NYCON's fiscal and legal staff chime in to answer a frequently asked question we get from our members.
Q: Can a nonprofit use their endowment as collateral?
A: "I vote no if it’s either temporarily or permanently restricted. If collateral, that means in default the lender could seize the assets. I don’t think restricted endowment is “available for use” on anything other than the restricted purpose, likewise, the temporarily restricted has a timing or use restriction." --Kelly Mathews, COO, Sr. VP, Financial Management Group, NYCON
A: "Kelly is correct. Assuming the endowment is a truly restricted fund (not a fund with self-imposed restrictions established by the board), a nonprofit can’t unilaterally authorize the use of the endowed funds as collateral for a loan. Any attempt at using the fund as collateral would be considered an “invasion” that requires judicial approval. The only time the courts would authorize such an invasion would be if it was “impracticable or impossible” for the nonprofit to comply with the restrictions on the fund. And, if those circumstances existed, the nonprofit would be better served by simply trying to liquidate the fund for capital, rather than attempting to borrow against it." -- Michael West, Esq., Senior Attorney, NYCON
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