Cash-hungry college sports programs are starting nonprofits to make money to stay competitive

NEW YORK (AP) — University of Louisville athletic director Josh Heird says there is no “silver bullet” that will help his department’s current revenue race.

To compete in the increasingly commercialized world of college sports, programs of its size might spend more than $40 million a year on talent acquisition, revenue sharing and other costs, according to experts. But just five of Louisville's 23 sports generate any revenue, according to the athletic department. Only football and men’s basketball turn profits.

Louisville, like a growing number of major conferences ′ public universities, is trying to narrow that spending gap and its supporters are trying to help by creating a new organization to oversee everything from third-party multimedia deals to hospitality packages.

This spring, Louisville launched Cardinal Ventures, a nonprofit designed to help the athletic department leverage its brand to generate new revenue streams, all to keep pace with the multibillion-dollar market around compensating athletes for the use of their name, image and likeness .

“We live in a highly, highly competitive environment and industry,” Heird said. “And if there’s anything that anybody can do to try to create even the smallest sort of competitive advantage, then they’re gonna look to do that.”

The University of Kentucky also has a revenue-raising nonprofit. The University of North Carolina is actively discussing a limited liability company. So, too, is Louisiana State University .

There’s “feverish” interest from higher education in these offshoots, according to Clay Grayson, whose South Carolina law firm designed Clemson University’s in-house venture. There’s also scrutiny from Congress . Widespread privatization could further transform universities into profit-driven businesses resembling professional sports franchises, weaning them off fatigued donors and opening the door to private capital.

“Governmental universities don’t do commercial very well,” Grayson said. “Those nonprofits are the ones that kind of can get out into that space.”

Record high gifts underscore the spending spree. Virginia Tech touted an “unprecedented” $75 million commitment intended to “ensure a strong start” for its nonprofit Hokie Ventures. Michigan State bolstered its athletic department with a $401 million contribution that included an investment in its own Spartan Ventures.

Louisville’s Heird said he frequently finds himself discussing these new organizations with peers as they all look to boost their bottom lines.

At his school, he has found some “low-hanging fruit” with concerts. Louisville’s 60,000-seat football stadium largely sits dark outside of home games.

Country music star Zach Bryan recently lit up the field. The rapper Ludacris headlines an upcoming hip-hop billing. Planning is already underway for next year’s shows — each of which could bring seven-figure profits for the hosts.

These new efforts may not provide a “silver bullet,” but they do offer new revenue and something many athletic directors may value even more — more control.

The nonprofits and LLCs offer greater flexibility to crack the financing puzzle than the previous system. Bureaucracy can drag decision-making out for months. Key components of the fan experience — tickets, parking, merchandise, concessions— are often outsourced to vendors they don’t fully run.

“There is an unstoppable train that is college sports," said Jason Belzer, a Sequence Equity partner who advises schools on NIL deals. "The reality is that you need to create new platforms and paradigms to be able to successfully operate a business that no longer really sits with the original mission of college athletics -- at least at the higher levels.”

Everything is on the table for Syracuse University. Athletic director Bryan Blair sees an opportunity to corner New York's college sports market. It's the state's only Power Four conference school. And all five ticketed sports play under a 50,000-seat dome that brings what he called a “big state school feel."

The question is how to build a “commercial engine,” Blair said, whether it exists within his department or outside it.

“We’re trying to educate young people, give them a great experience. We’re trying win on whatever day of the week it is for whatever competition it is. We’re trying to be great stewards and ambassadors for our university,” Blair said. “But to do a lot of those things requires more revenue than ever before.”

Commercial affiliates aren't new to higher education. Some universities use them to monetize drug patents or manage copyright.

Take the University of Kentucky, believed to be the first school to convert its athletic department into a limited-liability holding company. Trustees already managed separate health systems through a not-for-profit that was primed to take ownership of its athletics offshoot.

Athletic director J Batt, who recently joined the Wildcats from Michigan State, expects these formations will become the norm rather than an exception. “And everybody will do the one that’s right for your campus,” he added.

Grayson, the legal architect behind many such models, said he mostly hears from members of the Power Four. Those 67 schools tend to be the only ones with large, competitive enough programs to spend beyond the revenue-sharing cap of $21.3 million this year. His firm has helped create affiliated entities at an estimated one in seven schools competing in the Southeastern Conference, the Big Ten, the Atlantic Coast Conference and the Big 12.

His model strays from the traditional nonprofit. He proposes smaller, seven-person boards in order to expedite decision-making. Some of the athletic ancillaries even own for-profits that handle taxable activities such as stadium concerts.

Another big difference: they’re not registered to fundraise because their focus is programmatic revenue. He recommends aligning these new ventures with existing fundraising organizations — like “two pedals of a bicycle.”

“If you get them moving in sync, you’ve got a powerful, powerful motor," he said.

It remains to be seen whether these new entities will alleviate donor pressure to bankroll costly football programs. Moreover, they raise the same question that murky NIL collectives did: what is the charitable purpose of an institution whose main goal is to generate more revenue for athletics?

The Internal Revenue Service decided many nonprofit NIL collectives were erroneously given charitable status. They served players, not the public good, so their activities were likely not exempt from taxes .

These affiliates are similar, in the view of an NIL tax consultant who previously worked at the IRS. Thad Madden, who studied NIL compliance issues for the agency, said he doesn't see any “charitable connotation."

“It's to serve the financial interest of the athletes so that they make the most possible money with the goal of putting the best team on the field,” Madden said.

That financial interest has fatigued donors, according to consultants who advise schools on issues of NIL. They're fielding more athletics solicitations even as universities continue fundraising for student scholarships, research projects and other functions.

It used to be that development officers could leverage donor interest in athletics to direct some funds towards academics. That's not so nowadays, according to University of Pennsylvania professor Karen Weaver, a former athletic administrator who studies the evolving college sports landscape.

“Athletics doesn’t have a revenue problem. It has a spending problem," Weaver said. "So, whatever dollar they bring in is gonna be spent on trying to get an advantage in athletics.”

Associated Press coverage of philanthropy and nonprofits receives support through the AP’s collaboration with The Conversation US, with funding from Lilly Endowment Inc. The AP is solely responsible for this content. For all of AP’s philanthropy coverage, visit https://apnews.com/hub/philanthropy .