Yeah, But How About NonRefundable Fees
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Yeah, But How About NonRefundable Fees No sooner is the cyber space ink dry on my final,
definitive treatise on fees than a reader chimes in,
Yeah, but how about nonrefundable fees. Our
agreement calls for a $100 nonrefundable fee to be paid by all members when
they come into the club. How does that fit into your scheme of
things?
Short answer: it doesn't [fit]. Long answer to
follow.
Many agreements seem to call for
nonrefundable fees, but none of them tell you how to
compute them. The usual practice is for a club to pick some number for such
nonrefundable fees, presumably to cover administrative expenses. Let's try to
boil this down to very simple cases that we can follow easily.
Assume a two man partnership of Able and Baker. Able
makes an initial payment of $900 and receives 90 units. Baker puts in $100 and
receives 10 units. Now they decide that each should contribute $50 to cover
expenses. At this point, before any expenses are paid, the club has $1,100 in
assets and 100 units outstanding, making each unit worth $11. Baker is worth
$110 [10 times $11].
If Baker gets out at this point, he should be paid $110
less any withdrawal fee. But, wait a minute! There's this $50 nonrefundable fee
to consider. All right let's deduct $50 from his value and pay him $60. So
without the club suffering any loss at all, Baker pays in $150 and receives $60,
thus losing $90. Now there's a real nonrefundable fee.
Ok. I admit that's an extreme case and Baker is suffering
because Able gets most of his fee.. Let's take a situation where the positions
are relatively equal.Suppose Able and Baker both start off with $500 each, and
receive 50 units. Then they each put in a $50 fee for expenses. Let's say they
spend $25 on postage. Now Baker wants out. The total assets of the club are
$1,075 [that's $500 + $500+ $50 + $50  $25.Baker is worth half of that, or
$537.50. But we can't pay him that because we have this nonrefundable fee to
contend with. Do we deduct $50 from his pay out figure? But of that $50 fee,
$12.50 has already been expended and deducted from his total value. So, it would
seem the fair thing to do would be to charge him only $37.50 of that
nonrefundable fee.
Are we beginning to see the problem here? Consider what
happens a few years down the road, when we have admitted several new partners
and have expended unknown percentages of their nonrefundable fees. There is no
practical way to compute the unexpended portion.
So my answer to 'Where do
nonrefundable fees fit in?' is 'They
don't'.
I recommend strongly that the term nonrefundable fee be
stricken from all partnership agreements.

