“Field of Dreams” vs. Responsible Capital Projects
By Pete Kennedy, CPA of Cover & Rossiter, P.A.
There have been several local stories recently regarding nonprofit organizations that have fallen on hard times after undertaking building projects without the financial means to complete them. As I write this article, the News Journal is reporting that the Hockessin Community Center’s building and property are being sent to Sheriff’s sale to cover unpaid construction bills. Isn’t this ironic for an organization that lists among its programs “Foreclosure Prevention and Intervention Counseling” and “Mortgage Delinquency and Default & Resolution Counseling?” How does this happen? Why would an organization undertake a building project without the means to pay for it?We’ve seen dozens of capital campaigns in a variety of situations. There are some common themes and tendencies that should be considered when thinking about capital expansion:
- Capital campaigns are exciting, particularly where buildings are involved. New/renovated buildings say “permanence” in a way that new programs or enlarged endowments never can. It is also a way for a Board of Directors or Chief Executive to say “Here is my lasting legacy with this organization.” In the heady atmosphere where buildings are being discussed, it takes a strong, pragmatic Board to ask the tough questions involved in making sure the project is financially viable before taking the leap.
- I’ve never met a gloomy, cynical Development person. They are universally upbeat, enthusiastic and optimistic – great people to be around. This mindset can be dangerous where a capital campaign is involved, since in many campaigns realistic fundraising targets and tracking progress toward them is crucial to decision-makers understanding where they stand financially and in forming their decisions on which direction to take. Anyone involved in a capital campaign has probably seen one of those donor pyramids that fundraising consultants use – large lead donors at the top and stepping down to the smaller masses of $100 gifts at the bottom. It makes the whole thing seem attainable if the blocks can be populated with names. Even if the large upper blocks are filled with formal commitments, it takes a great deal of effort to fill in the lower ones.
The confluence of the two issues discussed above can create a “perfect storm” environment. It comes as no surprise that many organizations begin building campaigns without all the financing lined up to complete them. A certain type of “groupthink” can accompany the thought process around building campaigns. Famous last words can include “Only a few more blocks on that pyramid to fill;” “What will the donors who already gave think if we turn back now?”; “Once the project starts we will have increased visibility and a further outpouring of support;” “We’ll just borrow the money now and pay it down when the donations come in.”
To nonprofit decision makers, it may seem like words are being whispered in your ear “Go the distance” and “If you build it, they will come.” Unlike (Field of Dreams protagonist) Ray Kinsella’s happy ending, there are many cautionary tales of capital expansion plans gone badly awry, threatening the financial viability of the nonprofit organization. Instead of a statement of permanence, a new building can become a tombstone if the financial viability of the project is not carefully and critically appraised before committing.
Even if all the planned funding is lined up, you’re still not out of the woods. There are a few other things you can generally count on:
- Buildings usually cost more than anticipated: Contractors will often deliver the bad news up front in the form of a “contingency” line in the neighborhood of 5-10% of the total contract. This isn’t a slush fund for the contractor to tap into. Things can and do happen in the building/renovation process that are impossible to foresee and are beyond the contractor’s ability to control.
- Increased operating costs: Programs are often offered at cost or at a loss that is subsidized. More programs equal more costs to be covered. Larger building square footage equals more space to heat or cool equals more costs. Offering more programs does not always equal more contributions to support them.
- Decreased annual fund giving: Capital giving nearly always results in decreased annual fund giving. Donors who give to a capital campaign will often not give to the annual fund or won’t give as much. This should be factored in to your operating budget for the duration of the fundraising effort.
For help in planning your capital campaign, please contact Pete Kennedy or any other member of our Nonprofit Practice team at Cover & Rossiter at (302) 656-6632.
Cover & Rossiter, P.A. (www.CoverRossiter.com) is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware. This article was published in this yesterday's GetInvolved Nonprofit Guide in The News Journal. You can also find this article
