This article was written by Alex Mayyasi, a Priceonomics staff writer

Raffling off a house in San Francisco—a city of skyrocketing rents and homes that sell above the asking price—is a bit like promising a desert dweller a lifetime supply of water.

But the billboards and advertisements around San Francisco are no mirage: someone really is raffling off a “San Francisco dream house.” An organization holding a lottery will pick the winner of an eight-bedroom, three story house on Friday April 29.

Normally it is illegal for anyone other than a local government to hold a lottery. The city of San Francisco does raffle off spaces in affordable housing as they become available—at no cost. But the Dream House Raffle is not run by the city.

Instead the organization raffling off a mansion in San Francisco is—bizarrely—a nonprofit that organizes dance performances, art shows, and film screenings: the Yerba Buena Center for the Arts. Raffle tickets cost $150.

Yerba Buena is not the only nonprofit raffling off expensive homes. Organizations are raffling off cars and homes by taking advantage of a loophole in California law—a loophole that allows Yerba Buena to raise around $4 million by selling $10 million in raffle tickets. Nonprofits in other states with similar laws have done the same.

The marriage of charity and gambling has raised tens of millions of dollars for nonprofits. Is that a good thing?

An Unintended Consequence

Dream House Raffles in California owe their existence to a legal loophole, and holding one requires a level of legal dexterity that we rarely associate with nonprofits.

When Californians voted to allow nonprofits to hold raffles, the idea was to sanction the type of modest fundraisers that nonprofits regularly hold: raffles where supporters of a local organization try to win small prizes like donated baseball tickets or homemade cookies.

Until 2000, these raffles were actually illegal. Legally, raffles are indistinguishable from lotteries, and as is the case in many states, California banned all lotteries except the state lottery.

(When companies like Coca Cola hold sweepstakes, they get around these restrictions by giving raffle tickets to anyone who asks for one—hence the “no purchase necessary” disclaimers you hear in ads.)

In 2000, Californians voted on and passed an amendment to the state constitution to allow nonprofits to hold raffles. As a Californian deputy district attorney explained at the time, the idea was to avoid the common situation in which police theoretically should “shut down the Boys and Girls club” for holding a small raffle.

To prevent nonprofits from turning into lottery companies, the amendment included some restrictions. In California, nonprofits that organize raffles must be at least a year old, report the financial details to the state, and spend 90% of the raffle proceeds on the organization’s programming. (Professional lotteries typically give away 50% of the raffle proceeds as prizes.)

This last restriction would seem to limit nonprofits to raffling off donated items. Yet the Yerba Buena Center for the Arts has held a Dream House Raffle annually for eight years, and no one is donating a house. In 2014, the last year for which data is publicly available, Yerba Buena sold $3.6 million in tickets but spent $5.7 million on running the raffle and giving out prizes.

So how do they do it?

“It’s more of a bookkeeping thing than anything else,” says Brian Yacker, who advises nonprofits as the managing partner of YH Advisors. Nonprofits like Yerba Buena spend 90% of the money from the raffle tickets on their charitable work and use money they’ve raised from other sources to pay for the prizes, advertisements, and other expense. By doing so, they follow the letter of the law.

In an email, Charles Ward, the Chief Development Officer of Yerba Buena Center for the Arts, confirmed this. “Raffle expenses are budgeted as a part of our general operating expenses each year,” he writes, “so we are always in compliance with the state's 90/10 rule.”

In other states, no loophole is required. Tennessee law, for example, only requires that 25% of the raffle proceeds go toward charitable causes; in Minnesota, it’s 40%. Massachusetts law just states that a “reasonable” amount of the proceeds should fund the nonprofit’s work.

This year's dream house, which is located in the St. Francis Wood neighborhood of San Francisco. Photo courtesy of the Yerba Buena Center for the Arts.

Even with the advantage of amenable state law, it’s no mean feat for a nonprofit with a budget of $15 million to hold a $10 million raffle—as in the case of Yerba Buena. That’s where some fancy legal work comes in.

Yerba Buena does not buy a house every year, and it is unlikely that it has ever given away the dream home that it advertises on fliers and billboards. Instead, as SFGate has reported, the organization finds someone who is trying and failing to sell their expensive home. The homeowner signs a contract with Yerba Buena agreeing to potentially sell their house, which would allow the nonprofit to give it to the winner of the contest.

But no one ever takes the dream house—for two reasons. One is that Yerba Buena protects itself by writing into the fine print that contestants can only win the dream house if Yerba Buena sells a minimum number of tickets. (A practice that the Better Business Bureau has criticized.) The other is that the grand prize winner can instead choose a cash prize equal to 50% of the raffle proceeds.

