I’ve often argued that the traditional non-profit model discourages necessary risk-taking.  It does this for a few reasons:

1) Employees can’t own stock, so they don’t benefit from financial success.  Yet they’re still vulnerable to financial failures (i.e. they can lose their jobs or suffer career setbacks).  To a lesser extent, the same is true for non-profit Board members.  When someone’s got no stake in the upside but is still exposed on the downside, the rational response is extreme conservatism.

2) The culture of the non-profit sector is such that managers go to absurd, herculean efforts to avoid admitting failure, mostly in an effort not to embarrass themselves in front of funders.

3) Non-profit organizations are chronically under-capitalized.  By failing to build reserves or hoard surpluses, we end up in a situation where each budget is a tightrope.  A single serious misstep is enough to pose an existential threat to the organization.

So, if the non-profit sector is going to get more comfortable with risk, it needs to start acting more like the for-profit sector, right?  It’s true that for-profit businesses rarely experience any of these problems.  Unfortunately, they tend to swing too far in the exact opposite direction.

Unless you’ve been living in a cave (yes, your art studio counts), you’re aware of what’s going on with the financial markets.  Huge, venerable institutions are collapsing (Lehman Brothers), teetering on the brink getting bailed out by taxpayers (AIG), or being sold for a fraction of their recent valuations (Merrill Lynch).  A significant contributing factor to this mess is the fact that free-market capitalism - for which I am generally a sincere cheerleader - actually encourages excessive risk-taking.  The reasons for this are a mirror image of those I listed above:

1) Companies “incentivize” their employees by granting stock options.  The nature of an options contract is that it magnifies the gains from a stock’s upward movement but becomes worthless long before the stock itself does.  Here’s how it works:

Let’s say your company’s stock is at 100 and you’ve got an option to buy stock at 105.  Until that stock reaches 105, your option isn’t worth much.  When the stock hits 106, it’s worth roughly $1/share.  At 115, it’s worth $10/share.  Etc.  Now, imagine you’ve got to choose whether or not to take on a risky project with a 50/50 chance of success.  If it succeeds, your company’s stock will go to 110.  If it fails, your company’s stock will go to 60.  If you’re a shareholder, this is a terrible deal: heads you win $10, tails you lose $40.  But for the employee holding the options contract, it’s a golden opportunity: heads you win $5, tails you lose $0.

This is obviously a greatly simplified example, but you get the point.  Options grants encourage employees to take big risks that aren’t necessarily in the best interests of the company’s shareholders.

2) Executives of publicly traded companies are equally eager to avoid admitting failure, but it has the opposite effect as in the non-profit sector.  For a publicly traded company, the critical time not to screw up is in your quarterly earnings report.  Wall St. is ruthlessly impatient.  The markets rarely are willing to wait for long-term investments to pay off.  Rather, they focus almost exclusively on a) earnings per share in the last three months and b) predicted earnings per share in the next three months.  Miss your estimate and your stock price gets clobbered.  Beat your estimate and it soars.  This pressurized environment acts as an amplifier for the misaligned incentives in point #1.

3) The sophisticated capital markets that large corporations can access mean that companies not only are rarely under-capitalized, they’re often hyper-capitalized.  This was a huge part of the problems we’re seeing in the current crisis.  Companies like Lehman and Merrill were leveraged up the wazoo, effectively investing $30-40 of borrowed money for each $1 of collateral assets.  As long as those investments keep going up, profits are multiplied many times over.  But as soon as they start to fall, the proverbial house of cards collapses.

In both cases, the essential dysfunction comes down to what’s known as the “agency problem“. The term refers to a category of conflicts of interest that arise between management and other stakeholders.  These conflicts most often occur when incentives are misaligned or when management has access to information that isn’t available to shareholders, Board members, creditors, etc.

The main mechanism for addressing these problems in the for-profit world is government regulation.  We’re going to hear a lot about this over the coming weeks, as the feds debate what kinds of new rules need to be imposed on Wall Street.  In theory, such regulations are designed to mitigate the agency problem and protect shareholders, customers, etc. from excessive risk.

