Organizations looking to expand their programs sometimes need to obtain bank financing for large projects such as the acquisition of a building. Depending upon the financing received, collateral is often a necessary piece of closing the deal. For organizations with large endowments, the question may come up as to whether the organization may use the endowment as collateral. Let’s explore this question further to see what opportunities the organization may have to use their endowment as collateral.

Board vs. Donor Designation

The first important step is to determine if the endowment is donor restricted or board designated. This can be determined by reviewing donor agreements. If the endowment is board designated it may be pledged as collateral. If the endowment is donor restricted, then only the unspent and unrestricted earnings may be pledged as collateral. The amounts that donors have permanently restricted may not be used as collateral.

Example

An organization’s endowment consists of the following:
1. Permanently restricted gifts = $100,000 (assume earnings are unrestricted and can be used for any purpose)
2. Board designated endowment = $50,000
3. Fair Value of investments = $175,000 (original permanently restricted gifts plus board designated amounts plus $25,000 of earnings)

In this scenario, the organization could pledge $75,000 as collateral, which is the board designated amounts and the unspent, unrestricted earnings. The $100,000 of permanently restricted gifts could not be pledged as they are required to be held in perpetuity by the organization and pledging them puts the gifts at risk.

In summary, once an organization knows the make-up of its endowment, it may be able to pledge the assets as collateral. At TDT, we work with over 350 nonprofit organizations serving social service organizations, foundation and membership organizations just to name a few. We’re always happy to share our experience and insights to help your organization address transactions that occur outside of your normal operations.

Amanda Lane, CPA and Tax Manager, and Courtney De Ronde, CPA and Partner at TDT CPAs and Advisors, P.C., provides an overview of using an organization’s endowment as collateral in this quarter’s newsletter. Amanda and Courtney serve social service organizations, colleges and universities, membership organizations and many others throughout Iowa.

 

*The information provided in this newsletter article is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation.