The Inside Track: Using Donor-Advised Funds Creatively to Solve Nonprofit Problems
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a DAF was utilized to extend a financial lifeline to New York City’s Tenement Museum during COVID. Brian Logan Photography/shutterstock
For many donors, philanthropy is a largely reactive endeavor. Someone you know sends a solicitation and you write them a check. You find a compelling story for Giving Tuesday and make an online contribution. These acts of generosity are important — they provide unrestricted cash for many nonprofits. But behind the impact statements and glossy annual reports that attract donors, nonprofits grapple with the gritty operational issues familiar to any business — cash flow, payroll and banking relationships.
Given the scale of social challenges we’re facing, this is a time to experiment with deploying philanthropic dollars more strategically to help nonprofits address those issues more effectively and spend more effort on mission-critical work. Many foundations focus on providing unrestricted grants, which give nonprofits the flexibility to address any emerging needs. But donors can offer much more than just grants to their nonprofit partners. By looking at the full range of types of funding held by philanthropic actors, we can envision a broader tapestry of creative solutions, like revolving funds, lines of credit and other tailored financial solutions that are designed to propel organizations forward.
Impactful solutions like these grow out of a deeper understanding of nonprofits' business needs. Foundations have always played an important role as intermediaries between funders and charitable organizations. When decision-makers in philanthropy have had experience as practitioners, foundations can offer unique expertise to create dynamic, lasting and effective philanthropic partnerships. With their flexible structure, donor-advised funds (DAFs) can play an integral role in this approach. When augmented by the financial expertise of foundations and partnerships with grantees, DAFs can become even more powerful philanthropic vehicles.
Consider this example: The Fortune Society, dedicated to supporting successful reentry for people in the criminal legal system, faced challenges in expanding its reentry housing portfolio. One significant obstacle to building more supportive housing is a need for flexible, pre-development funding that allows nonprofits to start large, complex capital projects. Unlike their for-profit counterparts, nonprofit organizations typically lack the discretionary funds to cover expenses like site acquisition deposits or environmental assessments. While private developers have avenues to gather capital from investors or secure bank loans for these costs, nonprofits don't have the same luxury. Therefore, they must often draw from their daily operational budgets to meet these expenses.
In a cooperative effort with The Fortune Society, FJC initiated a revolving loan fund to supply the working capital to jumpstart supportive housing projects. Capitalized through donations from FJC's donor-advised fund participants and supplemented by additional resources from The Fortune Society, the fund's low-interest loans will enable the nonprofit to expand its supportive housing efforts twofold within the next half-decade.
Nonprofits are especially vulnerable to force majeure, as we’ve learned these past few years. In the early days of the COVID-19 pandemic, a particularly imaginative donor posed an interesting question: Could a donor-advised fund be used to refinance the mortgage of a struggling nonprofit organization? This donor, a longtime supporter of New York City's Tenement Museum, had read about the museum's financial troubles in a New York Times article. With visitor numbers and revenue plummeting due to the pandemic, the museum was saddled with a mortgage costing them $585,000 annually.
Seizing on the inventive idea, FJC developed a plan to acquire the organization's mortgage bond and amend the terms to a 1% interest-only rate for a period of five years. This strategic move drastically reduced monthly debt service payments, extending a much-needed financial lifeline to the Tenement Museum. The museum's executive director, Annie Polland, noted that this maneuver saved the organization $2.5 million in debt service costs over five years. It's a testament to how DAF funders, with a deep attachment to and knowledge of their favorite organizations, can develop tailored solutions to thorny challenges. How many more donors would deploy their capital this way if they knew it were possible?
Foundations can play an important role in elevating such solutions, leveraging our deep understanding of nonprofits and our financial expertise. For example, foundations can structure impact investment products that both serve the financial needs of nonprofits and offer philanthropists an opportunity to grow their principal. At FJC, we allow donors to invest in our impact investing product: a loan fund providing necessary bridge financing to our nonprofit borrowers. Our donors find the mission story compelling, but they also see their DAF accounts grow, invested at a competitive risk-adjusted return.
The conversation between philanthropy and nonprofits very often begins and ends with grantmaking, and there is no question that grants are a key component of nonprofit business models. But the nonprofit sector could surely benefit if this conversation were more expansive — on both sides. Nonprofit practitioners could be more explicit with their philanthropic partners about their cash flow challenges that distract senior management from a full focus on their missions, or the capital resources they need to grow and be truly transformative. Donors could consider more inventive and mission-focused uses of the philanthropic dollars that are currently invested in the private sector, whether in foundation endowments or in DAF accounts. These approaches depend on donors and nonprofits engaging more deeply and finding a common cause.
Simply put, there's an opportunity to grow beyond the conventional relationships between donors and nonprofits by elevating creative, entrepreneurial thinking. Sponsors of DAFs, in particular, can play a role in helping small donors align their funds and execute some of the more inventive uses of their philanthropic dollars, such as loans, recoverable grants or impact investments. DAF sponsors have always offered donors operational scale and efficiency; why not also offer technical and legal assistance to facilitate these more complex transactions? Or to pull together multiple donors that want to work collectively to create a solution?
This vision for DAFs is not just about more effective donations; it's about building a more robust philanthropic ecosystem where the interests of donors, nonprofits and beneficiaries converge.
Sam Marks is the CEO of FJC - A Foundation of Philanthropic Funds.