There’s no such easy solution on the non-profit side.  You can’t force non-profit managers to acquire stiffer backbones by government fiat.  However, you can tap into our tendency to dance shamelessly to the tune of our funders.  Any meaningful shift in the non-profit sector’s culture of risk must therefore begin with a shift in strategy from our leading philanthropists.

I was at an event a few years ago with a bunch of peers from the arts service community, including Ben Cameron, who was then head of Theatre Communications Group but is now the Program Director for the Arts at the Doris Duke Charitable Foundation.  Ben observed that, for the most part, arts funders were acting like consumers rather than investors.  His point was that most funders focused on short-term, narrowly defined, project-based support, instead of identifying important organizations doing exciting work and providing the financial resources for them to leverage their native strengths over the long-term.

If our biggest foundations could break the habit of cautiously supporting tiny, specific aspects of an organization’s activities and begin ensuring sufficient capitalization and providing multi-year general operating support, we’d go a long way towards fixing at least 2 of the problems I identified at the beginning of this post.  (The good news is that I’m starting to see a few moves in this direction, but that’s a subject for another post…)

The issue of incentivizing employees and Board members by ensuring that they benefit when the organization thrives is a lot trickier.  IRS rules prevent “private inurement” from contributions given to a 501(c)(3), so any kind of explicit sharing of a revenue surplus would be illegal.  At Fractured Atlas we’ve tried to work around that limitation by awarding annual performance-based group bonuses that, while meager by Wall Street standards, are meatier than at any other small non-profit I know.

Bonuses help, but they’re not a panacea.  That’s partly because non-profit employees tend to be motivated by largely non-financial factors (e.g. belief in the organization’s mission, aesthetic appreciation of its work, etc.).  Harnessing those passions in a way that encourages responsible risk-taking is difficult but potentially powerful.

Measurement is one tool.  To the extent that you can quantify “mission return on investment” (whatever that means) and make that transparent throughout the organization, people become more likely to appreciate the “upside” of a given project or decision.

Culture remains the most important factor, though.  We need to constantly remind each other that it’s okay to fail.  In fact, if you’ve never suffered a complete, humiliating, public failure, then you’re probably not trying hard enough.  Time to grow some cojones and take a chance.

The Financial Times reports on the increasing number of MBAs working in the non-profit sector:

In the past, executives seeking qualifications that would help them in the non-profit sector headed to policy schools or took programmes in education or non-profit management. “Now a lot more people are going the MBA route,” says Mel Ochoa, who graduated from the NYU Stern MBA programme in May and heads the marketing department of Achievement First, a charter school organisation in Connecticut and Brooklyn.

Mr Ochoa says this is because of the new requirements of non-profit organisations. “They’re changing their attitude towards the people they want on staff,” he says. “They want a lot of the skills you learn in business school, such as strategy and finance – and they want those applied to their non-profits.”

Full disclosure: I got my MBA from New York University’s part-time program, which I attended over a long 4 years while working at Fractured Atlas.  It was an incredibly valuable experience, and I use what I learned there every day.  I also recruited the Chairman of our Board of Directors from the ranks of my professors.

That training has undoubtedly helped me build and run Fractured Atlas in a way that’s atypical for the non-profit sector, and that often resembles a for-profit enterprise.  And, of course, most of our programs and services are, in turn, designed to help our members function more effectively as businesses.

These days, however, there’s some controversy in the non-profit sector over whether “acting like a business” is something we should be striving for or not.  For ages the mantra was that not-for-profit organizations needed to be “more businesslike” to increase their efficiency and effectiveness.  But in recent years there’s been a backlash against this notion, as chronicled by everyone from Don’t Tell the Donor, to Grantmakers in the Arts, to (sort of) Andrew Taylor.

To some critics, “acting like a business” conjures images of Enron, Halliburton, and perhaps now IndyMac or Countrywide.  Greed.  Excess.  Fiscal recklessness.  Lack of accountability.  I’d argue, however, that guys like Ken Lay and Angelo Mozillo aren’t acting very businesslike.  They’re acting like crony capitalists or even two-bit thugs.  And, to its credit, the capitalist marketplace eventually punishes such bad actors, albeit often after they’ve done a lot of harm.

