How Do I Raise Funds For a Nonprofit?

Nonprofit cultural institutions are increasingly issuing bonds as an additional revenue-raising vehicle. The number of organizations on Standard & Poor's credit ratings list in this category alone has doubled since 2000 to about 30 organizations.

The Please Touch Museum in Philadelphia issued $60 million in bonds last October to renovate and restore the 130-year-old Memorial Hall. The bonds helped finance the project quickly. "All large-scale projects have a mismatch in when you need to spend the money [and] when you get the money," says Concetta Anne Bencivenga, CFO of the Please Touch Museum. "We need to pay our contractor now. [A bond issuance] made the most economic sense." But do bonds issued by these institutions make financial sense for individual investors?

Risks and Rewards
The good news: These bonds are tax-exempt and bring diversity to your portfolio. Also, they usually offer higher yields than municipal bonds.

That said, nonprofit bonds tend to be riskier than munis because if, say, a museum or other cultural institution enters financial hardship, it's more difficult for it to bounce back than for a municipality to do so. Doubling admission to generate more revenue is not as easy as, well, raising taxes, says Josh Stern, a director at S&P's ratings group. Eric Wild, a managing director at Morgan Stanley who works in this sector as an underwriter, agrees. "Tax-backed obligations are the most secure because of the ability to continue raising revenue," he says, adding that despite the risks, defaults by museums and the like are still pretty rare.

Where to Shop
Investors can get a heads-up on bond sales by contacting the various public finance commissions in their area. These offer seals of approval on bonds and hold public hearings to discuss potential sales. For example, the American Museum of Natural History issued some $78 million in bonds through the Trust for Cultural Resources in New York City. The Please Touch Museum's bonds were issued by the Philadelphia Authority for Industrial Development. To buy nonprofit bonds, contact your portfolio manager--these types of bonds are typically sold first to investment banks, which then extend them to individuals.

"You need to do the same diligence you would with any kind of financial investment," says Ken Kirsner of Bank of America, who has helped underwrite more than 200 nonprofit bond issuances around the country. Investors should begin their research by checking out S&P's, Moody's Investors Service's and Fitch's online credit ratings for cultural nonprofit bonds. S&P gave the AMNH's recent bond issuance a very high AAA rating, indicating the museum's "pre-eminence" as one of the world's top natural history museums.

"Startup [nonprofits] are traditionally the most risky because there's no track record and no operating history," says Stern. S&P also notes the success of the AMNH's last bond issuance in 2004 and its lack of additional debt in the short term. It now has nearly 4 million paying visitors a year. The AMNH's bonds are also insured--yet another positive sign.

Finally, Susan Fitzgerald at Moody's also suggests asking, "Is [the institution] something people will support via membership or gifts? What is the appeal of the institution, and can you see it sustaining through the life of the bond?"

If not, there's always the much-appreciated donation, which offers individuals a tax deduction and, for the museum, instant and obligation-free gratification.

Farnoosh Torabi is a correspondent for TheStreet.com TV.