Toward Sustainable Cultural Infrastructure

Better Practices for Capital Projects

How We Got Here: Building Boom and Downturn

In 2012, the University of Chicago’s Cultural Policy Center published Set in Stone: Building America’s New Generation of Arts Facilities: 1994–2008, a wide-ranging analysis of the cultural-sector building boom in the United States from the mid-1990s through the economic downturn of 2008. Across the country, more than $15 billion was poured into cultural building projects, including museums, theaters, and performing arts centers.1 These projects inspired donors, became symbols of civic identity, and gave arts institutions both increased functional capacity and the sense of permanence that can accompany bricks and mortar.

However, this building boom resulted in a cultural sector very heavily invested in illiquid assets. Cultural buildings may have an estimated value on the balance sheet, but they are often so unique, so monumental, or so specific to their purpose that they would be difficult to sell or repurpose should the need arise. Planning for many facilities during this period was predicated on the “build it and they will come” approach, which saw buildings as means for generating demand for cultural activity and expected that operations post-opening and the long-term cost of building ownership would work themselves out.

When the Great Recession arrived — in the midst of planning and construction for dozens of projects great and small — the building boom came to a halt. Arts organizations across the country were faced with decreasing contributed revenue, anemic attendance, and reduced (if any) investment income. Organizations saddled with the high fixed costs that accompany building ownership found themselves cutting programs and staff just to (literally) keep the lights on. Many groups even closed their doors, without the reserve funds or liquidity to weather such an economic shock.

Knowledgeable public and private institutional funders saw that the sector as a whole was poorly capitalized, without the economic resources to stay liquid, weather change, and continue to innovate. The long-term costs of facility ownership and the inaccessibility of capital tied up in expensive buildings were not helping. In the context of economic hardship, many cultural buildings had become liabilities rather than assets.

Economic Recovery and Renewed Interest in Capital

As the economy has recovered, so too has the cultural sector’s impulse to build. Arts organizations still need places to work, to perform, and to call home. The work of art making and presentation has functional needs that are hard to accommodate in typical buildings, including long-span, high-volume spaces; special heating, ventilation, and cooling; acoustical protection; bathrooms and parking for hundreds of people; and so on. Communities are still hungry for places to gather, to learn, and to celebrate the arts. Elected officials see cultural buildings as opportunities to build civic pride and energize urban areas. So we have returned to creating purpose-built facilities for arts and culture.

Since the recession, many institutional funders have moved away from giving to bricks and mortar. Large foundations’ postrecession giving to capital campaigns has averaged little more than half of prerecession levels, and in 2015 giving to bricks and mortar was at its lowest in the decade of available data, even as total postrecession giving to the arts remained relatively stable between 2011 and 2015.2 Having seen that costly buildings can be “part of the problem” in a poorly capitalized sector, many funders have left capital project funding to others and shifted their attention toward better practices in operational capitalization, an important ongoing effort in which GIA’s Conversations on Capitalization and other resources have played an integral role.

Capital project funding, particularly the “early money” that influences project direction, supports planning, and drives decision making, now seems to come mostly from individual donors and sometimes from governments. These are the “venture” investors who hear arts organizations’ and communities’ need for facilities and jump in as early partners. They often share a vision of world-class performance halls and museums, vibrant downtown arts centers, and the transformative power of culture.

Some are interested in creating architectural monuments, accruing civic prestige, or building personal legacies. Mostly, they leave operational planning, comprehensive capitalization, and the question of “what happens after it’s built” to the arts leaders involved in the project. Individual donors and elected funders are less aware of the immense institutional impacts of capital cultural projects, of the building boom and its aftermath, and of the necessity of healthy capitalization to keep vibrant organizations in their buildings for the long term. These funders’ understandable interest in architecture, design, and construction drives arts leaders to design capital campaign messages around a vision for a facility, where the grand opening is seen as the end goal, instead of focusing on the new or expanded arts activity, programs, and outcomes that the building will help achieve.

As such, many arts organizations have little external incentive to plan for institutional health before, during, and after building projects. In the high-stakes environment of a capital campaign, arts organizations are in a “compliance mind-set” and will do what is needed to secure contributions. Unfortunately, when donors are focused only on the building, this means setting aside what we have learned since the recession about good capitalization, and often neglecting holistic institutional health.