So what does it look like when someone is acting businesslike?  I believe it comes down to a few key factors:

1. Pick the right customer (and know who your real customer is)
2. Make decisions based on unsentimental, dispassionate analysis
3. Seek to build long-term value

Perhaps this is too reductionist and I’m sure I could refine or supplement these criteria if I gave it some more thought, but I’m satisfied that this is a decent starting point.  The good news is that any of these principles can be applied by any business - for-profit or not-for-profit, international conglomerate or self-employed dancer.  Taking this view not only doesn’t reduce a non-profit organization’s mission orientation, but can actually enhance its clarity of focus and capacity for action.

Let’s look at each factor and I’ll try to offer some insights into how a B-school schlub like me thinks about this stuff.

Picking the right customer and knowing who your real customer is

Any business has customers.  They’re (duh) the people who buy what you’re selling.  If you don’t have a customer, you don’t have a business.  If you can match the right product or service with the right customer, then you’ve got a great business.  Simple, right?

For most for-profit businesses this is very straightforward.  A widget-maker seeks out people who need widgets and tries to offer them at a price that is a) higher than the costs of production and distribution, and b) lower than the perceived value they will provide to the widget-needing-individual.  That sweet spot is the basis for any economic transaction.

Where this gets tricky is when the one paying for the widget isn’t the same one consuming the widget.  Consider the US health insurance system.  The patient consumes the service but the insurance company pays for it.  Doctors, therefore, provide services based on what the insurance company will pay for, rather than what the patient needs.  That’s because our inevitable tendency is to focus on the payer rather than the consumer.  This is a self-preservation instinct, since a business can’t exist without money to fund its activities.

Of course, this payer-consumer disconnect happens all the time in the non-profit world.  Traditionally, non-profits have gotten most of their funding from individual donors and/or institutional funders.  Those people are very rarely the ones being served by the non-profit’s work.  So how does the non-profit ensure that its focus remains on the constituency it’s supposed to serve, where it surely belongs?  Unfortunately, it often doesn’t.  Whether they admit it or not, the “real customers” that such organizations focus on are all too often the donors or funders who underwrite their operations.  Fulfilling a mission - creating great theatre, feeding the homeless, curing malaria - becomes a tactic for pursuing the true goal (at least subconsciously) of satisfying the people who write the checks.  As you can imagine, all sorts of dysfunctional crap comes out of organizations that fall into this trap.

So how does a non-profit keep itself pure and focused on the people who need its help?  I’d argue that, whenever possible, it should strive to align the funders and consumers of its programs.  The simplest way to accomplish that is by adopting an earned revenue model.  Fractured Atlas has a rule that we don’t start new programs or services unless they can be fundamentally self-sustaining based on earned revenue.  By relying on membership dues and program fees, we’re guaranteed instant (and potentially painful) feedback on whether our services are actually meeting the needs of the artists and arts organizations we serve.

But this doesn’t always work, because there are some mission-essential activities which are impossible to monetize through earned revenue.  For Fractured Atlas, this includes our advocacy work.  A homeless shelter or animal welfare group, meanwhile, would find it difficult or impossible directly to monetize any of their programs at all.  So does that mean we all need to steer clear of these activities and only do things where we can make a buck?  Of course not.  But it does mean that we need to be more cautious and intentional about aligning the interests and perspectives of our funders and consumers.

There are a couple of ways you can do that.  At Fractured Atlas we often conceptualize these situations as investments, the same way a for-profit might spend money on marketing or research and development.  You don’t expect to get anything back directly, but you do expect a positive return in the long-term through indirect channels.  A project like Place + Displaced provides us with an unprecedented depth of information about the way artists live and work in their communities, along with new insights into the challenges they face every day.  I don’t believe it dimishes the intrinsic mission-value of the project to say that it serves a secondary function of providing great market research into how we can better serve our constituency.

That kind of R&D / marketing model is a nice framework for artists and arts organizations.  It’s vital to be able to pursue creative or audience development opportunities even if they’re not readily grant-fundable.  (I’ll address this concept again when I talk about building long-term value.)

