Editors’ note: This article, first published in print during May/Jun 2001, has been republished for Nonprofit Quarterly with minor updates.

THREE SMALL NONPROFITS ARE CONSIDERING CAPITAL CAMPAIGNS:

An advocacy organization whose annual budget is $150,000 pays monthly rent of $600 for a two-room office with a shared bathroom and kitchen. Their landlord tells them that at the end of their lease their rent will increase to $1,000. As a result, the group is pondering whether to buy a small house that could be converted to office space.

A modern dance company with a yearly budget of $300,000 rents a loft for $1,500 a month. The company managing their building tells them the building has been bought by an Internet company and they have two months to move. Desperately searching for space, they are invited to join other arts organizations in buying a large building. With so little time, they don’t know whether to move to a temporary space and continue to look for a rental or take the plunge and help buy a big building now.

The elderly owner of ten acres of forestland on the outskirts of a small town has been approached by a developer wanting to build a mini-mart and parking lot on the property. A local land trust wants to convert the property to a park. The owner would sell to the land trust for less than the developer is willing to pay, but still the price tag is far more than the land trust can afford.

All three of these organizations find that thinking about owning property is both exciting and terrifying. They have no idea where to begin their planning process and how to figure out what is realistic for them.

Rising rents, paving over of open space, and the sheer number of nonprofits competing with for-profit businesses for space have led a large number of relatively small organizations to explore buying and owning property. The rental situation is, of course, worse in fast-growing cities with already high property values, but all over the country, finding affordable quarters has become an enormous need. Even for nonprofits with secure locations, seismic safety requirements, the need to remove asbestos and lead paint and making buildings fully accessible may put them in the position of needing to embark on some kinds of capital improvements.

For grassroots groups like those in the examples above that have their hands full making ends meet from year to year (or even month to month), a capital campaign can seem daunting at best and impossible at worst.

Over the next several issues of the Journal, we will discuss how small groups can conduct large capital campaigns, with profiles of some successful organizations that have bought buildings, built playgrounds, renovated historic landmarks, and the like. This article will help you understand what you need to have in place before you begin to plan a capital campaign.

PUTTING THE CAMPAIGN IN CONTEXT

First, let’s remind ourselves of the fundraising context for a capital campaign by reviewing what organizations need financially and what donors can provide.

Organizations have three types of financial needs:

Annual Funding. The money they need every year. For most grassroots groups, raising this money consumes all their fundraising time.

Capital Funding. From time to time, groups need something that they don’t need every year. Items such as computers, a new phone system or furniture, or maintenance, such as rewiring or installing carpeting, are all capital improvements. For these, additional money needs to be raised beyond a group’s annual budget. For small capital needs, a group may just add the items to its annual budget and raise the money with an extra appeal, or submit a proposal to a foundation or an appeal to a generous major donor. When the capital improvement involves buying, retrofitting, or renovating a building, however, the group usually needs to conduct some kind of campaign to raise the money from a number of sources.

Endowment Funding. Organizations that think they will be needed forever, or at least as far into the future as they can project, will want to invest some of their money and use only the interest from the investment as part of their annual income. The principal that is set aside to be invested is usually referred to as an endowment.

Donors can provide income for these various funding needs through a few different vehicles:

Gifts of Income. The majority of people earn money every year from a job, investments, a pension, or some combination of these. About seven out of every ten people give some of their earned income away. These gifts generally provide for the annual needs of the organizations they donate to. In other words, some of my income as a donor becomes some of your income as an organization.

Gifts of Assets. In addition to their income, many people have saved or inherited assets that are in various forms of savings or investments — stock, property, bonds, art, insurance policies, and so on. A donor can also give these assets to an organization, which generally uses them for capital. In other words, I give some of my savings, or my capital, to increase the capital of an organization.

Gifts from Estate. Everyone eventually dies, but they control what they own even in death through the terms of their will. Through their will, a trust, or other estate planning mechanism, a donor can arrange for nonprofit organizations to receive some or all of their estate. These gifts are most often used for endowment. In other words, the last set of gifts I give, which form my legacy, are used for the group to exist long after I am gone.

Unless restricted by the donor, organizations can, of course, use gifts of assets and estate for their annual needs. In the case of very small gifts, or when donors regularly give stock as their annual gift, this may be appropriate. But for the most part, using assets and estate gifts for annual purposes is unwise because these gifts will not recur.