Since taking the dream house comes with a big tax bill, winners always choose the money. SFGate failed to find any winners who moved into the San Francisco dream homes, and this seems to be the case nationwide. “I believe that with most, if not all, [dream house raffles] around the U.S., the winner takes the cash,” says Brian Yacker, a lawyer who works in nonprofit law. “I don’t recall a winner taking the house.”

This is more or less the the formula for raffling homes or expensive cars: optioning the grand prize, advertising it with an asterisk about selling a minimum number of tickets, and ultimately giving out cash rather than the house. “That’s the only way I’ve seen it done,” Yacker says.

No one knows how many nonprofits run big ticket lotteries. Nonprofits have to report to the state when they hold raffles, but multimillion dollar raffles are hidden among the many modest raffles run by churches, high school booster clubs, and other small organizations in each state’s database. The office of the California Attorney General declined to offer any data on the number of dream house raffles.

But these raffles put up numbers approaching that of real lotteries: Yerba Buena sells close to $10 million of lottery tickets each year. A dream house lottery in Illinois awards a $1 million grand prize. Special Olympics Southern California has earned $4.5 million from three dream house raffles.

And these raffles’ size entail the risk that nonprofits’ raffles will come with all the downsides of gambling.

Gambling for a Cause

Although it seems odd for an arts center to run a multimillion dollar gambling operation, it’s no more odd than states outlawing gambling except their own $40 million jackpot lotteries.

Nonprofit raffles like Yerba Buena’s Dream House giveaway fit into an American tradition of turning to gambling to raise money for causes people don’t want to pay for. When the American War of Independence began, the Continental Congress tried (unsuccessfully) to fund it with a $10 million lottery. Due to early Americans’ opposition to taxation, all 13 colonies held lotteries to raise revenue and finance the building of churches, infrastructure, and most Ivy League Universities.

“Playing the lottery,” researcher and consultant Roger Dunstan wrote in a study of gambling, “became a civic responsibility.”

Today, Americans do not regard buying state lottery tickets as being a good citizen. But the justification for state lotteries and the occasional casino remains that it will fund good works. Often they are presented as a way to augment school budgets.

It’s an odd justification—by the same logic, states could monopolize the sale of cigarettes, heroin, or beer to raise money for schools and parks.

The homepage for the Dream House Raffle organized by the Yerba Buena Center for the Arts

Yet the most common objection to state lotteries is that they are a “tax on the poor.” The poorest and least educated Americans buy the majority of lottery tickets, spending 5% of their income on tickets. We expect the government to protect the vulnerable from payday loans and hidden credit card fees. Yet state governments run lotteries that tempt those same people with taglines like “Give your dreams a chance!”

So does Yerba Buena’s raffle depend on the same ugly phenomenon?

According to the center’s Chief Development Officer, Charles Ward, it does not. Ward says they target high-income people—since the raffle tickets cost $150—and look for signs of over-buying.

Based on our unscientific sampling of San Franciscans, we’re skeptical of his claim that “it's pretty well-established in the minds of the public that the raffle is a fundraiser [for Yerba Buena].” Putting up billboards and bus ads that exclaim “Win a dream house!” and that do not highlight the center for the arts feels worrisome, especially since San Franciscans are being priced out of the city.

But $150 is not the right price point for attracting low-income customers like the state lottery, and we did use public documents to corroborate that most raffle participants are high income.

When Californians voted on the amendment that legalized raffles like Yerba Buena’s Dream House Raffle, opponents said that its passage would allow the rise of sham nonprofits that exist to run gambling fundraisers. The Yerba Buena Center for the Arts, however, is no faux charity. It is an established nonprofit that runs a prominent community space and received $3 million in funding from the city in 2015. And its raffle seems more focused on wealthy patrons than the financially vulnerable.

That said, a lot more fundraising money is being spent on billboards and cash prizes than California law ever intended.

Your Philanthropic Dollar

If you donate a dollar to charity, or buy a box of Girl Scout cookies or a Yerba Buena raffle ticket, how much of that money do you expect to go toward a nonprofit’s cause?

When Californians voted to allow raffles, they expected 90% of the proceeds to go to charity. The fact that legal maneuvering makes it possible to spend most of the money on prizes and running the raffle—60% to 80% in the case of Yerba Buena—violates this expectation.

It’s hard to say whether too little money is going to charity in this case. Attorney generals, journalists, and the public have heaped scorn on professional fundraisers who hire telemarketers to dial for donations while only giving 10% or less of that money to charities.

