporate model. Beef and other food allowances, housing, medical and other needs were provided under the Parker Ranch umbrella. The death of Richard Smart brought a close to the era of providing these benefits and a move to modernizing employee benefits and practices.
Modernizing and streamlining Parker Ranch business operations became legal duties made necessary by the charitable purposes of the Trust. Following Smart’s death, Parker Ranch operations needed to change to produce the income necessary to satisfy the charitable nature of the Trust.
Business Operations Overhaul
By 1995, the diverse business operations of Parker Ranch did not yet meet a coherent business plan with reporting and organizational lines still weak and unclear. To survive, Parker Ranch needed to remodel itself and let go of bygone procedures. Business operations needed an overhaul to comply with the mission of the Trust.
The Parker Ranch Foundation Trust began this evolution in three phases. The first phase, a period of probate settlement and litigation, concluded in 1995 and existing short-term debt repayment was successfully concluded in 1999 with long-term permanent financial restructuring. Phase two involved diversification and land planning. Phase three, the current phase, involves governance and strategic planning.
In 1999, for the first time since its inception, the Trust was on firmer ground and its day-to-day survival was not in question. Financial challenges were addressed with changes to business operations. Profitability from cattle operations needed improvement and other business operations, particularly real estate, required further expansion and diversification to generate more stable income for distribution to Trust beneficiaries.
During phase two’s diversification and land planning from 2005 through 2007, tremendous progress was made with the Beneficiaries on the Ranch’s long-term strategic planning process. The Distribution Committee unanimously endorsed long-term guiding principles for the Ranch under the umbrella of a Next Century Plan. As the strategic plan continues to evolve and be implemented over the next several years during phase three of the evolution, the Ranch is well positioned to lead within the community and resolve many issues, and to explore diversification alternatives for the lands in a sustainable manner, respectful of the rich culture and history of the Kamuela area.
Change in Governance Structure
Most notable within the current phase was restructuring of the Trust. In 2007, with full support of the Beneficiaries, the Parker Ranch Foundation Trust Trustees petitioned for and were granted a change in the Trust’s governance structure by the Hawai’i Probate Court. Trustees sought approval to reform the Trust’s governance structure in order to qualify for a new federal tax status, known as a Type I supporting organization. Under the newly approved revised structure, Beneficiaries appoint Trustees, giving them more input and control in Trust matters. In addition, there is more flexibility for the Trust’s distributions, better ensuring continuation of meaningful distributions to the four beneficiary groups.
Conversion to Type I supporting organization status from the Trust’s previous Type III status was requested in response to recently-enacted federal legislation containing tax law changes related to charitable reform. Because the legislation subjects Type III supporting organizations, but not Type I’s, to additional operating restrictions and requirements, conversion has enabled the Trustees to move forward with careful and planned asset management to optimize ongoing support to the Beneficiaries over the long term, which was Richard Smart’s primary purpose in creating the Parker Ranch Foundation Trust. The approval to convert to a Type I supporting organization strengthens plans for the future direction of the Ranch.