Similarly, but probably less obvious, using gifts made from a donor’s income for capital or endowment purposes is also ill-advised. First, you don’t want to raid your annual income for funds to pay for capital costs (which many groups do), and second, any amount that a person can afford to give from income they should be encouraged to give every year and not just for a one-time event such as a capital or endowment campaign. I hope that it goes without saying (but I will say it anyway, just in case) that if a person wishes to give a gift from their income to a capital or endowment effort, a group should not turn that gift away but accept it and thank the donor appropriately.

When contemplating a capital campaign many groups will say, “Our donors don’t earn that kind of money.” However, the donors’ earnings are less important than their savings. I have seen groups mount successful capital campaigns with lead gifts from older donors living on fixed incomes who have some highly appreciated stock or a piece of property they are willing to give. Because the donor can deduct the fair-market value of their gift, they avoid the capital gains tax on that part of their savings, enabling them to make a much greater gift than they might have thought they could and at considerable tax savings.

Keep in mind, then, that in capital campaigns you are not asking donors to make extra gifts from their income; you are asking them to go to a whole new level with your organization — giving assets and often paying their gift as a pledge over a period of several years.

THE CAPITAL CAMPAIGN CASE STATEMENT

Once you are clear on the kind of money you are trying to raise, you will need to develop a case statement for the capital campaign. The capital campaign case statement is a variant of the case statement every organization should have, so we begin with a discussion of the general case statement.

All fundraising should start from a clear and compelling case statement. (See the sidebar on the next page for components of a case statement.)

The case statement justifies the existence of the group and answers the question, Why should this organization exist?

The case statement for a capital campaign justifies the need of the organization for whatever will be bought or built with its capital campaign funds. The capital campaign case statement says, “To do our work properly, we must have this.”

The capital campaign case statement will use much of the language in the organizational case statement, but the goals and objectives will be specific to the capital campaign. They will describe why having the building is imperative or why the renovations will make the group able to fulfill its mission better. The capital campaign case statement may also describe how savings generated by the work of the capital campaign will be plowed back into program.

If your capital campaign is to create an endowment, the case statement must justify the need for the group to exist in perpetuity. It takes little commitment or even knowledge of a group to donate $25 to it; it takes a little more to donate $100 and quite a bit more to donate $1,000. Capital and endowment gifts usually begin at $10,000 and can go into the millions. The more that is at stake for the donor, the clearer the group needs to be about why the need is so critical and what it is going to do with the money.

The Capital Campaign Budget

Probably the trickiest part of the case statement is the budget, which will be the basis of the fundraising goal of the campaign. This is because there are a lot of variables and some of them are hard to estimate ahead of time.

Let’s look at all the components that go into a capital campaign budget:

  • Cost of a building, renovation, property, or whatever is the actual capital expense.
  • Cost of furnishings, including new computers, new phone systems, and wiring for these.
  • If you are moving, include transition costs such as movers and staff time spent setting up the new space. If you are renovating, you may need to move out of your office for a period of time, which may mean including the costs of renting a temporary office.
  • Cost of the capital campaign itself (staff, equipment, events, recognition items for donors such as plaques or certificates, etc.). Generally, for campaigns seeking less than $1 million, budget 15% of the goal for this item; for campaigns of $1 million to $3 million, budget 10% of the goal; if you are trying to raise more than $3 million, add 7%–10% of the goal.
  • Maintenance fund. Add some money to the campaign for big repairs and updating equipment. This fund is not for general operating costs of the building. This money should be invested like an endowment. You want to have enough in this fund that you can pay for most repairs with the interest generated by the fund, or at least so that you will not deplete the whole amount with one large repair.
  • Debt service on bridge loans. Money pledged during a capital campaign comes in over a period of time and usually accrues more slowly than the expenses associated with the capital project. As a result, groups often have to borrow against the unpaid value of the pledges. Banks recognize pledges as collateral and will loan money against a certain percentage of their value. Debt service is the interest on these loans. This amount can vary widely and may be hard to determine in the very beginning of your campaign.

Remember, you can change your budget if necessary, but it is much better to lower it than to have to raise it. Of course, you will not have this item if you choose to wait for all the pledges to be paid before you start spending any money. Also, a generous donor may loan you the money you need at no interest, but don’t plan on that unless you know for sure it will happen.