So what if there’s really just no way to monitize an important program through earned revenue, either in the short or long term?  Well, then you need to rely on contributed revenue and you’re stuck with separate funders and consumers of your service.  There are still practical steps you can take to ensure this doesn’t result in mission drift:

1. Strive for autonomous program design by program staff (e.g., an artistic director or a program officer).  The front-line personnel at a non-profit are often better connected to the work it does or the people it serves than are the executives, whose focus by necessity is on the bottom line.
2. When possible, develop explicit, quantifiable criteria for program success and share them with the program’s funders/donors.  That way everyone’s on the same page about what you’re trying to accomplish.
3. Be as transparent as possible with both your constituency and your financial supporters.  It’ll help keep you honest and mitigate anyone’s concerns that their needs aren’t being considered.

Making decisions based on dispassionate, unsentimental analysis

I mentioned above that I use what I learned in business school every day.  That’s true, but the actual tools, concepts, and models that I learned weren’t the most valuable part of that experience.  The truly useful part was the simple exercise of thinking, talking, and writing about businessy problems in a rigorous manner three times a week for four years.  Before that my decision making was driven by instinct and emotion.  Today, instinct and emotion still play a part, but they’re balanced by a practiced ability to be coolly rational and unsentimental about organizational problems.

When people say “business is business” they’re talking about this kind of cool, impersonal attitude.  Usually there’s also an implied profit motive, but there doesn’t have to be.  You can be just as dispassionate about humanistic concerns.  The key is to apply an analytical framework or toolset that helps prevent biases (even unconscious ones) from clouding your perspective.

For financial analysis, my favorite tool is net present value calculation.  This tool from corporate finance is used to assign a risk-adjusted value in today’s dollars of a series of future cash flows.  It’s an excellent framework for assessing the long-term financial implications of a proposed project, or for comparing multiple competing projects to see which makes the most financial sense.  The non-profit arts sector is notorious for boondoggle capital projects that destabilize or even destroy otherwise great organizations.  The managers responsible for these quixotic messes may be relying on the generosity of donors or funders to bail them out when this happens.  But how much better it would be for the sector as a whole if we could get into the habit of making better decisions in the first place!

The inverse of this is the tendency of non-profits not to invest funds in a speculative project unless they can pass the expenses off to a third-party funder.  I was in a meeting not long ago in which we discussed a potential project that would cost roughly $100,000 to carry out, but which didn’t have any good funding prospects.  Conservative back of the envelope calculations suggested that doing the project might result in $120,000/year of earned revenue, more or less in perpetuity, without any additional costs.  Even assuming a high level of risk, that cash flow stream is worth perhaps $500,000 in present value terms.  In other words, deciding to undertake this project would be like trading $100,000 for $500,000.  Kind of no-brainer, huh?

But $100,000 is a lot of money for a small organization like Fractured Atlas, and the prospect of spending our own money in that way was pretty scary for most of the folks in the room.  The abstract fear associated with writing a six-digit check without any outside party taking the risk was overwhelming the logical appeal of the undertaking.  Non-profits, especially small ones, fall into this trap all the time.  In the long-run, being irrationally conservative is just as deadly as charging headlong into an ill-advised capital project.  Not to take on the above project would be like turning down a no-strings-attached donation of $400,000 which could be used to support or expand any of our programs and services.

I believe there’s an appropriate analytical framework for almost any category of organizational decision making.  They needn’t all come from fancy-pants financial models either.  Sometimes what you need is an ad hoc model based on your own internal, mission-based logic.

Permit me another example from Fractured Atlas.  We’re an unusually broad-based arts service organization.  Most of our peers focus on either a specific geographic region, a particular artistic discipline, or a narrow category of service.  By contrast, we’re national, multi-disciplinary, and customer-centric (i.e. rather than program or mission-centric).  That’s dangerous, because it imposes no discipline or boundaries in the program-development process.  And frankly I’m a lousy leader for such an organization, because my own instinct is always to try to do anything and everything under the sun.

Over the years we’ve developed an internal decision-tree to address this issue.  When an opportunity crops up for a new program or the expansion of an existing service, we ask a few key questions to assess whether it’s something we should do:

1. Can it be delivered nationally or is it limited by geography?
2. Is it relevant to artists from many different disciplines?
3. Is it scalable enough to reach a large audience?
4. Is anyone else in the field doing this?  If so, is there reason to believe our approach will be significantly superior/different to justify the redundancy?
5. Do we have (or can we acquire) the capacity and know how to do the work in a super high quality way?