But in that situation, people feel misled because they thought they were giving a direct donation. Most participants in Yerba Buena’s raffle probably would not be shocked to learn that a good chunk of their $150 raffle ticket goes toward the cost of the $4 million cash prize. And since the cost of raffle tickets is not tax-deductible, taxpayers are not subsidizing these fundraisers.

Most fundraisers have significant costs. When nonprofits hold $100-a-plate fundraisers, at least a quarter of that money is spent on organizing a fancy dinner. When the Girl Scouts sell cookies, no one is outraged about how much of the cost goes toward making Thin Mints.

“We’re always a little wary of setting a specific goal,” says Nancy Berlin of the California Association of Nonprofits, “because sometimes there’s a reason to run a charity event even if it doesn’t raise money. Because it builds your donor list and community.”

Legally, says Brian Yacker, an expert on nonprofit law, there are no standards on how much of the money nonprofits raise should be spent on programming. There’s not even an agreed upon definition of programming expenses, and many nonprofit leaders have criticized the tendency to look at a nonprofit’s “overhead”: how much money is spent on fundraising and administrative costs.

“You should really look at an organization's track record over time,” says Berlin. “Is this organization doing something that looks effective and is a good use of the money that it raises from the public?”

An inside view of the 2016 Dream House. Photo courtesy of the Yerba Buena Center for the Arts.

Of course, unlike selling Girl Scout cookies or holding fancy dinners, raffles involve gambling, a practice that has an odd legal status (banned except for cases when it’s deemed in support of good causes) and moral status (seen as morally wrong, yet incredibly common).

In fact, the California Association of Nonprofits recently opposed legislation that allows sports teams to hold charity raffles at games where 50% of the proceeds can be given away as cash prizes. When we spoke to policy director Nancy Berlin, she was unaware that nonprofits like Yerba Buena already award cash prizes worth 50% of the raffle proceeds.

“The original reason for the 90-10 raffle rule—and having those raffles just for nonprofits—is because it’s not gambling but a fun way to support nonprofits you want to support,” says Berlin. “Once you move away from most of the money going to charity, it looks more like gambling.”

***

There is something admirable about Yerba Buena’s Dream House Raffle.

Every nonprofit spends a lot of time conducting and worrying about fundraising, and that is time that could be spent on the nonprofit’s mission. The Yerba Buena Center for the Arts identified a new revenue stream and has done well at it. It now raises more money from its raffle than it receives from individual donations or from the city of San Francisco.

But novel fundraising strategies have a history of abuse—a fact demonstrated by the case of car donations.

Since the U.S. government wants to incentivize people to support charities, federal law allows Americans to get a tax write-off if they donate old clothes to Goodwill, an old boat to oceanography researchers, or a used car to Meals on Wheels. But beginning in 1978, nonprofits began asking people to donate cars, often by placing ads touting the tax advantages, and selling the cars to raise funds.

This has been a nice fundraising strategy for some nonprofits, but the strategy created a multibillion dollar industry of faux nonprofits and private fundraisers that subsist exclusively on car donations. Many give less than 5% of the money they make from donated cars to charity because they pay their executives high salaries or use all the funds paying for advertisements.

If you’ve heard the Kars 4 Kids jingle on the radio, which suggests that money from donated cars will benefit disadvantaged children, you should know that the organization actually spends tens of millions of dollars on private religious education.

The best example of a dream house raffle flirting with abuse is the Naperville Rotary Charities’ House of Dreams Raffle. In 2007, the Chicago Tribune reported that less than 10% of the ticket sale money went to charities. The Rotary Club paid much of the proceeds to advertisers and companies hired to run the raffle, including a marketing firm co-owned by the son of one of the raffle organizers.

The Rotary Club raffle continues today. It is highly advertised and offers a $1 million cash prize. Yet an article written by former presidents in 2014 boasted that the organization—between all its fundraisers—had donated $300,000 to charity over the past 5 years. This suggests that it’s giving even less of the raffle proceeds to charity today.

Whether it’s put to good ends or abused, however, nonprofits will likely remain interested in holding lotteries. When we asked Brian Yacker, the nonprofit law expert, about raffle fundraisers, he said that he thought they were a good fundraising tool, although he warns nonprofits that the regulations surrounding gambling are strict and hard to comply with.

He also said that he had not encountered any moral opposition to raffles as legalized gambling among nonprofits.

“If it’s legal way to raise revenue,” Yacker says, “they’re all over it.”

Our next post investigates why salespeople keep sending you the same email over and over. To get notified when we post it → join our email list.

If you’re a company that wants to work with Priceonomics to turn your data into great stories, learn more about the Priceonomics Data Studio.