  • Cost overruns. Building projects inevitably run over their estimated costs. A contractor may be able to suggest a percentage of the total to add to your budget to cover such overruns. Also, ask other groups and individuals what their experience has been on this point.
  • Discount. Not all pledges made will be paid. Sometimes stocks aren’t worth as much by the time they’re sold as when they were transferred; some donors cannot pay their pledges despite their good intentions; and once in a while a donor simply does not pay. Most groups build in 13% for loss of pledge income. This is a conservative estimate, which means you would almost never lose more than this amount.

Components Of a case statement

All of the items below brought together in one document comprise a case statement. From this document you will take information, language, and ideas that you will use in foundation proposals, direct mail appeals, brochures, speeches, and the like. None of your marketing and fundraising material will contradict the ideas and information in the case statement, even though the information may be presented in very different ways for different purposes.

MISSION/ PURPOSE: This is a one- or two-sentence statement describing why the organization exists. A mission statement generally begins with the words, “We believe…” or “Because….” Here are two sample mission or purpose statements:

We believe reading is fundamental to a full life. (literacy program)

We believe in the power of art to change the world.(political theatre company)

GOALS: These are broad statements of what you are going to do about why you exist. Goals start with the word “To…”

To eliminate adult illiteracy in Greene County.

To bring Ourtown the best in cutting-edge political theatre.

OBJECTIVES: Objectives describe very specifically how you will go about meeting your goals this year. Objectives are specific and time limited.

We will conduct ten 15-week classes for illiterate adults each spring and fall.

We will perform three new plays from three different countries every year.

HISTORY: Your history includes accomplished objectives and the lessons you have learned that make your group qualified to do the work you have described. If you are a brand new group, your history will be the history of the people who are starting the group and the history of other groups or movements like yours.

STRUCTURE: This section tells who is involved in the group and how people get involved. The structure makes it clear that the right people are in the right places to accomplish the goals of the group.

BUDGET: The budget shows where you get your money how much money you need

When you add up all these costs, you will see that the total budget can be twice as much as the cost of the building itself.

Beyond these hard costs, you should factor in loss of annual income. A good capital campaign will not cause a decrease in annual income, but during a capital campaign it is unlikely that annual income will rise significantly. If you normally count on being able to raise 10% more every year from your donors, during the two or three years of your campaign you will probably not be able to do that. So, you will experience a “loss” of the increase in annual income you would normally count on. This means you either won’t be able to expand programs during the capital campaign, or you will need to put some money aside for one or two years before beginning the campaign to cover your needs.

The good news about annual fundraising is that a well-run capital campaign will always produce an increase in annual income after the campaign is over. People will be excited about the new facility, many people will have realized that they can afford to give more than they had been giving, and you may well have attracted some donors to the capital campaign who then become annual fund donors.

WHAT ELSE YOU NEED TO HAVE IN PLACE

Beyond the case statement with its detailed budget, you will need a number of other things in place before you can begin planning your capital campaign.

A Good Database and Systems for Gathering and Entering Data

All groups should have a workable database and organized donor records. Your database needs to be easy to use, able to retrieve and sort information easily, and fast. Find a database that you like and spend the money to buy it and a computer that can handle it. Above all, take the time and money to train yourself and your staff in how to use it. This does not mean you need to spend thousands of dollars on a database — there are a number of inexpensive or free databases. The next issue of the Journal will review some of these.

Of course, a good database is only as good as the data entered in it. A capital campaign requires systems in place to gather and record donor information. These systems are more often what’s missing, even if the software and hardware needed to use them are present. As an example, I met with a 50-year-old independent school that had had one development director for the previous ten years. When he died suddenly of a heart attack, the new development director came into an office full of scraps of paper with donor information noted on them. The very expensive database that the previous director had bought had never been installed. Instead, he had used a simple mailing list database for mailings. This list undoubtedly had all the school’s donors on it, but it also had about 2,000 other people who were on the list for no apparent reason.

It took almost 18 months before all the paper was fully sorted and the donor history of the school reconstructed. Fortunately, helpful board members and longtime active alumnae were able to fill in many details; even so, the new development director remarked that she was only truly able to start her job after she had been at the school for a year and a half. Getting this system together delayed the capital expansion the school had been on the verge of planning when the longtime development director died.

