The camp industry is currently grappling with two crucial questions: Are we obligated to give refunds if camp doesn’t open? Regardless of our answer to the first question, how will we address the unprecedented financial impact of COVID-19?
Many camps have flexible refund policies which are based on years of the same experience: namely, a handful of enrolled families cancel for various reasons, while most families maintain their enrollment.
Refund policies which anticipate, for example, 6 out of 400 families canceling in a particular year completely break down if all 400 families cancel in a particular year.
When those outside the industry look at camp, they see a summer experience in a vacuum; thus the common question, “What do you do all year?” This leads to a perception that camps don’t “earn” the tuition revenue until delivering camp. However, as camp professionals know, the reality is that providing the summer experience requires extensive year-round planning and corresponding year-round spending.
Fixed Costs and Year Round Costs
Studies of the industry show that a typical camp’s annual fixed costs are roughly half of the camp’s total revenue. These year-round costs are incurred regardless of whether camp actually opens for the summer.
Let’s consider a camp with a $2 million annual budget. Roughly $1 million of that budget goes into fixed costs. Without these fixed costs, the camp could not open, but crucially, the camp incurs these costs regardless of whether the camp opens.
When families pay tuition to a camp in September, that money is usually being spent from the moment it’s received on all the things that are essential to delivering the summer experience: year-round staff; facilities and payroll taxes; summer hiring; planning and booking various elements of the program; facility renovations; and so much more.
This is why, if 6 families ask for a refund, it’s no problem – we’ve build it into our budgets – but if 400 families ask for a refund, many camps simply don’t have the money. It’s been spent to plan and deliver a summer experience, which nobody imagined would not take place.
The Doctrine of Impossibility
This brings us to a key legal principle called the doctrine of impossibility. The doctrine of impossibility frees a party from performing its obligations under a contract when a drastic change in circumstances occurs that the parties could not have reasonably foreseen when the contract was made. In other words, a camp’s contract with families, and the specific provision regarding refunds, is based on the unspoken assumption that camp will open.
At the time we entered into those contracts, it was completely unforeseeable that camp would be prevented from opening by a global pandemic. In light of this fundamental change in circumstances, it would be impossible to refund money that has already been spent to prepare for the summer experience.
Of course, camps should also check the actual terms of their contracts with families: Are refunds explicitly prohibited? Are refunds prohibited after a certain date? Does the contract have a force majeure clause?
Is my camp legally obligated to return payments?
However we get there, let’s make the assumption – and granted, it’s a significant assumption – that camps are not legally obligated to return payments. Even if that’s the legal outcome, does it align with business necessity?
To most camp professionals, the answer is obvious: Our relationships with families are the foundation of our business. Regardless of legal obligations, we can’t leave families unsatisfied with how we handled things during these unprecedented times.
Taking the long view, one of the most important factors in weathering this storm is keeping our families happy.
With that in mind, what should camps do?
A handful of camps will be in a position to give every family an immediate refund. That’s certainly the simplest option. However, for most camps, giving every family an immediate refund lies somewhere in the range of highly challenging to categorically impossible. Simply put, it would put most camps out of business.
What are the win-win options that work for camps and also work for families?
The starting point is moving all enrollments to the summer of 2021. From a budget standpoint, those enrollments become next year’s revenue, but from a cash flow standpoint, camps will have some money in the bank.
If this is presented to families using the right messaging, then perhaps only a small number of families will still push for refunds. Depending on that number, a camp might be in a position to give refunds to those who ask. Many camps will also tell families that the refunds will come at some point in the future when camp recovers from the economic impact of current events.
Even if the majority of families agree to move their enrollments to 2021, this still leaves the question of paying the bills between now and then. One year of revenue certainly won’t come anywhere close to covering two years of expenses; and again, the deferred enrollments are next year’s revenue anyway. What about this expenses we’ve already incurred this year? What other sources of revenue can camps rely on?
Small Business Loans
The Small Business Administration has made low interest disaster relief loans available for economic injuries stemming from COVID-19. Borrowers can access up to $2 million with a long repayment window. This might be one of the best options to help weather the storm.
Also, the recently-passed CARES Act includes the Payroll Protection Program, which provides unsecured, forgivable loans to small businesses to cover payroll and other essential expenses for the next few months. Certain bank lenders have also made clear that they will defer loan payments and make additional financing available to camps.
Nonprofit camps have the option of applying for various grants and seeking contributions from private donors. They can also ask families to donate their tuition to camp (or donate some portion of it). These efforts will likely still need to be supplemented with loans due to the significant financial need coming out of this crisis.
Other Sources of Revenue for Camps
Finally, camps can look for sources of revenue that wouldn’t exist in a typical year.
Using Your Camp as a Retreat Center
For example, camps may be able to open for retreats on August 1st, assuming the containment of COVID-19 does not allow camp to open in July but does allow events to move forward later in the season. August is a huge month for retreat centers. By contrast, since most camps are still operating camp in August, they typically can’t take advantage of its potential for rental groups. This year, they might be able to. As we gain clarity about the timeline of quarantines being lifted, camps might think of similar ideas that wouldn’t be available in a typical year.
As most camps have already learned, insurance likely does not apply in this situation. Communicable diseases are generally carved out of business interruption policies. If camps have a separate communicable disease policy, the policy is likely too small to address the fallout from COVID-19 – because most camps did not imagine a global pandemic when buying those policies. Check if your registration software offers a Protection Policy that covers cancellations due to illness, including COVID-19.
In any event, the communicable disease policies tend to apply only if camp closes because of an outbreak of a communicable disease at camp. They’re not generally triggered by an event in Boston or Manhattan that impacts enrollment at a camp that’s hours away. However, every policy is different, so be sure to check with your insurance provider about your specific policy.
There is currently a legislative push for insurers to provide COVID-19 coverage even though it’s not part of the original policies. This is something to watch. Along the same lines, the federal government has been aggressive in implementing financial relief measures for individuals and businesses. Forthcoming legislation might provide additional relief.
Isaac Mamaysky is a Partner in Potomac Law Group, where he represents camps and many other businesses. To reach Isaac, you can call 212-531-5050 or email email@example.com. Learn more about Isaac here.