Generally speaking, if the answer to any of those questions is “No” then we don’t do it.  When we first started using this tool, we actually cut out about half of the programs and services we were offering at the time, since they didn’t meet our criteria.  We got some complaints from our members, but we became a much more focused, “lean-and-mean” organization.  And it turned out that cutting the fat actually helped position us for a period of explosive growth over the ensuing years.

Building long-term value

Perhaps surprisingly, non-profits are often better at building long-term value than for-profits, especially publicly traded companies.  The stock market is obsessed with quarterly earnings reports and publicly traded companies are obsessed with their stock prices.  Lots of stupid decisions have been made because of those misguided short-term incentives.  But non-profits don’t have stock, which should free us up to worry about the long-term, right?  Sometimes it does indeed work that way, though not as often as it should.

Let’s consider three common traps:

Trap #1: Fear of investing in revenue-positive, mission-relevant opportunities if they can’t be funded by contributed income.

I’ve already talked about this one a little bit so I won’t belabor the point.  But this is a major pet peeve of mine so I’m having a hard time dropping the issue entirely.  I’ve had countless conversations with my counterparts at other arts service organizations in which I’ve proposed some kind of joint project.  Even when I can demonstrate the compelling positive financial return from the undertaking, I am, more often than not, met with an unwillingness to proceed unless I can bring grant funding to the table that covers their initial costs.  When that third party funder fails to materialize, we effectively flush lots of potential long-term value down the proverbial toilet.  It’s a terrible cliche, but sometimes you really do have to “spend money to make money”.

Trap #2: The superficial allure of a balanced budget.

The conventional wisdom is that non-profits should have balanced budgets.  That means they should plan for revenue and expenses to be as nearly equal as possible over the course of a fiscal year.  The ostensible reasoning here is that non-profits are mission-based, not profit-based.  A surplus would indicate that grant funds aren’t being fully spent or that program fees have been set higher than they should be.  A deficit would suggest poor financial planning and possible organizational instability.

The conventional wisdom couldn’t be more wrong, and it’s a shame that so many non-profit leaders (and worse, their funders) take this view.  I don’t think I can say it any better than non-profit consultant Jeanne Bell:

A potentially harmful habit practiced in many community nonprofits is presuming that a break-even budget is mandatory. Board members and staff may be under the influence of the false but persistent ‘nonprofits can’t make money’ myth as they develop the year’s income and expense plan…. Instead of “How can we make the budget balance?” the annual budgeting cycle should begin with the question, “What financial outcome does our organization want or need this year?” Different scenarios lead to different decisions about what the budget’s bottom line should look like:

1. We need to increase reserves or pay down debt: adopting a surplus budget. When the organization’s leaders decide that its cash and other reserves are lower than ideal, the organization can plan to generate more income than expenses, creating surplus funds that can be used in future years. A surplus may also be needed to provide funds for paying down debt or for easing cash flow….

2. We can’t gain ground now, but we can’t lose ground either: the break-even budget. Typically, organizations choose break-even budgets by default and the skin of their teeth. A first cut on the budget shows expenses much higher than revenue, so the staff then tries to figure out how to increase the revenue number (but still stay close to reality) and decrease the expenses (but not damage programs). The staff and the Finance Committee tack their way towards a break-even budget, and hope that their cautiously optimistic projections work out.

3. A…reason for a deficit budget is a decision to invest. For example, the organization may invest funds in strengthening its fundraising capacity, or in new programming. Leadership believes that resources from previous surplus years can be risked as investments in future programmatic or financial paybacks.

At Fractured Atlas we’ve had a couple of break-even budgets over the years, but most have projected either a surplus or a deficit.  In my experience these things are cyclical, especially for a growing organization.  When ramping up for a major expansion, we run a deficit as we make investments in infrastructure and capacity to fuel that growth.  As the expansion unfolds and those investments pay off, we shift to a surplus.  Sooner or later, it’s time for another ramp up.

