Many North Carolina local governments wrestle with how to fund those valued local nonprofits that are effectively doing good work in the community. There are a variety of approaches for annually funding operating expenses, but occasionally the question arises of how can our local government provide capital funding for local nonprofits?

There are many ways to provide capital funding once your governing board decides that’s what it wants to do.

One-year grants can be used for capital purposes.

If you have a nonprofit that would qualify for an annual grant for operating expenses, then you can make that same grant for use on capital expenses – whether that’s buying a vehicle, unfitting a building, or even paying on a debt incurred for a capital purpose. You do not need to trace the specific use of your money with respect to capital or operating.

But how can I provide a multi-year commitment?

A multi-year commitment can be especially valuable in allowing the nonprofit to make longer term plans, and perhaps allow it to direct more resources to its mission (and away from constant fundraising).

Local governments can enter into multi-year agreements for local nonprofits to perform services without running afoul of debt laws or the principle of improperly binding future boards. This authority derives from the local government’s authority to contract with nonprofits to perform services, in combination with the government’s authority to make multi-year contracts with service providers. Your contract would still require the nonprofit to comply with its service obligations for the term of the agreement. To the extent that the nonprofit contributes to the locality’s employment or business prospects, then the business incentive statutes (Section 158-7.1) may provide additional authority for action.

Here are some alternative scenarios for making a grant to cover capital expenses over multiple years.

Make a restricted capital grant. The local government would make a larger than usual grant that the nonprofit could use for a capital expense. In this case the performance agreement would restrict the use of the funds for the planned capital expense, and the nonprofit’s obligation to provide services could extend for a term commensurate with the size of the grant.  The disadvantage to this approach is that the government puts its money up front, and may have limited practical recourse if the nonprofit fails to perform in the future.

Make a multi-year grant for use on lease or loan payments. The government and the nonprofit would have a contract extending for multiple years, with the government advancing money only on a periodic basis as the nonprofit complied with the contract terms. The nonprofit could nevertheless have some assurance of continuing payments with which it could plan to make continuing payments on a lease or a loan (whether for a building, vehicles, or other needed equipment).

Lease out space on a long-term basis. If you have space available, lease it to the nonprofit. Leasing out property for up to ten years does not require a competitive process. The lease could provide that the services to be provided by the nonprofit form all or a part of the rent due on the building.

Fund a loan-loss reserve to back loans to the local nonprofits. Some local governments have provided cash to establish a loan-loss reserve to help secure back private sector loans to businesses, as an economic development tool. This same approach could be used to help support local nonprofits. If you have some other commercial revolving loan fund or similar tool, you could adapt that as well to help support your nonprofits – with the services provided perhaps satisfying at least a part of the nonprofit’s repayment obligation.

Other general considerations –

You will always want a written contract. Each arrangement should be supported by a written contract with the outside nonprofit that specifies the work to be done by the nonprofit. If the local government uses a multi-year grant approach, then the contract (or lease, as the case may be) should extend for the term of the grant. There should in all events be some level of proportionality between the funding from the local government and the service by the nonprofit.

Build your record of public benefit, and don’t short-cut the public process. In undertaking any program of this sort, the local government should build a strong record documenting the public benefit expected from the arrangement. Following the public notice and hearing procedures in the business incentive statutes, whether or not you are strictly relying on that statute for authorization, provides an extra layer of protection from later challenges to your decisions.

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These descriptions of course are brief and general – they’re just designed to give you an idea of how these arrangements can be structured and spark your own brainstorming.

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