When design begins and there are drawings to look at and an exciting vision to craft, the mundane work of forecasting the impacts of design decisions on operating revenues and expenses takes a back seat. Even those organizations with well-laid plans for raising working capital, facility reserves, and funds to cover planned deficits during early operations in a new facility often find it difficult to protect these funds from covering cost overruns, fundraising shortfalls, and the desire to “get it done” when all eyes are focused on construction. Continuing capital campaigns with the intention of raising reserve money or start-up funds after the building opens is often an exercise in futility — why give money if the project is complete? Many organizations complete their capital projects unprepared for the transformative impact the facilities will have on their business models, their institutional identities, and their economic resiliency. Despite the good intentions of donors, arts leaders, and policymakers, as a sector we are creating more responsibility for cultural infrastructure without the solid capitalization to reliably sustain it long term.

Toward Better Practices

So, what can be done? How can institutional funders who see the risks inherent in capital projects help arts organizations survive them and thrive once they are complete? What questions can be asked of organizations early on, as they contemplate projects that could transform their institutions and magnify their impact — if the organization stays healthy? Institutional funders have long-term relationships with arts organizations, can often influence project direction early on, and are looked to by arts leaders, elected officials, and private donors as among the most credible voices in the sector. As such, institutional funders are in a unique position to influence capital project planning for the better. Even without funding bricks and mortar, foundations that support the arts can help create the conditions for arts organizations’ sustainability before, during, and after capital projects.

Drawing on conversations with funders, arts leaders, consultants, architects, fundraisers, and planners across the country and on my own experience planning theaters, museums, and performing arts centers before, during, and since the economic downturn, a number of better practices have emerged as key factors in capital project success. Outlined below are suggestions for ways in which institutional funders can help the cultural sector create more sustainable infrastructure.

1. Help connect arts leaders with peers who have completed similar projects.

Arts organizations talk to architects and consultants when entering into early planning but less often seek out peer organizations for honest conversations about what went wrong and what went right for similar projects. When arts leaders talk about completed projects in public, the job is done, people are happy, and challenges, surprises, and mistakes are not usually discussed. Soliciting private feedback and asking tough questions of people who are in the same business help organizations benefit from 20/20 hindsight, more fully understand project costs, avoid encountering surprises and repeating mistakes, and find new opportunities building on the experiences of others. With deep connections to varied arts organizations and leaders, institutional funders can help connect those aspiring toward building projects with those who have been there and lived to tell about it.

2. Make good capitalization a prerequisite for capital support.

Grantmakers in the Arts, the National Center for Arts Research, Nonprofit Finance Fund, and others have thoroughly documented what it means for an arts organization to be economically healthy. Adequate liquidity, budgeting and managing to achieve consistent surpluses, and accumulating board-designated reserves are not only indicators of institutional health and good governance but should be prerequisites for entering into a significant capital project. In limited circumstances, a building project may help an organization access new revenue streams, correct an upside-down business model, or catch up on deferred maintenance, but these are few and far between. Successful capital projects are built on a firm foundation of good fiscal management, and institutional funding guidelines and requirements can be an effective motivator to get one’s fiscal house in order.

3. Help make scholarship on capitalization, capital projects, and their impact on mission delivery more accessible to individual donors and policymakers.

Why should big foundations be the only funders who see the bigger picture of capital projects’ impact on arts organizations? Lots of good work has been done about best practices in capitalization and institutional health in recent years, but much of it has been for an audience of institutional funders and arts leaders. If institutional funders could help reframe some of this scholarship and target it toward governing boards, wealth managers, elected officials, family trusts, and community foundations, we might see organizational health become a higher priority, even for capital projects that do not receive institutional gifts. Armed with this knowledge, more philanthropists can be enlisted in planning for organizational health even before a capital project is a twinkle in someone’s eye.

4. Incentivize integrating business planning with early design.

Buildings change a lot during early design. As the design team works to accommodate functional needs, address site constraints, and reconcile budget limitations, decisions to add, subtract, or change spaces are often made with little input on how they might impact operating economics post-opening. Often early feasibility analyses and pro forma estimates stay on the shelf. The most successful projects have been through several iterations during the earliest stages of design, where different scenarios were informed by a detailed understanding of how the building would operate and the related revenue and expense impacts. Incentivizing or even funding operational analysis in collaboration with the development of a project design concept could be a funder’s most effective way to ensure that a building does not outrun an arts organization’s capacity to operate it in the long term.

