The Baltimore Symphony is considering a unique way to escape its debt and build its endowment…by leveraging the nonprofit’s access to even more debt. Under a scenario described in the Baltimore Sun (username: ajreader@artsjournal.com, password: access) they would sell their concert hall to a newly created nonprofit, and use the proceeds to fill their coffers.
Money for the purchase might come from tax-exempt bonds, a specialized form of debt available to nonprofit and public capital projects (like hospitals and housing projects and symphonic halls). In theory, the newly formed nonprofit would secure the bond financing to make the purchase (about $30 million by current rough estimates), and then lease the facility back to the symphony. The BSO would take the $30 million, use just under half to pay its current deficit, and stick the rest in the bank as part of their endowment.
Tax-exempt bond financing for nonprofits isn’t a new idea, and is in fact quite common among new capital projects or purchases (the Detroit Symphony financed the construction of their new Max M. Fisher Music Center, in part, with bonds; museums have used the approach to finance major paintings or parking garages or even Sue the Tyrannosaurus rex).
The general idea is that capital projects that serve the public purpose are a good thing, and states and cities want to create incentives to their advancement. Tax-exempt bonds are one such vehicle, offering low interest rates (astoundingly low) to the borrower, and tax-exempt earnings to whoever buys the bond. Even if the nonprofit has cash in hand that might be used to build or buy, they can often benefit from the tax-exempt debt (since they can earn interest on the cash in hand above the interest accruing on the debt…an equation that can also raise the eyebrows of the IRS).
As you can tell, however, the catch here is attorneys…lots and lots of attorneys, and underwriters, and accountants, and bank representatives (who are often attorneys).
The twist in Baltimore is the sale of a current asset (Meyerhoff Symphony Hall) to a nonprofit that will likely be controlled in some way by the symphony itself (or members of its board), and with proceeds to pay off current debt and build an endowment. On the face of it, it sounds eerily like Enron’s shenanigans with money-shuffling, except this time using public debt. Attorneys, attorneys, and more attorneys.
Tax-exempt bonds are a fascinating financial option for any nonprofit constructing or purchasing something very expensive (if it’s not over several million, don’t bother, the attorney fees will kill you). But when you invoke public debt, be prepared to cross every T and dot every I on the deal.
Let’s watch Baltimore to see if and how it goes.
NOTE: If you’re really interested in how this all works, there are some good article links on tax-exempt financing for nonprofits, and a downloadable brochure on the basics available on-line as well (called ‘Nonprofit Corporations: Borrowing with Tax-Exempt Bonds,’ the second download from the bottom of the list). It’s a real page-turner…or not.
