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The Aragona-Pembroke Little League had less than $30,000 in the bank, could not pay basic expenses and was losing money at its twice-a-week bingo fundraisers. Bankruptcy seemed certain.
Then, in late 2009, bingo hall owner Debbie Tibbitt approached league President Lou Mazza with an offer: Why not buy her facility instead of renting it a couple of days a week?
Under Virginia law, the league, as a nonprofit, would be allowed to run more gaming sessions than private owners. And by giving itself the best hours, bingo could be the ticket to a financial turnaround.
Mazza signed a deal within weeks that put the 300-player baseball league in the bingo business and, soon after, landed him and his wife jobs running the bingo hall.
According to a deed of sale and property records, the league bought the Witchduck Hall building at 660 N. Witchduck Road for $1.8 million, almost 2½ times its assessed value of $743,000. It paid an additional $1.5 million for the hall's bingo business - which included calling wheels, used tables and chairs, a snack bar, coolers and a freezer - without ever getting an independent appraisal of its worth.
The league never negotiated a price, and the property was never advertised by Tibbitt, who financed two 30-year mortgages totaling $3.3 million at 6 percent interest, according to interviews with Tibbitt and Carl Bush, league vice president.
Five years later, the deal has transformed the league.
Aragona-Pembroke makes more money from bingo and pull-tab gambling cards than any other Little League in the country, bringing in about $800,000 per year after paying out winnings, according to its most recent tax returns.
But the windfall hasn't trickled down to the players, a Virginian-Pilot investigation shows.
In 2012, Aragona-Pembroke spent $150,000 on baseball operations, including uniforms, field maintenance and umpire salaries. That is about the same amount shown in the league's 2009 tax filing, one year before it bought Witchduck Hall.
What has changed are the league's expenses.
More than $500,000 of the bingo hall revenue winds up in private hands, according to tax returns, property records, sales contracts and a deed of trust filed with the city.
The league paid $251,000 in salaries in 2012, including a combined $136,000 to Lou and Cheryl Mazza. Lou Mazza is apparently the only Little League president in the country receiving a salary, according to a review of Internal Revenue Service returns and the national Little League office. The national organization's rules prohibit league officers from receiving money for their baseball service. Such an arrangement would inspire a "thorough, lengthy internal review," national Little League spokesman Brian McClintock said in an email.
The league pays $262,000 a year to Tibbitt Properties for mortgage costs and "condo fees" for maintaining the parking lot and common areas.
Mazza declined to be interviewed, although the league did relay some of his responses via email. Bush, speaking for the league, said everything done was legal, set up by the league's lawyers and accountants, and intended solely to benefit the players and keep the league alive.
The bingo hall sale also contained an unusual provision that could draw IRS scrutiny, according to a handful of attorneys and accountants specializing in tax law who reviewed the details at The Pilot's request. When the mortgage is paid in full, Tibbitt Properties has an option to buy back the building for $1.8 million, no matter how much Virginia Beach property values increase in the next three decades.
The league would be kicked out of its building and left with nothing - not even the additional $1.5 million it paid for the business rights, because it was purchased as a package deal.
Bush said there was no choice but to buy the property at that price.
"You can get your terms or your price, but you can't get both," he said. "We didn't have any money for a down payment, so we had to pay a lot more."
The buyback clause and the decision to pay far above the property's assessed value raise questions about whether the Aragona-Pembroke board of directors is properly guarding the nonprofit's financial interests, several tax attorneys and accountants said.
"A private company can buy property for whatever price it wants, but a nonprofit can't. When you are paying more than $20,000 a month to a private entity, I think the IRS will be all over this because of the private inurement rules," said Jennifer Urban, a former assistant attorney general of Ohio for gaming matters who is now in private practice in Minnesota. The IRS defines "inurement" as a private entity receiving more money from a nonprofit than the service it provides is worth.
"The Little League board has a legal obligation to do due diligence to make financial deals that benefit the league," she said, "and when the purchase price is so much higher than an assessed value, it appears they aren't meeting that obligation."
Bush said the league probably should not have accepted the buyback provision.
"A lot of us were never comfortable with that," he said. "But you have to remember we were desperate, weeks from going out of business. It saved us."
The Little League's situation came to light during a Virginian-Pilot review of all tax-exempt properties in the city. The league stood out because of its total revenue, its decision to pay officers in apparent violation of national Little League rules, the bingo hall's purchase price and an attempt by the league to have the hall declared tax-exempt.
Tibbitt defended the sale price and said the city's valuation of $743,000 for the property was irrelevant because the league needed revenue and because of the moneymaking potential of the business.
"I came up with a price I needed. I knew they would be getting more gaming days, so I knew it would also give them enough money to pay the mortgage and support the Little League," Tibbitt said. "The purchase price they felt was fair and appropriate, or they wouldn't have accepted it."
The sale contract and a deed of trust, filed together on Jan. 5, 2010, contain provisions that allow Tibbitt and her family to retain an unusual amount of control over the property and its future dealings.
For example, the buyback clause: If Tibbitt or her heirs exercise the option to buy the building for $1.8 million as soon as the mortgage is paid in full, the league would have spent $7.1 million in interest and principal but be out of business and have nothing tangible to show for it.