It’s a bit of a rollercoaster, and I know for a fact that it makes some of our funders (and even some of our Board members) uncomfortable.  But this model has helped us create enormous long-term value.  Ten years ago our annual budget was $7,500.  Five years ago it was $100,000.  Today it is $4.2 million.  You can’t grow like that unless you invest in your own organization, and that means deficits.  Likewise, surpluses are how you build reserves to invest in future growth.

Trap #3:Treating funders like investors (the wrong kind, that is)

We’re often told to think of funders as the non-profit equivalent of investors.  It’s not a bad analogy.  Like investors, funders finance your activities and measure the return on that investment.  The return is in mission fulfillment, not financial gain, but it’s the same basic relationship.  And just as a dissatisfied investor will sell his stock, so a dissatisfied funder may pull her support.

Believe it or not, it’s actually a good thing when funders don’t simply write a check and say “have fun, see ya’ later!”  When a funder takes a serious interest in your work, enough to pay close attention to the results you’re getting and the progress you’re making, then that makes him a potentially invaluable partner.  Such allies provide money, yes, but they can also provide advice, connections, and other intangible resources.

But the kind of interest they take - the type of investor they resemble - is very important.

I mentioned before that the stock market is notoriously obsessed with quarterly earnings reports.  There are many reasons for that, but in part it’s because most shareholders aren’t really interested in the underlying business of the companies they invest in.  They need a very simple proxy for a company’s financial health and the quarterly earnings per share figure is the best they can find.  If it’s lower than they’d hoped, they sell the stock.  If it’s higher, perhaps they’ll buy more.

Because they live and die by their quarterly earnings, publicly traded companies make enormous efforts to “manage” those earnings.  Transactions might be timed specifically so that they fall into one quarter or another.  Accounting tricks are used to hide losses and exaggerate gains.

Many non-profits resort to similar shenanigans in an attempt to impress their financial supporters.  They bend over backwards to put a positive spin on program performance, sometimes to the point of de facto dishonesty.  Likewise, these organizations go to great lengths to hide their failures and shortfalls.

Then there’s private equity.  Private equity funds invest in non-public companies precisely because those companies don’t have to report their earnings quarterly and are therefore able to focus on long-term profit over short-term gains.  Private equity investors get to know the company’s management and study its business in depth.

Non-profits should cultivate “private equity-like” relationships with funders rather than relationships that resemble market investments.  Resist the temptation to keep your funders at arms-length and shield them from the ugly complexities of your operations.  Be honest and transparent about your failures as well as your successes.  Make sincere efforts to reveal and explain your organization’s internal logic.

Not all institutional funders or private donors want this kind of relationship, of course, but many do.  And keep in mind that I’m not for a minute suggesting that funders should be allowed to micromanage your program operations or policies.  The goal is for them to have a deep and accurate understanding of who you are and what you do, so that they’re in the best possible position to help you grow and develop as an organization.  Because that’s a great way to build long-term value and a strong organization.

WNYC recently broadcast a segment that touched on the “grey-ing” of the non-profit arts sector. It’s a familiar subject that most artists have heard plenty about: The audience for the arts is gradually getting older and unless an effort is made to engage a younger demographic, many art institutions will die with its patrons.

But this debate focuses specifically around arts leadership: Are seasoned veterans more equipped to run arts institutions than younger administrators with new (and potentially controversial) ideas? What can the arts industry do to cultivate younger leaders and what is their place in the institutions’ future.

Here’s the summary of the debate from their website:

If it’s too loud, you’re too old. That’s the old rock ‘n’ roll saying. But many believe veteran experience counts in running arts organizations. Others say fresh blood is needed at a time when the arts need to reach younger audiences. In this week’s “Soundcheck Smackdown,” Lee Rosenbaum, a veteran cultural journalist who blogs for Artsjournal.com; and Barry Hessenius, author of the study “Involving Youth in Nonprofit Arts Organizations,” square off on the topic.

Listen to the full audio here.

