Facility grants are among the most difficult grants for a nonprofit to secure and almost impossible for a new organization with no track record.
Last week, a guy in Atlanta called about grants for a transitional living facility for pregnant teens. I immediately asked the caller if his organization had received its IRS Letter of Determination of tax exempt status under Section 501(c)3 of the IRS Code, and the organization’s track record. At first he said he had the letter, but after some questioning he finally admitted that he had just applied to the IRS.*
I know from decades of incorporating nonprofits that the organization was unlikely to get the all-important IRS letter for at least six months to a year. Ordinarily, I would have brought up the potential of the caller finding a fiscal agent to serve as the applicant, but he also eventually revealed that the new organization hadn’t actually done anything yet—and he was seeking capital grants to buy a facility for the proposed transitional living facility.
The conversation declined and he eventually hung up on me. Why? Because I told him, as I always do with such callers, what I told you in the first paragraph of this post: that “facility grants are among the most difficult grants for a nonprofit to secure and almost impossible for a new organization with no track record.” I suggested he consider seeking start-up grants to lease a facility, hire staff and so on. Nonprofits, like most businesses, should test their idea first and worry about long-term real estate second, or really eighth—behind a host of other factors.
It’s also challenging to get grants of any kind for transitional living facilities, which are sometimes called group homes, board & care homes, or sober living housing, depending on the population being served. Most such facilities serve a small number of residents—often only six, because of zoning restrictions, and rarely more than 25 or so.
Let me do the math: the organization seeks $500,000 to buy, renovate and equip a building for use as a transitional living facility to house ten pregnant teens. That’s $50,000/teen, without providing staff, supportive services and so on. If the funder simply gave $50,000 to the teen, she could rent her own apartment, provide child care, hire a personal case manager and have her nails done weekly. There’s really no need for the nonprofit.
Additionally, funders all know that most transitional housing operators charge rent to residents, which is usually provided at least in part by a third-party payer (e.g., SSI, foster care system, child protective services, insurance, family, etc.). Thus, a facility grant request requires a cash flow analysis and sources & uses statement to demonstrate a funding gap. Every real estate developer trying to get investors or a bank loan knows that a positive cash flow must be demonstrated, but in the nonprofit world of facility grants, the reverse is true: a gap must be demonstrated.
This is called a “but-for” analysis; but for the grant in question, the facility can not be purchased or built. In any other condition, the nonprofit faces supplantation problems. Back to my example: a sources & uses analysis might demonstrate that a $100,000 grant is enough to support a $500,000 facility acquisition, taking into account projected revenue, mortgages costs, and the like. Nonprofit executive directors, and especially founders of new organizations, never want to hear this reality; they want money for nothing and chicks for free.
Funders generally will not even fund the gap for new organizations with no track record, for perhaps obvious reasons. Most new organizations that require purchase of a facility are actually funded by a combination of a direct loan from the founder and/or a bank line of credit, secured by the personal guarantee of the founder or an “angel” who loves the project. This, of course, eliminates most would-be facility acquisition proponents, as they either don’t have much money, lack credit, and/or have yet to meet an angel.
The better, more realistic approach is to gather enough capital and/or grants to lease a facility, operate on a shoe-string and collect third-party payments. After a few years of successful operations, the organization can then plausibly seek capital grants, based on demonstrated expenses and documented projected revenues.
* For reasons that elude me, callers often lie to me about their nonprofit and operational status. Since I’ve been fielding such calls for 21 years, I recognize pointless obfuscation immediately. As Long John Baldry put it, “Don’t Try to Lay No Boogie Woogie on the King of Rock & Roll.”
Moreover, there’s little point in lying to your doctor or grant writers: what we don’t know can hurt you.