GRANT AGREEMENTS BETWEEN FRATERNAL ORGANIZATIONS AND AFFILIATED FOUNDATIONS – THE TEN MOST COMMON MISTAKES

Barbara Schwartz Bromberg, Dinsmore & Shohl LLP

Introduction:

Everyone reading this article is probably familiar with the general guidelines that have been well known in the fraternal organization world since the issuance of the Excerpts from the Phi Gamma Delta case several years ago, to the effect that when a charitable foundation affiliated with a fraternal organization makes an educational or leadership grant to its affiliated fraternity, there needs to be a written grant agreement in place supporting such grant. Such grant agreements should be similar to those that would be entered into by an organization seeking a grant for a specific purpose from another non-related charitable organization. Therefore, such grant agreements, at a minimum, should contain a complete description of the program for which funding is sought, a budget for completion of the program, provision for followup reports, should be approved by both Boards and executed by both parties, and should provide for the return of any funds to the foundation that are not expended for the purposes of the grant. In reviewing numerous examples of grant agreements entered into between fraternal organizations and their related foundations, this author has seen certain errors that occur frequently in the drafting and implementation of such grant agreements. This article will highlight these types of mistakes and how they can be avoided.

10 Most Common Errors in Grant Agreements:

1. Using a grant agreement instead of a reimbursement agreement –While grant agreements  are the accepted  form of documenting an educational or leadership grant to a fraternal organization from its related foundation, there are some situations where they should not be used. For  example, when a foundation is paying its fraternal organization for salaries or other overhead expenses that it has obtained from the fraternity, no grant agreement is necessary. Rather, these types of reimbursements should be covered under a written reimbursement agreement. Similarly, when scholarships or grants are made to individuals or to other Code Section 501 (c)(3) organizations, no grant agreement is required (although it may be optional or other types of documents may be used).
2. Too many grants covered by one grant agreement –­ This is a very common error. It is this author’s suggestion that there be one grant agreement for each grant. While it may well be possible to have a grant agreement that clearly sets forth several different grants and includes all of the required documentation for each grant, it is much more likely that the grant agreement will be insufficient if it contains several types of grants. It is also important to separate the grants into individual grant agreements for ease of under­standability. Therefore, unless there are very special circumstances, it is best not to group different grants in one grant agreement.
3. Grant agreements should be in place for all grants to non-Code Section 501(c)(3) organizations — Another commonly made mistake is for an organization to ensure that it has proper grant agreements to cover all grants made to its related Code Section 501(c)(7) organization, but fails to do so for grants that it makes to other non-Code Section 501(c)(3). This would include local chapters or house corporations as well as unrelated non-Code Section 501(c)(3) organizations. The guideline as to the necessity for such grant agreements is also valid as to non-related non­-Code Section 501(c)(3) organizations as well.
4. Complete explanation of educational purposes -­- This author has reviewed numerous grant agreements where the ” uts and bolts” of the grant are clearly and sufficiently described — e.g., how many persons will attend an event, where a conference was to be held, the dates of the confer­ ence and the like, yet the basic educational purpose of the grant was not explained at all or not explained adequately. An example would be where the rationale for the grant did not contain an explanation of the topics to be covered at a conference and how these topics would help educate the membership or chapters of the organization. It is important to remember that the Internal Revenue Service, while want­ ing to see the supporting information as to logistics, is more interested in the underlying educational purpose of the
5. Amendments — It is often the case that after a grant agreement is entered into between the two organizations, an additional need relating to the original grant becomes appar­ ent. Therefore, the organizations wish to change the original grant, either to increase the funding or in some other fashion. It is acceptable to have an amendment to a grant agreement as long as such amendment follows the same rules and for­ mat as the original grant agreement. However, when draft­ ing such amendments, it is important for the organizations to clearly explain the relationship between the amendment or subsequent grants to the first grant so that a question  does not arise as to why the entire situation was not covered  in one grant
6. Board approval and execution — as indicated above is very important that each Board approve the entrance into particular grant agreement and that such approval appears in the corporate minute book of each organization. The authorized officer of each organization should then execute the grant agreement on behalf of his or her respective organization. An execution copy of each grant agreement should be retained in the records of each organization.
7. Recoupment of unallocated expenses — As  indicated above, it is important that such grant agreements provide that if the fraternal organization does not expend all of the funds granted in achievement of the grant purposes, any excess will be refunded to the foundation. Whenever this occurs, such funds should actually be returned to the foundation, not carried over to the next year or applied to another grant.
8. Follow-up reports — As indicated above, all grant agreements should have incorporated therein a provision requiring follow-up reports, whether quarterly or one time, depending upon the nature of the grant. Probably the most common error that I have seen in the course of my review of such grant agreements is that complete follow-up reports are not obtained for each and every grant. This is very important.
9. Avoiding the use of internal terms –While it is understandable that in preparing grant requests and rationales, the organizations may employ internal terms for items or use acronyms for programs, they should bear in mind that an important purpose of the grant agreement is to describe the substance of the grant to a third party who has no prior knowledge of the organizations. It is therefore always best to avoid use of such terms or acronyms and when they must be used, to explain them fully.
10. Supporting information — Most grant agreements require additional grant supporting documentation other than the request rationale and a budget. For example, if a request is made by a fraternal organization to its affiliated foundation for funding for a certain program which is designated by the fraternity to be 50% educational in content, there must be an explanation and supporting documentation as to how this percentage was reached. Such supporting documentation might include counsel’s opinion, a summary of time logs, or other data, but this is a very important item to be attached to the grant

Conclusion:

As indicated above, these are some of the most commonly made errors in drafting and implementing grant requests between fraternal organizations and their related foundations. Since these comments are necessarily somewhat general, it is recommended that each organization consult with its own advisors for guidance in preparing and implementing its grant agreements or for specific advice with reference to particular issues as they arise.