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Slow Going For Kroc Centers

By Marla Nobles - November 1, 2006

When the Salvation Army of San Francisco broke ground this past June on a complex that would include a Ray and Joan Kroc Corps Community Center, the project became the first to make it through a maze of guidelines and restrictions to access a share of the $1.6 billion bequest to the Salvation Army from the McDonald’s fast-food heiress.

It helped that such a complex was being planned two years before the 2003 bequest so that officials could simply adapt the project. But to date, of the 99 applications for the pot of money at the bottom of the golden arches, just two other Armies have received final approval to get started. Part of the challenge – and basis for much controversy — is raising matching funds within communities where donors now perceive the Salvation Army as affluent because of the gift.

“It kind of brought things to a standstill because our potential donors were saying, ‘Well, right now you don’t need our money because you have the gift,’” Maj. Joe Posillico, divisional commander at The Salvation Army of San Francisco, said of the public’s initial reaction to the Kroc gift.

Mission creep

Among the nation’s largest charities — it raised more than $3.1 billion in Fiscal Year 2004 — the Army is also one of the most effective, with about 84 cents of each dollar raised going to the organization’s programs.

In large part because it’s been long-perceived as thrifty, the Army was a favorite of Mrs. Kroc, who along with husband Ray Kroc, a founder of the McDonald’s fast-food chain, had over the years given the Army nearly $2 billion, including the bequest.

In a strange twist, the Kroc gift nearly changed that perception. “The interesting thing is The Salvation Army, which is either the second or third wealthiest nonprofit organization in the country, didn’t need to do that,” Pablo Eisenberg, Senior Fellow at the Center for Public & Nonprofit Leadership at the Georgetown University Public Policy Institute, said of the Army’s decision to accept the enormous bequest. A long-time critic of that decision, Eisenberg said his view remains that the Army “should’ve stood with their mission and tried to negotiate that grant to expand its mission.

“I think it was a mistake taking that billion dollars without putting serious conditions on the grant,” added Eisenberg, who attributed the move to the Army not being used to dealing with foundations and large grant bequests. In contrast, National Public Radio benefited from a $200-million relatively no-strings-attached bequest from Mrs. Kroc after she died in October 2003. “I think they could’ve done a tougher negotiating job,” Eisenberg said of the Army.

Donor creep

While much concern had arisen by some outsiders of “mission creep,” according to Salvationists the only “creep” they feared was that by donors.

Art Taylor, president and CEO of the BBB Wise Giving Alliance, a national charity watchdog affiliated with the Better Business Bureau, negated the argument that the Army was moving away from its mission by accepting the heavily restricted Kroc gift. “For an organization of that size, I don’t think so.”

Added Taylor, “So much of (the money the Army collects) is in the form of small gifts that come unrestricted. When they get a large gift – and first of all, a gift like this is nearly unprecedented — you can expect there are going to be some challenges. But I think it’s also somewhat challenging for the Army because institutionally, they have a set programming. It’s very clear who they are.”

According to Jack Getz, territorial Kroc center development consultant at the Southern Territory’s Atlanta headquarters, many in the Army feared that by accepting the gift donors would pull back, jeopardizing existing programs.

“In the early, early days of the Kroc surprise, that’s probably the one thing that concerned people (in the organization) most,” said Getz. “Not officially, not a statement was made, but as far as the grassroots reaction, some (Salvationists) wanted the Kroc money not to be accepted because it could cause that reaction.” According to Getz, that concern has since largely receded, but there remains “scuttlebutt” regarding how the upcoming holiday fundraising season will be affected, if at all.

The first of what the Army anticipates will be about 30 centers nationwide using the Kroc bequest, San Francisco broke ground on a $27-million center in the low-income Tenderloin neighborhood on June 22 — five years after the project was conceived.

The announcement of the bequest “kind of changed the direction of the project,” said San Francisco’s Posillico, who said its advisory board pulled back, recommending the field unit apply for Kroc monies. What the board and donors didn’t know, he said, was that with the gift came strict guidelines.

According to the Army, as per Mrs. Kroc the bequest money was to be designated to fund community-based centers in under-served communities, 50 percent in the form of capital to construct the facility. The other 50 percent would go toward the endowment, with the stipulation that each receiving affiliate must work alongside participating communities to match that endowment.

Maj. Cindy Foley, administrator of the Ray and Joan Kroc Corps Community Center in San Diego, witnessed firsthand the many challenges of realizing Mrs. Kroc’s vision — namely, the threat of a shift in perception by the public.

