A Nonprofit Primer for Producers, Part II
By Maida Lynn
Thanks to the folks who responded to my previous article, “A Nonprofit Primer for Producers” with excellent questions! Most of them fell along the lines of, “yeah, yeah, grants I get. But what about…” followed by the myriad ways individuals and foundations can use to move money to 501c3s beyond the simple grant, and the possible implications for the recipient.
As soon as you start digging into the particulars of this stuff, you quickly get into some complex tax and accounting laws and regulations. I think a lot of us are in the dark because a) the explanations can be technical, dry, and overwhelming, and b) we’re not (yet) working with a CPA who can explain confusing concepts to us in plain English. I have to be very careful here and steer clear of providing advice that I am not qualified to offer. Questions that start with “can” or “should” (“Can an investor make both an equity investment and a grant on the same project?” or “Should I agree to let a film donor recoup their grant, even if the money goes back into their DAF?”) are best addressed by a qualified professional.
But what I can do is attempt to provide a few definitions in clear terms and pull the curtain back a bit on the factors that might go into how a donor thinks about which vehicle to use and when. The goal is to empower producers with information you can use to most effectively advocate for yourselves, your projects, and your organizations.
People with access to wealth (their own, their family’s, or the foundation’s they work for) have a menu of options at their disposal for how to deploy the money to non-profit organizations beyond a cash donation. For example, individuals can make a charitable donation of stock, put the nonprofit in their will (called a “bequest”), or make a “qualified charitable contribution,” which is a fancy way of saying a donation from an IRA after age 70 ½. I won’t get into the nitty-gritty of these here (see above: not qualified) but instead point you to this overview and explanation of terms and recommend following up with a trusted advisor to discuss specific situations you may encounter.
As I explained in my previous post, foundations and DAFs (Donor Advised Funds) are entities that allow a donor to take a charitable tax deduction divorced from any decision about which organizations to support or distributions made to said organizations. This money is intended to someday make its way to the communities and organizations that could use it – in exchange for the tax deduction given – but there’s no guarantee that it will.
But the money that does get distributed can take several forms. I think we’re all pretty familiar with the basic grant: a donation to a qualifying non-profit that has no expectation of financial return. Or, as I like to call it, “free money.” Beyond the straightforward grant, however, foundations and DAF-holders can use other methods to deploy resources to 501c3s that come with some expectation of a return:
recoverable/recoupable grant
program-related investment (‘PRI’)
mission-related investment (‘MRI’)
In very broad terms, these vehicles are designed to incentivize the flow of funds from funders to grantees in situations where grantees are in a temporary cash flow dip but have a reasonable expectation of funds coming in the door in the foreseeable future. For example, a donor may offer a recoverable grant to an arts nonprofit in the midst of a capital campaign raising money to purchase real estate. The grant is in lieu of a mortgage and allows the nonprofit to close escrow on the building before the campaign goal is met. If the terms are super favorable, there may even be very low – or no – interest due on repayment! Ideally, the recoverable grant is then repaid to the donor on an agreed-upon schedule after the campaign concludes. But because it’s a grant, there is also the possibility that the funds are only partially or not at all repaid.
Another example: PRI’s/MRI’s are often used to facilitate the investment of endowment funds in constructive community initiatives versus extractive market options (i.e. a CDFI, or Community Development Financial Institution, vs, say, Chevron). These vehicles have strict requirements and are designed to be used in support of nonprofit organizations, so fiscally-sponsored projects are not candidates for these kinds of investments. They are also most often deployed by large institutional funders like Ford Foundation, which has a handy explainer video about their program-related investing. If you are a nonprofit and are exploring a PRI or MRI from a donor, you’ll definitely need reliable legal and accounting council to facilitate it.
On the grantee side, “free money” and recoverable grants are mostly booked as income, while PRI/MRIs count as loans, debt, or equity, based on the type of investment.
Before we conclude this little tour through 501c3 Land, I thought it might be useful to share the kinds of questions donors may ask themselves to help guide the decision-making about the use of their assets. Then I’ll offer a few suggestions for how producers can use these to shape conversations with future funders.
Amount: What is our total giving budget this year? What is the recipient’s budget? Do we think about what percentage of their needs we can meet with our funds? Are we prepared to commit to multi-year support?
Return: What is the likelihood of a return, how much, and by when? Another way to frame this would be to evaluate risk.
Source: Do we want to use funds from our investment earnings or from our investments (ie endowment)? And do we want to convert them to cash or transfer investment assets?
Taxes: What is our tax-paying philosophy, and are we looking for opportunities to pay less in tax?
Time horizon: How long do we want to try to make our foundation or DAF money last? In other words, should this entity exist forever (“perpetuity” in foundationese), or is there a planned sunset date?
Opportunity: What kinds of mission-aligned opportunities exist out there for us to support, and how do they operate?
Complexity: How much complexity (in the form of contracts and fees) can we and our grantee partner assume in order to get this money moved?
OK, so how are these useful to you? I’m sure many of you are already doing many or all of these, but just to cover our bases I will offer, based on my experience, a few tips on how you might approach conversations with a possible funder specifically related to the topics covered in this article.
Budget: Share the budget as soon as the funder asks for it, if not before. In a follow-up conversation, ask them what story the budget tells them about your project or organization; in other words, what impressions do they get from their interpretation of the budget? You’ll learn a lot about each other and can use what you learn to assess fit.
Source: Tell the funder what kinds of funds you are set up to accept and into what entity or entities they can be transferred. Better yet, have all of this laid out clearly on a one-sheet or in your deck: your LLC name, the fiscal sponsor (if there is one), account info for transfers of cash. Take the time to make it look professional and be sure the format is copy-and-pastable so there is less room for error if the funder has to manually type bank wire instructions. Seriously!
Benefits: Be up front if you are bundling items with fair-market value in your pitch (like a membership, table at a gala, or festival passes) and clearly communicate the split between those costs and the donation.
Priorities: Most high net worth individuals and institutional funders support a range of causes for a variety of reasons. Ask them about the broader context of their giving, and how they see your project within it. You can always start with, “Are you comfortable sharing…?”
Proportionality: Some financiers think about the percentage of a budget (or a gap) that they are comfortable using their funds to fill. I think it’s fair game to ask about this (see above: “Are you comfortable…?”)!
Timing: Tax planning can have an impact on the timing of the flow of funds from a funder to a recipient. Without seeming too pushy, I think it’s OK to ask something like, “is timing a factor for you and, if so, when might be a particularly advantageous time to plan for support?”
Philanthropy and the nonprofit sector play a critical role in the US independent film ecosystem, especially for documentary. At the same time, significant barriers prevent the flow of resources quickly, efficiently, and joyfully. I am passionate about doing what I can to reduce these barriers, and hope that demystifying some terms and processes is at a least a tiny step in that direction. Thank you for reading!
This is excellent. Thank you