Quality facilities are essential to mission-driven work, helping nonprofits more effectively and efficiently provide critical services that strengthen their communities. But for organizations operating with narrow margins, as most nonprofits do, assembling the capital needed to purchase and/or renovate a facility optimized for their needs is a challenge. That leaves three basic options: raise the money needed for the project through a capital campaign, borrow it from a financial institution, or do both.
Though it’s accepted (and expected) that buyers will finance large purchases in their personal lives – like houses and cars – there’s a perception at many nonprofits that taking on debt for a capital expenditure is a risky choice. In our experience, one of the reasons for this is that the risks of borrowing are well known while the benefits aren’t fully understood.
To be clear, taking on debt does involve risk, and it’s not a solution for every facility challenge. While narrow margins alone shouldn’t deter nonprofits from seeking loans, underlying financial instability should. For organizations that struggle to meet expenses on a consistent basis and find themselves dipping into unrestricted net assets year-over-year, taking on loan payments will simply create a more precarious situation that puts the viability of the organization at risk.
For nonprofits with secure, consistent revenue and a track record of financial stability, however, debt can be a powerful tool. To tease out how that tool can be wielded to help nonprofits expand their capacity and impact, we talked to IFF’s Senior Lender in Ohio, Omar Elhagmusa, and posed the question: Why should a nonprofit consider debt for a facility project?
Faster Projects Mean More Impact Sooner
Pursuing a loan may not always feel like the quickest, easiest process, but it’s lightning fast when compared to the time it takes to build net assets when margins are slim or to plan for a capital campaign, launch it, secure pledges, and convert those pledges to cash.
Taking on debt enables nonprofits to complete facility projects without a long waiting period between planning and execution while the full amount needed to fund the project is raised, helping them achieve greater impact more quickly by serving more people, expanding service offerings, etc.
This also results in a tangible community asset that potential donors can see and touch when considering whether to support the campaign, and, with payments spread out over time, there’s less pressure for a capital campaign to deliver immediate results.
Begin Accruing the Benefits of Ownership More Quickly
First, a disclaimer: not every nonprofit should own its facility. Those experiencing rapid growth, for example, would be better served by leasing a facility until their operations have stabilized and they can better assess their long-term facility needs. Also worth noting is that the availability of a building in and of itself is not a good reason to consider purchasing a facility. That’s a decision that should be driven entirely by an exhaustive assessment of the organization’s needs.
But, for organizations that have thoroughly examined their needs, determined that purchasing a facility is in their best interests, and identified a property for sale that would meet all of the needs defined during the planning process, taking on debt may be in the organization’s best interests if the only roadblock to acquiring the building is a successful capital campaign.
For one, there’s no guarantee that the property will be available by the time the organization has raised the funds necessary to purchase it, which could necessitate additional time, energy, and resources to identify alternatives once the capital campaign is completed. If a suitable facility identified at that point costs more than the organization has raised, even more time will be required to raise the difference.
Beyond the costs of identifying viable options and/or raising additional capital – which could very easily exceed the costs associated with taking on debt – the organization will also have missed an opportunity to begin accruing the benefits of ownership sooner, including building equity and net assets, achieving savings from a real estate tax exemption, and taking full control of occupancy costs by eliminating potential rent increases, among others.
Flexibility to Meet Pressing Needs
Making a 15-year commitment to service debt on a facility loan sounds like the opposite of financial flexibility, but spreading out the costs for the purchase and/or renovation of the facility over that timeframe can mean having more cash on hand to deploy for other immediate needs.
Modcon Living in Columbus is an example of a nonprofit that benefited from this approach. Focused on sustaining homes and neighborhoods by providing reliable, affordable home repair and modification services, the organization sought to acquire its own facility last year to gain long-term stability and better control expenses after having experienced a drastic rent increase in a leased location. Rather than self-funding the project, Modcon Living made a strategic decision to leverage financing from IFF for the purchase of and renovations to its new headquarters – providing the nonprofit with more cash up-front to support expanded operations enabled by the new facility.
Elsewhere in IFF’s footprint, Kranzberg Arts Foundation made a similar choice to take out a loan and leverage tax credits while developing its 3333 facility. Doing so preserved the organization’s cash on hand at a time when the capital was needed to support the arts community during the pandemic with rent subsidies and other relief measures. Had the organization already committed that capital to 3333, its options would have been limited.
These scenarios don’t apply for every nonprofit, but they’re illustrative of why it’s worth it for debt-averse nonprofits to closely scrutinize the pros and cons of financing vs. fundraising alone.
For examples of how nonprofits of all types throughout the Midwest have leveraged debt to achieve their facility goals, visit our news page.