Tibbitt, 63, said she has "no idea" why the clause was included but expects any decision will fall to her heirs. She said the league should have insisted on "fair market value" if it wasn't happy with the option price.
Tibbitt said her lawyers from Wolcott Rivers Gates P.C. drew up the contract. Two of the firm's attorneys, Edward W. Wolcott Jr. and Leslie R. Watson, are listed as trustees on the deed of trust. They did not return repeated phone calls seeking comment.
The league said it was represented by an attorney, but that could not be verified by The Pilot. Only Lou Mazza's name and the Wolcott Rivers Gates attorneys appear on the sales and deed documents.
The contract leaves the nonprofit Aragona-Pembroke with a mortgage of more than $20,000 a month, plus $22,000 in yearly condo fees, the league said.
Tibbitt said the condo fee is standard, although there is no mention of it in the deeds of sale or trust. The league did not say why it agreed to the fees.
"This is a very big nut we have to make each month, and it is keeping us from doing a lot of things we'd like to do with the league, including getting lights on the existing fields," Bush said, adding it has saved about $350,000 so far toward a new field. "We are planning to build new fields, but it costs a lot of money."
Facing tighter budgets, cities and the IRS are increasing scrutiny on the operations of nonprofits to make sure money is spent on the charity and not on private individuals.
The city rejected the Aragona-Pembroke league's tax-exempt application in 2010, saying running a bingo hall had nothing to do with youth baseball. It kept the exemption for the sports complex.
On a recent Tuesday night, more than 100 boys and girls invaded the half-dozen practice and playing fields at the Aragona-Pembroke Little League complex on De Laura Lane. The tiny parking lot overflowed, sending cars down neighborhood streets, but nobody seemed to mind.
The league has been a fixture for more than 50 years, the last 20 under Lou Mazza's leadership. It has added fields and equipment and hosted national Little League events. Aragona-Pembroke's fees for players are among the lowest in the area, and Bush said the league routinely gives scholarships to low-income families and won't turn away any child or family.
Parents said there is no dispute about Mazza's dedication to the league or any doubt that he and his wife earn every penny of their salaries. He has driven buses on road trips, pulled money out of his own pocket for expenses and personally guaranteed a loan several years ago when the league bought an adjoining piece of property for $70,000, league officials said.
So Mazza naturally jumped when offered a chance to save the league by buying a bingo hall, Bush and league parents said.
But a few things became apparent to league officials within weeks of taking over as bingo hall owners. First, the building was in bad shape, with air-conditioning units, floorboards and parts of the interior and exterior structure needing to be fixed or replaced, Bush said.
"It's an old building, and maintenance costs are very high, as you'd expect," he said. "Those are expenses we have every year."
The league also was making a lot more money than it had before, in large part because it was able to assign itself the busiest bingo days and time slots. It needed someone to manage the facility.
It immediately turned to Lou Mazza, who the league said had extensive business experience and was working full time while running the Little League. Bush said Mazza had been "in the automotive business" and forfeited about $45,000 a year in salary to help run the bingo hall. Putting Mazza in charge gave the league someone it could trust in such an important position, Bush said.
It did not advertise the position or seek other candidates.
The league then hired Cheryl Mazza to oversee Witchduck Hall's finances because she "had a background in accounting," Bush said.
Under federal rules for nonprofits, tax experts said, the league should have advertised the positions and sought other candidates before hiring its president and his wife.
According to the league's most recent tax filing, Lou Mazza made $71,898, and Cheryl Mazza was paid $65,591. The tax return had a box checked marking them as "officers" and not "key employees," an important distinction.
If they are paid to run baseball, that violates the organization's national charter, and the league could lose its status as an affiliate. If the Mazzas are paid from gambling revenue, that breaks state gaming rules and federal tax laws, putting the league's tax-exempt status in danger, according to guidelines published by the IRS and the state.
The league says it complies with all rules and laws by paying the Mazzas from a separate account as managers of the bingo hall building. It takes a portion of each day's proceeds and pays it to the facility fund. Lou and Cheryl Mazza, who is the league treasurer, are paid out of that money.
"We rent the building to ourselves," Bush said.
The league's 2013 gaming permit issued by the state says the Little League paid $32,000 per month in rent to Witchduck Hall - $10,000 more than it is paying Tibbitt Properties for the two mortgages. The league, hall and the bingo operation all fall "under the umbrella" of Aragona-Pembroke baseball, Bush said.
In emails and interviews, Aragona-Pembroke officials said the Mazzas are not paid as officers of the league, despite what the tax returns say. The officials initially promised to file years of amended tax returns to correct the error, but Bush later said in an email that all of the league's tax returns are accurate.
"I understand all these elaborate accounts and moving money around could look bad, but we have talked to accountants, lawyers, and it is all legal," Bush said. "Nobody is getting paid with gaming funds. Not directly. Yes, you could make the case that the money for salaries is all gaming money, but it isn't."
$3.3M bingo investment
In 2009, Aragona-Pembroke Little League bought the Witchduck Hall bingo building for $1.8 million, almost 2½ times its assessed value of $743,000. In addition, the league bought the hall's bingo business for $1.5 million.
A provision in the purchase of Witchduck Hall allows the original owners to buy back the property in 30 years for $1.8 million, the sale price, after Aragona-Pembroke Little League has made its final mortgage payment. The league would be out three decades of accrued equity and would be without a building.