Program related investments (PRI) are loans, loan guarantees, or other types of investments made by a foundation to support a charitable purpose. They’re also a powerful and flexible tool to add to your foundation’s toolkit. A PRI can count toward a foundation’s distribution requirement if it meets the following federal criteria:
- They serve a charitable purpose. A PRI’s primary function must be to further the foundation’s charitable purpose.
- Income or appreciation of property is not a significant purpose. An investor solely interested in profit would not make an investment on the same terms.
- They don’t go directly or indirectly to lobby or political campaign purposes. Like grants, however, PRIs may fund voter registration, voter education, and advocacy within legal guidelines.
Foundations can make PRIs to any organization that advances the foundation’s charitable purpose, including a for-profit enterprise. However, if the recipient is not a public charity, the foundation must exercise expenditure responsibility. This is a set of procedures defined by the IRS to ensure that a grant serves charitable purposes.
Greg Cantori, former executive director of the Marion I. & Henry J. Knott Foundation in Maryland, encourages small foundations to consider PRIs:
“Try it! We didn’t need any special staff or training, and we found the process to be the most rewarding of all our charitable activities because we met grantees where they were—in great need.”
Common program related investments
The following are three of the most accessible types of PRIs:
1. Investing in intermediaries
Intermediaries offer a relatively easy way to make PRIs—that is, by investing in organizations that specialize in loans or other investments to advance charitable purposes. The most common intermediaries are community development financial institutions (CDFIs), which include banks, credit unions, loan funds, or venture funds that make investments in disadvantaged communities. CDFIs can allow you to make PRIs almost as easily as making deposits to a bank account. Look for intermediaries with expertise in the field in which you’re interested.
2. Making loans
Loans are the most common PRIs among foundations of all sizes. Although loans require more time than investing in intermediaries, Exponent Philanthropy members report that small and simple loans are manageable and do not require special skills or much additional time.
Loan terms may vary based on borrower’s and foundation’s needs. Time frames for payback can range from a few months to more than 15 years, and the IRS requires that rates of return be below market. Experienced PRI makers report that PRI borrowers rarely default: According to the Foundation Center, overall repayment rate on PRI loans is more than 90%. If a borrower does default, the loan essentially becomes a grant.
3. Guaranteeing loans
A loan guarantee is a promise that a foundation will repay an agreed-on portion of a loan if the borrower defaults. Loan guarantees are powerful tools at little to no cost if the borrower repays as promised. A foundation may use a loan guarantee to induce a bank to provide a loan that advances the foundation’s charitable purpose. Borrowers also use guarantees to get a loan at a lower interest rate than otherwise would be available. Guarantees involve less time and effort than making loans because the bank serves as the direct lender and administers the associated billing and tracking.
Benefits of PRIs
PRIs can engage grantmakers and grantees in a true partnership that allows both to leverage even modest funds for tremendous impact.
For foundations, PRIs can:
- Recycle funds—They do so by returning principal and, in most cases, a modest amount of interest income. Note: As principal is repaid to the foundation, the entire amount must be redeployed as other PRIs or grants, unless the foundation has been distributing more than its required 5% annual distribution requirement.
- Leverage other funding—With a PRI, you can leverage other funding for projects you want to be successful. Showing your confidence with a PRI increases the likelihood of other funders getting involved and also helps organizations to attract traditional lenders.
- Manage your distribution requirement—If your foundation experiences a sudden growth in assets or you’re taking time to revamp your grantmaking strategy, investing in an intermediary can be an easy way to meet your annual distribution requirement.
“PRIs gave us another set of tools in situations where a grant may not fit,” says Pam Baker, former executive director of Woods Charitable Fund in Nebraska. “They expanded our options while preserving the resources that made it possible to grant or lend another day.”
For grantees, PRIs can:
- Bridge funding gaps. PRIs can help when promised funding from other sources has yet to arrive.
- Increase access to, and lower the costs of, financing. PRIs can do both in low-income areas in which capital can be scarce or nonexistent.
- Help organizations become bankable. By using PRIs successfully, grantees build credit histories and can prove to financial institutions that they can manage and repay debt.
- Expand resources for essential projects. PRIs can open access to larger amounts of money that grantees can raise through grants. The prestige of a PRI can also help the nonprofit attract new grants.
Are PRIs right for your foundation?
PRIs provide a tool to help you meet your goals. They can make you a more agile and responsive grantmaker by deepening your relationships with grantees and leveraging your dollars in powerful ways. PRIs can transform your thinking about how your foundation achieves its mission. Resources and support are there to help you every step of the way.
If you’re curious about the opportunities presented by PRIs but are unsure whether they’re right for your foundation, consider the following questions:
- Is my board on board? There’s a good chance that only some of your board members are familiar with PRIs. Inform and educate your board (and staff, if any) and discuss how PRIs might complement your current grantmaking.
- What’s my board’s comfort with risk? There’s always the slim chance that recipient’s default on the loan. However, you can reduce that risk with a careful assessment of capacity to repay, rigorous documentation, and ongoing dialogue and monitoring. You might also look for opportunities to start with small loans to familiar grantees. Remember: A deposit at a fully insured CDFI involves little to no risk.
- Does my foundation have the necessary skills and time? Making PRIs through reputable intermediaries requires few additional skills or extra time. If you are interested in making PRIs directly to organizations, though, your foundation will need the time and people power to understand and manage the process, or the willingness to pay outside consultants to do much of the work for you.
Ready to learn more about program related investments?
Leveraging Your Assets With Loans and Other Program-Related Investments
Whether you want to learn about PRIs, are ready to make your first PRI, or want to refine your PRI process and are looking for tips, this primer is for you. Wherever you are on your journey, PRIs are a powerful tool to help meet your goals and transform how your foundation achieves its mission. Get your copy!
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