5. Encourage comprehensive campaigns that fund a healthy capital structure as well as bricks and mortar.

Capital campaign goals are often set by adding a project’s estimated construction costs to soft costs, including design fees, permitting, the cost of fundraising, and hopefully a generous contingency. What is usually missing is an examination of a desirable capital structure post-opening — the “buckets of money” beyond project costs that an organization will need to open the doors and keep them open for decades to come. At minimum, campaign goals must include adequate working capital to ensure comfortable cash flow in year one; for new organizations or those expanding their scale of operations in a new building, this can be significant. Most projects should also include substantial start-up capital, money to support organizations as they adjust their programs and operations to the realities of a new building. Despite the first-year attendance bump that new facilities often see, it will take three to five years for an organization’s operations to stabilize post-opening. Planned deficits (with start-up capital to make up the difference) in the first few years help organizations have the flexibility to adjust to new staffing, management, and business models and to respond to the inevitable changes and surprises that will take place post-opening. Many project supporters see the wisdom in establishing and funding this structure as long as estimates are included before campaign goals and project costs are announced. The more institutional funders who begin a conversation with grantees about comprehensive capitalization during early project planning, the more likely a project will be to emerge from a project well capitalized.

6. Continue to push for separate accounting for revenue and capital.

As explained in detail in Nonprofit Finance Fund’s Case for Capital, capital income is different from operating revenue.3 It must be categorized as such and tracked differently, especially before, during, and after a capital project, because it is difficult to measure the building’s impact on operational health. The large financial influxes associated with capital projects begin several years prior to construction and can continue many years after opening as pledges come in and elements of the building are finalized. If multiyear capital income associated with construction is conflated with annual operating revenues, like ticket sales, annual fund contributions, or program grants, operational imbalances can be obscured until it is too late to easily correct them. If funders consistently ask for separation of capital and revenue on balance sheets throughout the capital project process, it will become a recognized best practice.

7. Encourage facility reserve contributions as part of annual operations.

Despite the building boom and the cultural sector’s heavy investment in costly, complex buildings, it has not been common practice to accumulate facility reserve funds or even account for long-term building maintenance in a meaningful way. Deferred maintenance of existing facilities is commonplace and suggests that building stewardship and the fixed costs of ownership have not yet entered our consciousness as a key component of arts business plans. This is fine in a new building for a few years, but eventually carpets get stained, roofs leak, and HVAC units begin to fail. Organizations must recognize that building maintenance is an operating cost and contribute to a building reserve fund gradually over time to accumulate the substantial funds needed to upgrade or replace aging systems. The math behind this is the subject for another article, but a facility reserve need not necessarily cover the depreciated cost of the entire structure nor even cover the full cost of future replacements. It must instead establish that the organization has made a disciplined, consistent effort to incorporate the cost of ownership in its operating plan. Foundations that review operating pro formas should look for this as an annual expense or contribution to a sinking fund investment.

The Opportunity of Capital Projects

Planning, building, and opening capital projects are times of risk and instability for arts organizations. When planned holistically, with comprehensive capitalization and careful planning, they can simultaneously be times of growth, change, and opportunity. Building projects are still — for better or for worse — one of few reliable ways arts organizations can access substantial capital. This can incentivize overinvestment in bricks and mortar without a plan to sustain the programs and mission that made the building desirable in the first place, and create albatrosses. But with leadership from funders and widespread better practices, capital projects can transform institutions, make places to create and share artistic practices and products, and serve the arts sustainably for decades to come.

NOTES

  1. Joanna Woronkowicz, D. Carroll Joynes, Peter Frumkin, Anastasia Kolendo, Bruce Seaman, Robert Gertner, Norman Bradburn, Set in Stone: Building America’s New Generation of Arts Facilities 1994–2008 (Chicago: Cultural Policy Center, University of Chicago, 2012).
  2. Foundation Center, “Foundation Support for Arts and Culture by Support Strategy,” data provided to author, April 11, 2018.
  3. Rebecca Thomas and Rodney Christopher, “Case for Capital: Financial Reporting Done Right” (Nonprofit Finance Fund, 2011).