Haywood LLC

A July 2010 study supported by the Philadelphia Foundation highlighted the management difficulties for nonprofit organizations that do not have any savings in the mist of government cuts and reductions in charitable giving.  Government cuts have significantly reduced money for nonprofit organizations in the past two years and the cuts are likely to continue for some time.  All nonprofits that received funding cuts also trimmed services, programs and staff and sometimes key staff.  However, the nonprofits that had savings were able to manage with less trauma.  That study encourages donors to provide more funds for administration of nonprofits and not just programs so that they may keep key staff.  The study also advocated for an approach that I have long promoted of accumulating savings by nonprofit organizations.

In 2008 I wrote about the importance of earning excess revenue and saving for nonprofit organizations in order to encourage innovation and manage reductions in donations or government funding.  Excess revenue is the money that is received, but not spent and retained each year. 
Earning excess revenue is most common in the affordable housing activities of nonprofit organizations.  For example, nonprofit housing developers may earn a development fee for their efforts to create housing for low income persons.  This fee must be used for a charitable purpose, but it may be retained instead of spent in the year it is received. 

Nonprofit organizations that produce housing for low income persons routinely take what is earned from the development of the housing and apply the earnings to the charitable work of the organization.  For example, New Communities in Newark, NJ supports a significant social service support and jobs operation for over 12,000 individuals with money earned from many low income housing developments and a neighborhood retail center.  Other organizations like Esperanza in Philadelphia, PA have created a junior college with the accumulated savings from neighborhood revitalization real estate projects.

Nonprofit organizations may also earn income that is exempt from taxation in carrying out charitable activities in such activities as renting housing to low income persons, selling books, providing child or elderly care or charging fees for services. The fees that a nonprofit organization may charge for its services are limited however.  The services provided for which a fee is received must be substantially related to the charitable purpose of the organization.  In addition, the charitable activity cannot have an undue commercial hue and the fee must be reasonable.  However, the money earned after paying all expenses is exempt income that can be retained from year to year for charitable purposes.
Unfortunately, the dominant approach in the nonprofit sector is based on cost reimbursement and cost allocation.  This approach has two major limitations.  First, reimbursement for cost limits the payments to nonprofit based on actual costs.  Savings is not an actual cost.  Second, the allocation of all cost means that all money is allocated to operating expenses.  When all money is allocated to operating expenses then there is no money left at the end of the year.  There is no money retained from the end of one year to the next. 

For example, an organization may receive a government grant to provide emergency shelter services that only permits reimbursement for actual costs.  Invoices to support actual cost and timesheets to show actual time worked of staff are required to demonstrate actual cost.  At the end of the work, there is service, relief of the poor, but no money. 

As a result, the drive to avoid paying for duplication of cost leaves the nonprofit organization without any savings to manage cash flow issues or loss of donations.  In addition, the organization has no funds for innovation.

Instead, nonprofit organizations should attempt to accumulate savings by getting more income than expenses each year in order to address the up and downs of operations without violating the public trust.  Organizations that retain excess revenue from year to year may build up significant capital that can permit investment in deeper and broader charitable services and work.  It is the continued capital formation from retaining excess revenue that creates the resources for sustainability and innovation that many nonprofit organizations and the public need.

-Art Haywood

Churches that create jobs and housing for the community may add to the income and stability of a neighborhood and increase membership and giving.  Churches invest were government and business do not because of a faith commitment to the oppressed with long term perseverance.  Churches invest without a goal of profit.  Churches bring compassion to the environment. 

In addition, churches can bring love, community support and money to invest in a community.  The money that a church may apply to a project may be to pay a staff person to perform community development work or to contribute to the cost of a recreation center or low income housing of senior and families or other purposes.

Church community development does require a connection between religious and nonreligious people and institutions to change a community.  Religious organizations that do not reach out to the community will find great difficulty in an approach that seeks to impose the will of the church on a community.  Community participation in community development is fundamental.  Some community support will be required for extensive work.  That community support will typically include local politicians and community leaders.

Churches can obtain political support for community development without endorsements and campaigning.  Neighborhood improvement should be support without a quid pro quo exchange requirement with politicians or community leaders.

Two main roles exist for church community development (CD) work.  One role is to influence development.  Influencing development means that a church is supporting the work of another organization and not taking on the work directly.  For example, a church may participate in a coalition to attract retail or housing development into an area.  A church may write a support letter or call a source of financial support for a community development project.  A church leader might serve on the board of a local community development organization. When a church decides to influence development it can usually do so without developing concentrated leadership.

On the other hand, if a church decides to undertake a community development project, concentrated leadership is essential.  The activities of apartment creation, operating a school, building an area that is conducive for retail business is full time hard work. Implementing community development requires concentrated leadership and therefore some separation from worship focus of church. 

A separate nonprofit organization is recommended to conduct community development work with church oversight on the board of directors of a nonprofit organization.  The board of directors of the nonprofit may be appointed by the church, typically the board of trustees or deacons.  The board of directors oversees the activities of the staff of the organization.  The composition of the board of directors should include persons that are loyal to the church as well as person with some experience in the area of community development that the organization is undertaking.  Persons familiar with finance are very valuable as well.  Persons who understand how to obtain money from foundations, government or corporations are also very valuable to boards. 

The church can remain connected to the newly formed nonprofit organization.  Church and new nonprofit organization may share office location and office supplies.  The leadership of the nonprofit corporation and the church may be shared.  The nonprofit organization will be governed by a board of directors.  That board of directors may have persons selected by the church.

The name of the nonprofit organization does not need to include “Community Development Corporation” although it may do so.  The CDC does not create special funding or privileges that some other name would not.

Forming the nonprofit organization requires creating a corporation in your state.  Creating the nonprofit requires a name, address, purpose and at least to sign the incorporation documents.  While the assistance of an attorney is not required for incorporation, it is recommended because of special provisions that the Internal Revenue Service (IRS) demands in the incorporation documents to grant tax exemption. 

Incorporation limits the liability of related nonprofit organization.  The risk or losses of the nonprofit organization can then be separated from the church and the individuals that are operating the organization.  Churches and individuals should not guarantee financing connected with community development.

Once your organization is incorporated it may obtain a tax identification number from the IRS and then apply for federal tax exemption.  Applications for state and local tax exemptions may be required as well.  The process of obtaining a federal tax exemption can also be aided by an attorney or an accountant.  The IRS grants tax exemptions to organizations that are operated exclusively for charitable purpose upon submission and review of an application.  The tax exemption application can be found at the IRS website along with a helpful instruction booklet.

Most nonprofit organizations that are undertaking community development work will seek recognition from the IRS under section 501(c)(3).  The number of these organizations has grown dramatically over the past 20 years.  IRS concerns about the operation of exempt organizations have concentrated on the pay to the leaders of these organization, conflicts of interests, political involvement and support for terrorism.  All of the IRS concerns can be easily avoided with prudent management.