November 22, 2007
Can nonprofits rake it in with raffles?
Actually, probably not. The more likely scenario is that the grand prize winner of Kadima's first stab at a mega-raffle will take home a six-figure prize, and Kadima will net the same, depending on how many more of its 18,000 available tickets it sells. As of last week, Kadima had sold more than 4,000 tickets at $150 each, and was projecting more than doubling that number by the final drawing on Dec. 30. The deadline had originally been set for Nov. 22, but Kadima extended the raffle and has added more prizes as incentives.
Even with the extension, it seems unlikely that Kadima will reach the 15,000 tickets necessary to give away the house, as stipulated in the rules. Still, the pre-kindergarden through-eighth-grade school considers this first try a success: Many winners will walk away with the dozens of hefty cash prizes, the school will bring in money to support operations and scholarships, and the foundation will be set for a possible rerun next year.
"Once you put time and energy and effort into getting folks interested, then you have a brand," said Brian Hersh, the consultant Kadima hired to run the effort. "Now that we've gotten started, we'll do better next year."
A growing number of nonprofits are looking toward raffles with huge prizes -- generally a house, or a cash alternative -- as a way to bring in large sums of money. A sold-out home raffle would bring in more than $1 million for a nonprofit.
In 2001, a change in the California Penal Code made it legal for nonprofits to hold these kinds of mega raffles. The Palos Verdes Art Center ran the first home raffle in 2003, and has had one every year since then, this year giving away a $1.5 million cash prize, in addition to two BMWs and cash prizes ranging from $25,000 to $300 to more than 100 winners.
This year, Hersh estimates about two dozen nonprofits in Southern California are running home raffles, including the Irvine Public Schools Foundation, the Greater Los Angeles Big Brothers and Big Sisters, and the Pacific Film Institute.
The first Jewish organization to try it out, the Conejo Jewish Day School, last year held a million-dollar home raffle, but sales were low and the grand-prize winner took home $50,000.
As it turns out, in most cases the house ends up being little more than a gimmick.
Most first-year raffles don't sell enough to give away the house, and even when organizations sell all the tickets, in most cases the grand-prize winner opts for cash rather than the house. A real estate prize can be a complicated acquisition, even if the house's location and layout fit in with the winner's lifestyle.
The value of the house would be taxed as regular income, at 35 percent for federal taxes, according to Jonathan Gerber of Gerber and Company, an accounting firm in Century City. Throw in state taxes, and the winner can be looking at a tax payment of more than $400,000 due that year. For most people, that would mean taking out a mortgage to pay the taxes, plus potentially cashing in on a bit more of the home's equity to make mortgage payments, pay property taxes and see to the upkeep of the house.
A cash prize, simpler because it is liquid, requires the school to withhold 25 percent of the cash for taxes, and the prizewinner would pay their remaining tax obligation from their winnings.
And yet, it is the idea of winning a dream house that draws people in.
The most successful raffles are those where the it-could-be-me factor kicks in -- when the house is in a neighborhood like Beverly Hills, or even better, on the beach.
"I have a suspicion that it's all about the dream," said Hersh, who has run the sold-out Santa Barbara Contemporary Arts Forum raffle for two years and got Kadima started this year.
Most mega raffles use the formula of selling 18,000 tickets at $150, bringing in $2.7 million. Of that, $500,000 or more gets spent on expenses and prizes, about $1 million goes to the grand-prize winner (in cash or real estate), and the nonprofit takes in the rest. If all the tickets aren't sold, the nonprofit and the grand-prize winner go 50-50 on the after-costs take.
State regulations require that 90 percent of the gross -- after prizes are paid for, according to most interpretations -- go directly to the nonprofit. Nevertheless, Hersh estimates that expenses, including a massive advertising campaign, administrative costs and consultants, can run up to $300,000 to $500,000, which goes well beyond the limit allowed to cover costs. That means the nonprofit has to have other funds available to back up the expenses of running the raffle.
There are also complex State Department of Justice regulations to follow, some of which are still being interpreted to apply to this new field of real estate raffles.
Hersh emphasizes that the school or other organization's board has to be behind the effort, both to assume the financial risk and to mobilize the community to generate ticket sales. And, an organization has to be prepared to continue traditional fundraising efforts to cover the annual budget and capital costs for the school, while running the raffle.
Kadima's raffle, like most raffles, is offering early-bird giveaways, meant to spike sales as deadlines approach. It has already given away more than $50,000 to about a dozen winners, all of whom are still eligible for the grand prize. People who buy more than one ticket are entered into a drawing for a BMW Z4, and a $25,000 cash prize was added when the raffle was extended. With only a few-thousand tickets sold, the odds are pretty high to win a significant prize. The next early-bird deadline is Nov. 28.
But the big draw is still the grand prize -- $800,000, or a million-dollar house.