Long Term Planning And Growth

Establishing Reserves

Reserves are critical to the viability of fraternity housing. They are needed for three principal reasons: (1) regular capital improvement, (2) major renovation every 20 years and replacement in 60 years, and (3) coverage of short-term operating deficits caused by low chapter manpower. Capital improvement reserves (roof carpeting, heat and cooling plant, furniture, appliances, etc.) should be set aside at the annual rate of approximately 1.5 percent of the market value of the property. Major renovation and replacement reserves should be set aside at the annual rate of approximately 3 percent of the market value of the property. The market value should be re-determined every five years and is best based on replacement cost for purposes of reserve calculations.

The short-term operating deficit reserves should be set aside at an annual rate of approximately one-tenth of the annual rent charged by the chapter before adding on the operating reserve, and continue to be charged at least until one year's rent in total has been set aside. The reserves should be maintained as separate funds in the accounting records to make the administration of them simple and to allow for continual focus on their status. Interest (after taxes) should be added to each fund. Consult your accountant for any applicable set-aside requirements under the tax code.

Capital Improvements

Capital improvements should be planned for in accordance with suggested Capital Improvement Schedules. They should be part of the Business Plan and Budget of the house corporation, and should be funded from the capital improvements fund created by annual reserves set aside from rent revenues received from the chapter.

Replacement of Structure

Plan on replacement of the house in 60 years, with major renovations every 20 years. Because of the long-term nature of replacement, the Business Plan and Budget, and the reserves set aside generally will be focused on the setting aside of annual reserves for replacement or renovation in the future.

Changes in health and safety rules or zoning codes, rather than wear and tear on the house, may become the reason for a major renovation or replacement. Consequently, it is best not to focus solely on the physical wear and tear on the house to determine the adequacy of reserves and the timing requirements for expenditures.

Business Planning

A business plan, updated annually, is critical for the success of any house corporation. A well thought out, comprehensive business plan will be required in connection with most borrowing by the house corporation. It also is an excellent tool for communication among house corporation officers and directors, and a summary should be presented at the annual meeting.

Sources of Funding

The two principal sources of funding available for a house corporation, as with other businesses, are (1) equity, and (2) debt. The equity can be provided by member gifts or by investors who may, or may not, be members.

Information on programs to solicit gifts from members for the benefit of a house corporation is available through the Phi Kappa Tau housing and loan fund administered by the Foundation. Because techniques vary with times and situations, it is best to get the latest information and guidance available.

However, a general plan for house corporation capital campaigns is provided in Appendix A of this manual. Member gifts to a house corporation do not qualify as charitable contributions. Consequently, while a direct solicitation program may be successful, even though the gift is not deductible, it may be well to consider how the house corporation can benefit from funds raised as charitable contributions.

There are three relatively convenient organizations available to serve in this charitable capacity. They are (1) the Phi Kappa tau Foundation, (2) a Phi Kappa Tau Chapter affiliated with the Phi Kappa Tau Foundation qualified under Internal Revenue Code Section 501(c) 3, and (3) your local university or its foundation. If either the first or third of these is utilized, arrangements must be made in advance for a "restricted" fund within the charitable entity to be used for the purposes and requirements of the house corporation. Although the fundraising is from members and for the benefit of the house corporation, a charitable organization is required to sell, lease, or lend its assets consistent with its investment and asset management policies. Thus, the house corporation ultimately will be required to pay the charitable organization for the assets or for the use of the assets, and generally will not be able to control or receive these assets without arms-length, market-value compensation.

In reality, the use of a charitable organization enables members to receive a tax deduction, but the house corporation never gets the funds. The house corporation will obtain only the use of the funds or assets of the organization and must compensate the charitable organization for their use. Therefore, this is not equity, although the ability to subordinate the assets of the charitable organization to other conventional sources may make the overall acquisition and construction workable. Similarly, if investor equity were raised, the house corporation would be required to compensate the investor for the period of time that the investor's money was used.


Loans are available from a variety of sources. Procedures and requirements for applying for loans from the fraternity housing and loan fund are outlined in the Appendix of this manual. However, high demand limits availability for these loans.

More conventional sources are banks, savings and loans, insurance companies, pension funds, and other sources which may be identified by a mortgage broker. It may be possible to arrange a mortgage that will be packaged with other Greek housing mortgages in a mortgage pool, and sold either to alumni, investors, or a combination. Contact the Executive Office to obtain information on the availability of such mortgage pools.

It may also be possible to borrow from one of the charitable organizations mentioned, or to take advantage of bond funding available through them or some governmental body. Generally, the loan underwriting criteria will require substantial equity, a first mortgage
position, or a combination before the loan will be approved. These underwriting criteria generally will dictate how the equity vs. debt components of the total funding requirements must be structured.


A variety of lease arrangements, including land, house, or both, perhaps with a purchase option, if desirable, may be available from the university or its foundation or another private party. If a purchase option exists, plans should be implemented to assess the desirability of exercising the option, and also to determine the manner of funding and the timing of the exercise of the option.


A university or its foundation's guarantee or a Fraternity guarantee of a loan or lease may make some situations workable, when they would not otherwise be possible.

Joint Ventures/Partnerships

Joint ventures/partnerships equity will be mandatory in structuring many funding needs. As discussed, equity can be provided by direct, but not deductible gifts to the house corporation by members and to some extent a form of "quasi-equity" can be provided by subordination of some lender positions to those of the principal lender. However, often more equity is required. Two major sources, other than member direct gifts, are available. These are (1) the Fraternity and (2) private investors, who may or may not be alumni, or entities controlled or owned by alumni.

In either instance, a partnership would be created —- with the local house corporation,
International Fraternity and the investors, if any, as partners. Over time, the investors, if
any, would receive their investment back, plus a pre-agreed-upon return on that investment. The local house corporation would receive its investment back and would operate the house. The International Fraternity would receive the balance of the equity.

With a partnership, ail of the assets and liabilities related to the house would be on the books and records of the partnership. Books and records of each partner would contain only that partner's investment in the partnership.

The partnership would stand in the position of the house corporation, with respect to all matters generally referred to as applying to a house corporation, and would be entitled to both the benefits and responsibilities of said house corporation.

Did you find this information useful? Do you feel you can improve upon it? Are you an expert in another area? Join the site and edit or create new resources for Phi Kappa Tau.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License

SSL configuration warning

This site has been configured to use only SSL (HTTPS) secure connection. SSL is available only for Pro+ premium accounts.

If you are the master administrator of this site, please either upgrade your account to enable secure access. You can also disable SSL access in the Site Manager for this site.