Chad Bauman, Director of Communications at Arena Stage, has suggested in a recent post on his blog that perhaps nonprofit resident theaters should consider casting off their nonprofit status. These are surprising words given the rather generously supported theater where he works. When I suggested in my recent post L3C Cha Cha Cha (referenced by Mr. Bauman) that some nonprofits might have been more appropriately organized at the outset as L3C’s (if such a model had existed at the time) I was not suggesting that current nonprofits give up their 501(c)3 status. Putting aside the ‘charitable and educational’ mission implications for the time being (an important topic for another day, perhaps), there are clearly legal and financial implications of such conversions that would need to be weighed:
- First, once you add the tax burdens and increased expenses and eliminate the contributed resources to support both capital growth and ongoing operations I would venture to say that the current programming model, buildings, and administrative staff infrastructure for most resident theaters could not be supported. Becoming for-profit doesn’t simply result in the loss of government grants. Among other things, giving up nonprofit status also means losing the ability to accept tax exempt contributions and losing (in some states) property tax exemption. I assume it may also result in the necessity to pay higher wages to actors, stage hands and more competitive wages to administrative staff.
- Second, donations come with restrictions and the assets of a nonprofit cannot simply be turned over to a for-profit. To use Arena Stage as an example, public and private donors gave money in good faith to support its operations (now and in the future), and to build its impressive buildings believing that funds would be used in perpetuity to support the mission.Would those gifts need to be returned or transferred to another nonprofit? Would the buildings need to be turned over to a qualified 501(c)3 organization? Would Arena need to pay back-taxes on its buildings? (BTW, it’s recently been reported that the Annenberg Foundation may ask for the return of the remainder of its $50 million gift to the Philadelphia Orchestra because the symphony has recently filed for Chapter 11 bankruptcy protection).
- Third, I think that Mr. Bauman may be overestimating the degree to which additional user fees (higher ticket prices in exchange for VIP amenities, for instance) could compensate for some portion of the loss of contributions, especially when Arena is already charging as much as $110 for tickets (in other words, I’m not sure how much more people would be willing to pay). Furthermore, Arena could lose patron trust and goodwill by converting to a for-profit: to the degree that some of its loyal subscribers actually care about its mission and go to shows at Arena Stage in order to support that mission, it’s not unreasonable to think that some might shift their loyalty to another nonprofit theater (Woolly Mammoth, for instance)?
- Fourth, Bauman suggests that some of a nonprofit’s donors (its board members, for instance) might become ‘investors’; perhaps, but then one assumes they would be expecting to share in profits. If surpluses are small or nonexistent then it stands to reason that, in time, such investors would find somewhere else to put their funds. Moreover, I don’t recall hearing any commercial producers saying it’s become easier in recent years to find investors for their shows. Bauman also suggests that becoming for-profit could eliminate the volatility inherent in the nonprofit business model; but I’m not sure why he thinks that a market-driven model would be any more stable than one reliant on contributed revenues? Commercial and nonprofit entities alike are in search of new business models these days.
From where I sit (and albeit, that is not and never has been at the head of a theater like Arena) large leading nonprofit arts institutions (like Arena) benefit from the nonprofit model far more than they are burdened by it. The majority of all contributions to the nonprofit arts and culture sector flow to such institutions. If any nonprofits would benefit from considering a new model it is most likely those smaller institutions that have a very slim chance of ever becoming recipients of significant contributions (hence the recommendations in my L3C Cha Cha Cha post). Indeed, given the fact that Arena Stage has a brand new $125 million building, I imagine largely paid for through contributions (one assumes with significant gifts from the Mead and Kogod families), it strikes me as somewhat cheeky to suggest that the nonprofit model is not working for Arena and that such donations are easily replaced with other revenues sources with a few tweaks to the business model.
Sisyphean Toil image by sellingpix, licensed on Shutterstock.com.