The Community Arts Network is publishing a series of “bridge conversations”:

“Bridge Conversations: People Who Live and Work in Multiple Worlds,” [is] a series of 18 conversations commissioned by the Center for Civic Participation’s Arts & Democracy Project and the Community Arts Network. These conversations highlight a diverse group of people — including artists, community activists, educators, funders, political leaders and scholars — who are building bridges and creating hybrid and integrated programs, strategies and lives. They illustrate how some of the most creative strategies for positive social change live in the intersections of disciplines, sectors, cultures and generations.

I was invited to interview Ruby Lerner from Creative Capital.

I recently met with Seedco Financial and went over some of their services. I wanted to post it because the services are very helpful for startups and those forming a non-profit organization. Here’s some information about the great services they offer.

Through Seedco Financial and its New York City ArtBusiness Initiative, you may be eligible for low cost financing and free consulting services!

Free customized training and business advisory services on various topics including financial management, marketing & business planning, resource development, facilities development, and other topics. Services will be provided through intensive group sessions, workshops and one-on-one consultations in collaboration with specialized arts technical assistance providers.

Seedco Financial also provides below market rate loans ranging from $25,000 to $1.5 million with interest rates as low as 3%. Loan funds may be used for long-term working capital, expansion, cash flow needs, financial restructuring, and real estate projects.

Seedco Financial is a nonprofit community development financial institution that offers technical assistance and below market-rate loans to community organizations, nonprofits, and businesses in economically distressed communities. Since February 2005, the ArtBusiness Initiative has disbursed over $4.8 million in loans and worked with more than 450 arts groups in New York City.

To access services or to get more information, contact Edgar Zavala at (646) 843-6510 or ezavala@seedco.org

Philanthropy.com reports on a proposal for a new kind of for-profit / non-profit hybrid entity: the L3C:

[T]he low-profit, limited liability company, or L3C is designed to increase the number of program-related investments, or PRI’s, that foundations make in social-purpose businesses by making those enterprises easier to find. Proponents hope that foundation investment in those ventures would, in turn, would spur an influx of private capital.

For those of you who aren’t tax lawyers, the key issue here is that private foundations are required by law to distribute at least 5% of their assets annually. The vast majority of the time this is done exclusively through grants to public charities. However a little-used option exists whereby foundations can make program-related investments - investments that they expect to make a return on - which count towards the 5% threshold. The L3C is designed to promote and facilitate this process.

Americans for Community Development, the organization which is most actively promoting the L3C concept, has a great F.A.Q. that explains the concept in greater depth and provides some down-to-earth examples.

The line between for-profit and non-profit enterprise has been getting blurrier and blurrier. Increasingly we’re seeing charities graded by independent agencies on their financial performance and efficiency as if they were stocks to invest in. At the same time, for-profit corporations are under mounting pressure to exercise “corporate social responsibility” and soften the ruthless pursuit of profits with concern for the greater social good. It seems to me that the L3C is a logical and welcome next step.

Yesterday’s onPhilanthropy features a piece by Josh Moore on growing scrutiny and federal oversight of the non-profit sector.

A few of the highlights:

• a lawsuit between Princeton University and the Robertson Foundation should establish new legal precedent on the enforceability of donor intent;
• a draft of a new form 990, seemingly longer and more detailed, is currently being circulated;
• no more exemption from annual filing for non-profits with expenditures under $25K.

The NY Times reported this morning that three New York non-profits have landed long-term leases in downtown Manhattan for $1/year. Poets House, the New York Public Library, and Mercy Corps are the lucky recipients of this bounty from the Battery Park City Authority.

For a smallish organization like Poets House, this is the kind of windfall that, if managed properly, can make a major contribution to long-term stability and growth. Several of the city’s great arts organizations, including the Public Theater and BAM, made the march from upstart to institution bolstered by gift leases from the city like these.

I wonder, though, if the city’s efforts to subsidize real estate for non-profits would be more effective in the aggregate if they were less curatorial and more market friendly. For example, there’s an effort underway (led, I believe, by the office of City Council Member Alan Gerson) to establish a pass-through property tax exemption for non-profits who rent rather than own their office space. Sure, measures like these are more modest and less sexy than 60-year leases at $1/year. But by spreading the wealth and not using city funds to distort the “market” of the non-profit sector, we might see better results over the long run.

Having said all that, if anyone wants to offer Fractured Atlas one of these leases, I’m ready to sign!