Agenda

1. Promoting Capitalization:Understanding the Arts and Culture Facility Investments and Building Reserves Grant Preliminary ApplicationJanuary 27, 2011 Promoting Capitalization

2. Agenda • About The Kresge Foundation • Institutional Capitalization Goals • Capitalization • Preliminary Application • Q&A 2 Promoting Capitalization

3. The Kresge Foundation • The Kresge Foundation is a $3.1 billion private, national foundation that seeks to influence the quality of life for future generations through its support of nonprofit organizations • The Foundation works in six fields of interest: • Health Program • Environment Program • Community Development: Detroit and National Program • Education Program • Human Services Program • Arts and Culture Program 3 Promoting Capitalization

4. The Arts and Culture Program • The Kresge Foundation’s Arts and Culture Program seeks to build vibrant communities enlivened by the presence of healthy arts and cultural organizations, creative and well-supported artists, and well-integrated arts and community-building efforts • The Arts and Culture Program is focused in three areas: • Institutional Capitalization • Artists’ Support Services • Arts and Community Building • This webinar addresses the Facility Investments and Building Reserves grant opportunity within the Institutional Capitalization Focus Area 4 Promoting Capitalization

5. Institutional Capitalization Goals 5 Promoting Capitalization

6. About Institutional Capitalization • Through the Institutional Capitalization focus area, Kresge expects to see: • A shared understanding of basic definitions, principles and practices of capitalization • The adoption of capitalization best practices among organizations • Better capitalized arts and cultural institutions that are stronger and whose business models are more sustainable, where appropriate • Arts and cultural institutions that are well positioned to produce high quality, impactful, innovative and relevant artistic product • This focus area provides support in five areas: • Field-wide efforts to promote and adopt capitalization principles • Facility Investments and Building Reserves • Sector Leaders • Place-based Cohorts • Strengthening Arts Facilities Effectively (SAFE) 6 Promoting Capitalization

7. About Facility Investments and Building Reserves • Why facility investments and building reserves? • The Arts and Culture Team’s Institutional Capitalization focus area uses facilities and building reserves as an entree to help organizations examine their level of comprehensive capitalization • While this grant opportunity places an emphasis on facility investments and building reserves, it is truly about comprehensive organizational capitalization 7 Promoting Capitalization

8. Capitalization 8 Promoting Capitalization

9. What is Capitalization? • Capitalization is the accumulation and application of resources (operating and working capital, operating reserve, risk capital, endowment and building reserve) to support achievement of an organization’s mission over time. Elements Needed by All Needed by Some Endowment Building Reserve Risk Capital Operating and Working Capital Operating Reserve Ensure appropriate longevity of programs Design, test, and refine effective programs Deliver high quality and effective programs Maintain adequate supportive infrastructure Steward necessary fixed assets and collections Source: TDC 9 Promoting Capitalization

10. Why Does Capitalization Matter? • Without adequate capitalization, your mission is at risk Capital Fund Inadequate Risk Capital Inadequate Operating and Working Capital Inadequate Operating Reserve Inadequate Endowment Inadequate Building Reserve Warning Signs Passing up new program ideas. Inadequate cash flow to handle expansion. Borrowing from advance ticket sales. Permanently drained lines of credit. Making payroll is an adventure. Collections calls. Chronic deficits are covered by endowment and reserve draws with no way to replenish. Roof has been leaking for past 18 months. Collections are crumbling. Underlying Risk Inability to innovate or realize benefits from innovation. Inability to spend adequate resources to create quality programs. Inability to attract talent or maintain quality partners and vendors. Inability to weather risks, and/or inability to deliver quality product over time. Inability to steward fixed assets or collections. Source: TDC 10 Promoting Capitalization

11. How Well Are You Capitalized Now? • Capitalization is embodied in the balance sheet • The balance sheet records an organization’s accumulated financial performance over time • The Income Statement (the Statement of Activities) shows only one year’s revenue and expenses • The balance sheet also demonstrates the strength and availability of an organization’s asset base to support its future • Finally, the balance sheet shows an organization’s degree of liquidity Source: TDC 11 Promoting Capitalization