“In many communities where the Kroc center projects are ongoing, it’s easy to just hear about all of the money The Salvation Army and Joan Kroc are providing and not realize the total amount of funding it will take not only to open the facilities, but to provide the high quality programs, and to keep the building in good repair over the next decade,” explained Foley.

The landmark San Diego Center was funded by a separate $92-million donation to the Army by Mrs. Kroc in 1997. After an initial $87 million proved insufficient, Mrs. Kroc gave another $5 million for the construction. “But the endowment was never added to, to make it equal endowment to equal capital,” explained Foley. The center opened in 2002 to its share of problems.

One key take-away from San Diego, said Foley, was the realization that an endowment match is not enough to fulfill the Kroc mandates. “It is very helpful, and it is extremely generous, but additional funds are needed.” Echoed another Salvationist, “Sure, if you build it they will come. But, who’s going to keep the lights on?”

The Ithaca Corps was denied Kroc monies, according to Maj. Ronald Lugiano, who said the refusal was based on the unit’s inability to secure enough land in the small, upstate New York college town. Still, there was a sense that donors might pull away. “We experienced a drop in donations,” said Lugiano. “It wasn’t a significant drop, but a couple large donations fell off. We’re talking like a thousand bucks here and there.”

Lugiano attributed the drop to misinformation. Some donors had simply heard the Army was to receive a tremendous amount of money, “and not that it was for building an endowment for Kroc centers.” Lugiano admitted to a similar internal reaction. “We were thinking, ‘Oh, we’re finally going to be out of the red.’ Well, then the announcement went on to say it was to build centers — all of our enthusiasm just dropped.”

To counter the “donor creep,” Ithaca sent a series of informational letters to its more than 3,000 donors. Lugiano mailed donors personalized Thank You notes, which sparked an increase in donations. Coupled with two annual newsletters and a phone-a-thon reaching out to donors, the unit was able to bounce back financially within a year.

According to Lugiano, other Army units around the country saw donations slip and donors back peddle. “People thought, ‘Well, they don’t need our money now,’” he said. According to Capt. Brian Clark at the Eastern Territory headquarters in West Nyack, N.Y., “I had heard from several major donors, ‘Well, the Salvation Army does not need my money anymore because they just got all this money from Joan Kroc.’” He did not give specifics.

In the Central Territory, the Army countered the “creep” by including informational inserts in their direct mail pieces and sending personalized Thank You notes. “In all of our communications, whenever appropriate, we mention the restrictive nature of the gift,” said Evie Polsley, communications specialist at Central Territory in Des Plains, Ill. “We also made it clear that we would need additional funding for the center’s operations, as well as for the other programs that The Salvation Army provides.”

Growing pains

Challenges, other than matching the endowment, surfaced in the months and years that followed announcement of the gift. Compounding the heavy fundraising burden, there were issues with building design, staffing, real estate acquisition and securing community and corporate buy-in.

Taking it all into consideration, the Army would have to whittle down the applications received from 99 communities to no more than 30. The four regional territories, each allotted $400 million to start, and each with its own application process, were in charge of deciding which units would secure funding for a Kroc center. Three years after the announcement, just two units, San Francisco and Atlanta, have received final approval (at presstime).

The groundbreaking of the San Francisco center came just over a month after the project was green-lighted by the Army’s administrative unit to the western territory. Not much else about the project was as swift.

Delays included the board postponing the unit’s appeal to donors, as well as the lengthy application process. But according to Posillico, “The main hold up was even though the Ray and Joan Kroc money was announced three years ago, it took almost two years before the estate actually distributed the money.”

Along with the 18 other applicants in the Western Territory, San Francisco had to meet the following three preliminary qualifications for consideration:

  • Show control of the property;
  • Ability to develop some matching endowment funds (each center will have unique operating costs, thus it might not need to match the endowment dollar-for-dollar) by certain deadlines; and,
  • Community support.

To fund the $25-million Tenderloin Housing project (not covered by Kroc money), San Francisco used grants from the State of California, tax credits, and is running a two-in-one capital campaign for the housing and community center.

The unit must raise an additional $13 million to fully fund the housing project and match the endowment for its Kroc center operating costs (about 30 cents on the dollar). Already about $4.5 million towards the endowment has been raised in the community. Another $1 million (to be split among the housing and Kroc center) must be raised by the end of December, and the rest within two years.

Location, location, location

Posillico noted its site — which will also be the home of the new housing and community center — as a big selling point. “It’s in one of the worst parts of (San Francisco). Surrounding the facility, in a five-to-eight block area, 3,500 children under the age of 18 live. And there’s very little safe places in this area for children.”