In another example, an organization with only one staff person was offered a chance to buy the house they had been renting at considerably below its market value. The owner had died, her children did not want to displace the nonprofit, and they asked only that the group retire the mortgage. The executive director and two board members leapt into action to buy the building, soliciting enough gifts to pay off the mortgage.

However, within weeks there were problems. Donors were being sent pledge reminders for the wrong amounts, many donors were not thanked, a check for $10,000 was found by the husband of a board member in his wife’s pocket as he was folding clean laundry — unfortunately it had already gone through the wash and the donor had to be asked to rewrite it, and so on. Because neither the lone staff person nor the board had established systems to handle the gifts the committee was generating, the group ended up with a number of disgruntled donors.

An incomplete or inadequate database may (barely) be used to manage an annual campaign, but such an underpowered system will not work as the organization moves into capital and endowment campaigns. Before you even think about capital campaigns, make sure that all your systems are in place and that you can deliver on the back end what you promise on the front end.

Gift Acceptance Policies

Many groups already have gift acceptance policies; if you don’t, you will need to create them. These are policies approved by the board that spell out what kind of gifts you will and will not accept. You may be wondering what kind of idiot would turn down a gift, but here are some examples of gifts given for capital campaigns that didn’t work out:

A small organization was given a house that they decided to sell. The house was several miles from an EPA Superfund clean-up site, but after the organization accepted the house, the contaminated area was discovered to be much larger than originally thought. Although neither the house nor its property was in danger, the presence of the site discouraged buyers. While the house sat on the market for seven years, the group had to pay insurance and property tax on it. In the end, they sold the house, but for much less than they had been forced to invest in it.

A group accepted a painting valued at $25,000 and expected to be able to sell it for that amount for their capital campaign. However, they could not find a buyer willing to pay that much. In need of whatever cash the painting could bring, the group sold it for $10,000. This angered the artist, who then complained to the volunteer who had solicited the gift in the first place; in a domino effect, the volunteer decided not to pay her pledge of $50,000 to the campaign.

A group was offered $100,000 as a lead gift by a corporation known for its anti-union activities. After much heated discussion, the group’s board decided to accept the gift, only to be severely criticized in the press, by unions, and by other nonprofits. The board then reversed itself and turned down the gift, but the damage was done. The development director estimated that this controversy cost the group more than $150,000 in potential donations beyond the $100,000 they turned down.

Grassroots groups should be very careful about accepting complicated assets such as real estate, art, or privately held securities, and they may also want to discuss a framework for thinking about accepting gifts from corporations. Although a group’s policies can allow it to decline gifts that could be more trouble than they’re worth, the board always has the right to override its policies in order to accept something they have deemed worth the exception.

There are two easy ways to create gift acceptance policies. One is to adopt an all-purpose policy that simply says, “The board of directors reserves the right to review all gifts and to decline gifts that it feels our organization is unable to handle appropriately or are not in the best interest of our mission.” The other way is to find another organization that you trust that has developed a more detailed policy and use parts or all of theirs, substituting your name for theirs.

Having the policy is important, but having the conversation is more important. It is much easier to have a theoretical conversation about accepting a gift horse than to look a gift horse, which comes with his own pasture, in the mouth.

An Active, Motivated Board of Directors

In order to have everything you need for your capital campaign in place, your board must understand how serious a capital campaign is and must be willing to do its part to help raise the money. In fact, board members should make the first gifts to the campaign. Traditionally, board members contribute 10% of the goal, but that amount is too high for most grassroots groups. Rather than setting a specific percentage or dollar goal for the board as a whole, it is important that each board member give what is, for him or her, a significant gift over and above the significant gift they should already be giving to the annual fund.

Almost more important than making their own gift is board members’ willingness to help ask for money and to find volunteers who will ask. A capital campaign cannot be done by a few overworked staff people. Even if it is possible for the staff to raise the money, it will be at the price of program or other fundraising. Moreover, with staff doing the work, the organization misses a great opportunity to involve the larger community in their goals, which will strengthen the group in ways other than financial. Without a good board or a strong set of volunteers who take the place of the board, a capital campaign is not going to get out of the starting gate.

As you can see, everything that an organization needs to have for a capital campaign it needs to have in place anyway. Getting ready for a capital campaign often helps a group strengthen its annual fundraising by instituting necessary elements or updating ones already in place. Any weakness in your annual fundraising program will be 100 times more debilitating in capital fundraising