12. Unpacking the Balance Sheet • What are we looking for in your balance sheet? Income Statement Revenue Expenses Net Income Balance Sheet Cash/Investments Receivables Fixed Assets Total Assets Payables Deferred Revenue Debt Net Assets Total Liabilities and Net Assets Elements of Capitalization Requires Liquidity Operating and Working Capital Operating Reserve Building Reserve Risk Capital Endowment Source: TDC 12 Promoting Capitalization

13. What Are We Looking For in a Capitalization Strategy? • There are no cookie cutter answers • A capitalization strategy looks at four distinct pieces: • Mission and vision • Business model drivers • Time horizon • Marketplace • With this in mind, the strategy determines the types of funds required • It then articulates the necessary size of the funds, the timing of the need, and the method for obtaining the required resources Source: TDC 13 Promoting Capitalization

14. What Are Your Business Model Drivers? Audience Audience + facility Audience + high fixed costs Audience + facility + high fixed costs Fixed costs Fixed costs High flexibility Low capital intensity Low flexibility High capital intensity Source: TDC 14 Promoting Capitalization

15. What is Your Time Horizon? Medium Term (Organizational View) Long Term (Institutional View) Immediate (Individual View) Artistic expression fulfills established brand identity Obligation to persist as civic anchor or long-term stewardship of collection or art form Highly specific artistic expression – often focused on a particular artist Fixed costs Fixed costs Fixed costs Rented or borrowed facilities Fixed costs must be tightly controlled Highly flexible with limited fixed costs Fixed costs extensive and multi-faceted Facility ownership often necessary Facility ownership may or may not be supportable • Higher risk tolerance may be appropriate • Requires coverage of basic needs – working capital, risk capital, and operating reserves. • Level of obligations call for low risk tolerance • Requires larger scale of basics and, often, plant reserves and endowment to meet all obligations. Source: TDC 15 Promoting Capitalization

16. Importance of the Marketplace • A thorough understanding of the marketplace tests the mission and vision and predicts the resources available by asking: • Who is the anticipated audience? Is the product or service needed or wanted in the community? What level of support will they provide? • With whom might the organization be competing locally for audience and support? • These questions can only be answered in the context of the local community and are particularly important during projected program or facility expansions Source: TDC 16 Promoting Capitalization

17. Resources • Analyzing the marketplace also helps determine necessary operating resources for the environment • With whom is the organization competing for talent and key resources? How does that impact fixed costs? • What investments are necessary in marketing and development? • Organizations with facilities must also define long- term systems replacement needs • These organizations often operate with a systems replacement plan (SRP), which articulates anticipated need, but does not address the funding of those needs Source: TDC 17 Promoting Capitalization

18. What Are We Looking For in a Strategy? Time Horizon and Business Model Drivers • Mission/Vision • Artistic/cultural production • Theory of change for impact on audiences and other beneficiaries • Market • Customers • Donors • Competition • Resources • Ongoing resources to sustain operations and a facility if appropriate • Human resources • Key investments Planning process informed by Mission/Vision, Market, and Resources engages board, staff, partners, and supporters, and encourages a holistic understanding of the organization. Integrated Strategy Programmaticstrategymaximizes artistic quality and impact Organizationalstrategyincludes adequate human and other resources for marketing, development and space Capitalization strategy articulates size and shape of capital needs grounded in organization’s inherent business model drivers and strategic goals Source: TDC 18 Promoting Capitalization

19. What Does This Look Like Over Time? • Once need is defined – prioritize! • The capitalization strategy identifies the needs and sources, and prioritizes among them • Generating reserves often implies surpluses. Break-even budgets do not allow organizations to implement a real capitalization strategy • Preserving the more capital-intensive funds is difficult without adequate operating funds Elements of Capitalization Operating surplus Operating and Working Capital Operating Reserve Surplus or non-operating fundraising Building Reserve Risk Capital Net Assets Endowment Non-operating fundraising Source: TDC 19 Promoting Capitalization

20. 300000000000 Preliminary Application Facility Investments and Building Reserves 20 Promoting Capitalization

21. Getting Started • Read the supporting documents on the Kresge Web site: • Program Philosophy and Terms • Guide to the Facility Investments and Building Reserves Grant Application • Guide to Strategic Planning • Guide to Building Reserves • Reading List • FAQs • Capitalization is a new topic for many, and we believe that reviewing these materials in their entirety before applying will help applicants 21 Promoting Capitalization

