Lending to Fund Non-Profit Organizations
Or How to use your IRA Creatively and Mindfully
Private schools, churches and
other non-profit entities, regardless of focus or denomination, frequently have
difficulty borrowing funds for building projects. The addition of classrooms, labs, a new
steeple, additional capacity added to an existing facility, or even remodeling
of an existing space all take money. The
use of building fund drives has long been the method of fundraising, requiring
significant long term planning and the uncertainty of consistent results. New Direction IRA has seen alternatives to this fundraising approach among its clients.
There is another way.
Ask the members to lend funds
from their IRA and other tax-advantaged plans!
Self-directed plans may lend funds and can benefit both the organization
and the IRA holder. IRA lending using a
self-directed IRA administrator allows the individual to choose their own
investments, one of which can be a loan to the organization. These loans, for example, could be:
- In the form of a Note
- Can be secured by the organization’s property
- Would represent an investment for the IRA and
would have to reflect a reasonable rate of return.
- Would pass the benefit of interest on principal and fees to the IRA account as opposed to an outside lender.
Consider these examples:
The
An inner city church
has decided to add a teen social center in an existing space currently used for
storage. The 1000 square foot area needs
new flooring, painting, drywall partitions and restrooms. In addition, the furniture and equipment for
Friday night movies and a pool table will be purchased. The cost of this project is estimated to be
approximately $50,000. The youth group
will charge for movies and food purchased at the location.
Funds are raised by
creating a $50,000 note which will pay 5.5% interest annually. The note will be amortized on a 5 year
schedule and the investors will be church members’ IRAs. Let us assume that 5 individuals come forth,
each lending $10,000 from their IRA accounts using a self-directed administrator
who is responsible for maintaining the tax-deferred status of the IRA
accounts. Principal and interest flow
back to the IRA account. The IRA holder
has made a retirement investment that is secure and feels good too.
The Theatre
A small private school
would like to have a venue for school assemblies and theatrical
productions. It is anticipated that this
new facility will boost enrollment as the Board has decided to focus on the
arts in their curriculum. They have the
room to expand on their current property and approach a local bank to fund the
$500,000 price of this addition. The
bank is interested in the project based on the reputation of the school and the
predictability of the annual tuition paid by the students but is not willing to
provide 100% funding.
Wildlife Conservation
Your favorite charity, a bird rehabilitation facility would like to create an educational facility to educate the public on the importance of preserving the habitats of native birds. The organization already has the land available to place a facility on its property but does not have the current cash flow necessary to secure a bank loan. You have an IRA which can lend 25% of the funds for the purchase of a prefabricated building in order to house the education center. The remaining funds will come from cash donations and pledges from local businesses. Ultimately the education center will charge an admission fee to the facility and provide special presentations for schools and other interested groups. Payments from the organization will be made directly to the IRA and the loan can be structured in a way to both provide collateral for the loan and allow construction draws as the facility is being built.
Many individuals these days
want their investments to in some way reflect their personal values. The stock market does not necessarily speak to some individuals' viewpoints. What better way to invest, not
only in “what you know” but in what you believe as well.
