Lending To Fund Non-Profit Organizations – Use Your Self-Directed IRA Creatively And Mindfully
Lending To Fund Non-Profit Organizations – Use Your Self-Directed 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.
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 Youth Center
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.
With a $250,000 loan from the bank, the school trustees decide to issue “bonds” for the construction to interested parents and alumni. They structure the issue in $50,000 increments that will be offered in step with the construction. The interest rate offered will be based on some margin over the T-Bill rate at the time the bonds are issued. This allows them to only borrow the money when it is needed, thus controlling costs and allows them to offer current competitive rates to their investors.
Many individuals these days want their investments to, in some way, reflect their personal or political values. What better way to invest, not only in “what you know” but in what you believe as well.
Catherine Wynne is President of Entrust New Direction IRA, Inc, which provides account administration and record keeping services for Individual Retirement Arrangements and other plans to clients who want to control their own investment decisions.