22. Eligibility • Who is eligible? • Organizations with arts and culture as the primary purpose of their mission • US-based organizations • 501(c)3 organizations not classified as a private foundation • Organizations with facilities that are government-owned, but operated by separate 501(c)3 organizations • Organizations with audited financial statements • Who is not eligible? • Art-focused subsidiaries of larger parent organizations such as universities or human services agencies • Start-up organizations (less than two years of operational history) • Government-owned and operated entities • Organizations with compilations or reviews, or financial statements prepared on a cash or modified cash basis 22 Promoting Capitalization

23. What We Support • Organizations may apply for two types of grants • Facility Investments and Building Reserves • Building Reserves • If seeking a facility investment, renovation and repair projects will be prioritized over new construction • Grant amount will be dependent on the type of project and the size, scope and business model of the organization. However, grants will not exceed $1 million and/or a period of three years • Some grants may be awarded on a matching or challenge basis 23 Promoting Capitalization

24. A Highly Competitive Process • Round 1: 141 preliminary applications; 21 invited full proposals; nine grants • Round 2: 134 preliminary applications; 10 invited full proposals; grants still under review 24 Promoting Capitalization

25. Criteria and Review Process • Step 1: Competitive assessment of preliminary applications for alignment with the Arts and Culture Program’s values: • Create opportunity and enhance access to arts and culture through authentic and relevant programs that exemplify excellence in the field; that involve people of all social and economic backgrounds; and increase participation of new and non-traditional audiences. • Exhibit a high level of community impact through work that contributes to a vibrant arts and cultural ecosystem and exemplifies excellence in the field; benefits the broad local community and reflects the diversity of the community population; advances community building efforts; and embodies key principles of community planning to enhance quality of life. 25 Promoting Capitalization

26. Criteria and Review Process • Values continued: • Stimulate innovation through work that furthers best practices in the field; uses new and possibly untested approaches; and brings multi-party, interdisciplinary approaches to problems that defy solution by a single sector. • Support institutional transformation and the capacity to profoundly influence the overall organization and its operations; or create new business models to strengthen financial stability. 26 Promoting Capitalization

27. Criteria and Review Process • Step 2: Competitive assessment of the overall quality of the preliminary application and the strength of the comprehensive capitalization strategy including: • Evidence of planning, including but not limited to external market research and analysis for earned and contributed revenue, benchmarking research, system replacement strategy • Evidence that the proposed project fits within the larger capitalization strategy and that it is the next appropriate step in that strategy, and that the organization understands how the proposed project will impact the future operating budgets and balance sheet • Evidence of a realistic fundraising plan, if appropriate to the request • Assessment of the liquid unrestricted net assets available for operations • The determination as to whether to request a full application is assessed on the competitiveness of the overall preliminary application 27 Promoting Capitalization

28. How to Apply • All Facility Investments and Building Reserves grant applications must be submitted through our online application system • Find the “Apply Online” link on the Institutional Capitalization homepage 28 Promoting Capitalization

29. Competitive elements • Competitive preliminary applications demonstrate the following: • Values that are addressed in a detailed way and which align with the Program’s • A capitalization strategy that aligns with the organization’s mission and strategic plan, and which: • Accurately diagnoses business model drivers • Defines the needs and plans for each type of fund, and prioritizes among them • Includes a strategy to build surpluses and reserves over time • Building reserves strategies based on a realistic plan, accurate data, and policies which address use, withdrawal and replenishment • Realistic fundraising plans, when appropriate to the request • Evident collaboration among the CEO, CFO and Development staff in completing the application • Unrestricted Net Asset Tool correctly completed 29 Promoting Capitalization

30. Current Preliminary Application Deadline • Spring 2011 deadline is Tuesday, March 1, 2011 at midnight Eastern Standard Time • Decisions on these preliminary applications will be made within eight – 10 weeks 30 Promoting Capitalization

31. Q&A 31 Promoting Capitalization

32. www.kresge.org The Kresge Foundation 3215 W. Big Beaver Road Troy, Michigan 48084 info@kresge.org 248.643.9630 Promoting Capitalization