On Nonprofit Buildings & Other Big Bets: Lessons from One Foundation’s Folly

December 3, 2016; Ventura County Star

We at NPQ feel we must continue to sound a warning to our readers about the potential folly of making big capital expenditures, especially in an unstable financial environment, on the basis of untested assumptions, or both.

We have covered this particular story before but it just popped back up in the news, indicating how long the recovery from such folly can take. Here is the problem in a nutshell:

The Ventura County Community Foundation opened its $11 million nonprofit center with a financing strategy that lowered the value of the building, banked on a flawed fundraising campaign, and diverted funds that had been raised decades ago for operating expenses.

The VCCF Nonprofit Center in Camarillo now houses about 15 charities. Everyone agrees it was a great idea, but financing fell well short of projections and the organization is still trying to dig out with a combination of deep spending reductions and new gifts from the board. Meanwhile, the aggressive financing strategy for the building has exhausted the resources of all involved and a $4 million balloon payment is due in February 2017. Additionally, the California state attorney general’s office is being consulted about whether it was OK to repurpose $3.9 million in 2012 to finish the building with funds taken from an endowment intended for staff salaries.

Ralph Mahan, one of the founding trustees of the foundation, was not a fan of the endowment repurposing. “We worked long and hard to bring in all those funds,” he said. “We put it out as a promise to keep those funds for operating expenses.”

In any case, after its initial conversation with the AG, the foundation decided it must sell the building to pay off the endowment obligation. However, they later took it back off the market when they found they couldn’t get anywhere near their asking price.

The current CEO, Vanessa Bechtel, says the foundation’s reserves have been depleted, which resulted in a 75 percent reduction of staff and a budget cut of more than 60 percent in 2015. Bechtel, by the way, is not the CEO who helped lead the foundation into this mess. He is long gone, taking his entrepreneurial ideas elsewhere where another financial fiasco began to play out before he was shown the door—or possibly found it on his own.

The lesson of this story? New big building projects can be thought of as big fixed costs that have the capacity to suck every bit of spare money out of a nonprofit. Speculative activity on a building or any big capital investment during uncertain times or without thorough planning and ample reserves in the bank (or at least pledged in writing) is irresponsible. Better to consider the more conservative but less visible value of building reserves and working capital; it might mean the difference in your responsiveness, your effectiveness, and possibly even your longevity.—Ruth McCambridge