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Can we utilize endowment to collateralize line of credit?

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Can we utilize endowment to collateralize line of credit?

Our 501(c)(3) organization is selling its real property, which is currently utilized as collateral for a line of credit. After the sale, can the organization use permanently restricted endowment funds as collateral for a margin line of credit?  

No.  Permanently restricted endowment (restricted by the donor(s) and not the board) must be held “in perpetuity,” with only the income being spent for the charitable purposes for which it was given.  The principal can’t be spent currently for your work.  Even if the organization goes out of business, the assets will have to be given to someone else for the same charitable purpose.  (If this is “board-restricted endowment,” of course, it can be unrestricted by the board and spent at any time.  The true endowment rules don’t apply and it can be used as collateral.)

If the income from the endowment fund is unrestricted and may be used for your general charitable purposes, you can probably pledge the income as collateral for a line of credit for your operations.  It might cover all or a significant part of the interest due on the loan if you otherwise default.  But pledge the income only, not the fund itself. 

You could also pledge the proceeds of the sale, which presumably is not restricted in any way.  It would be a lot smarter and would avoid problems with the Attorney General if you use the proceeds as collateral rather than the endowment.

You ask specifically whether the permanently restricted fund can be pledged as collateral for “a margin line of credit.”  If you mean a line of credit to support purchases of investment securities on margin, those loans are normally collateralized by the securities themselves.  (A margin account also generates unrelated business taxable income because the securities are “debt financed property.”  (See Nonprofit Issues®, 11/1/10.))  It is not clear why you would need to pledge the endowment for a margin line of credit.  You have the securities themselves for collateral.

Tuesday, May 1, 2018

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