The project, to be completed in July 2008, will consist of an eight-story Kroc center with gymnasium, dance studio, graphic arts studios, and a public swimming pool; and a 113-unit housing facility. A third of the apartments will be for aged-out foster youths. All those involved in the housing program will have membership benefits to the center. “I think the facility is most reflective of what the Army’s original mission is, and with two projects together we’re enhancing what we’re doing,” said Posillico.

While San Francisco came in with the land secured, for many units land acquisition has proven troublesome, knocking some out of the running for Kroc money.

“That’s become one of the biggest issues,” said Maj. George Hood, the charity’s national spokesman. Hood cited land shortage and high real estate costs as reasons why Armies in the Northeast – where as of presstime none of the 29 applicants had received final approval — are having difficulty securing the gift.

And again, there’s the issue of the public perceiving the charity as nouveau riche. Said Hood, “Because once you start looking for property in cities, and they know you’re working from a bucket of money, suddenly there’s tremendous escalation in the value of the property.”

Growing the endowment

In a 2004 article in The NonProfit Times, Hood described the donor base at The Salvation Army as “millions of people who make checks of $100 a year or drop five bucks into a Salvation Army kettle.” He added, “In constructing these community centers, it’s going to push us in a new discipline of fundraising.”

Building the endowment, which Hood more recently described as “the most difficult piece of the puzzle,” was a new experience for most of the Army field units.

“It is a challenge to bring donors to the table, especially for endowments,” agreed San Francisco’s Posillico, who noted another lesson learned from San Diego: start building the endowment prior to opening the center.

“The San Diego center had begun fundraising with a dedicated fundraiser after the center had been open two years,” said Foley, who said the endowment at San Diego, slightly more than $48 million, isn’t where it should be. “But not as much time has been focused on fundraising as in the new centers.” Foley said the Armies are now hiring fundraising professionals prior to construction.

Territorial differences

Each of the four territorial administrative units (Western, Eastern, Central, Southern) established its own unique oversight process to seek and review applicants, according to Melissa Temme, spokesperson at National. Temme said the Western Territory is moving through fastest. In fact, of the 99 applications nationwide, six in the Western have received final approval, just one in the Southern Territory (Atlanta), and none in the Eastern or Central territories.

According to Maj. Raphael Jackson, business and mission expansion secretary at The Salvation Army of Massachusetts, the road to bringing a Kroc center to the state has been bumpy. But, said Jackson, “there’s been no time when we said we need to give this up.” At presstime, Boston was moving into the final stage (conceptual design) of consideration for a $40 million Kroc gift. The plan is to build a 95,000-square-foot center on a 7-acre plot in the dense Dorchester/Roxbury area.

“The similarities are more prevalent than the differences,” Hood said of each territory’s application process. “But I think the biggest challenges are going to be in the Northeast – to find an under-served community where there is acreage available, without displacing people.”

As per Mrs. Kroc, facilities are to be built from the ground up, therefore occupying existing buildings isn’t an option. “Then to find that acreage at fair market price that you can afford to buy and still build on is the second (challenge),” said Hood.

In the largely rural central states, Hood said running a capital campaign is the most challenging aspect. “Middle America is traditionally farm-built and working class people, so you don’t have the intense pockets of wealth in some of those communities once you get outside of Chicago.”

Similar problems will be faced by those in the Southern Territory, where Hood said the intent “is not to build as large of centers” in comparison to San Diego’s sprawling 195,000-square-foot center. And then there’s the fallout from Hurricane Katrina.

“Before Katrina, construction costs generally were around $165 a square foot, for quality construction,” said Southern Territory’s Getz, who said the average cost today is $200 per square foot.

Prior to Hurricane Katrina, the Army in Biloxi, Miss., was well on its way to earning a Kroc center. “Biloxi was an unusual situation because while Joan Kroc was alive she gave money and asked that a swimming pool be built. She died in the process of those planning days,” said Getz. Today, Biloxi’s Yankie Stadium – the planned location of the swimming pool and site of the proposed $22-million Kroc center – is Volunteer Village, a housing facility for victims of Katrina.

Getz said the Army will eventually build a pool using the $2 million gift Mrs. Kroc gave Biloxi. As for a center, “right now we’re not sure what the plan is for Biloxi.”

Each territory has a main focus; for the Southern units it’s the endowment. “Our philosophy in the South is we want them to run with very few problems for 30 years. Long-term security, that’s what we’re working on,” said Getz. To that end, the South has no deadlines. Of the 12 applicants, 10 are in the final stages and one, Atlanta, has secured its endowment and is awaiting city construction permits.  NPT

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