Program Related Investments FAQ

What are Program Related Investments?

Like grants, foundations use program-related investments (PRls) to support charitable activities. Unlike grants, PRIs take the form of investments, usually requiring the return of capital within an established time frame, plus modest interest payments or dividends.

Since the Tax Reform Act of 1969 under Section 4944, private foundations have been allowed by the Internal Revenue Service to count PRIs as a part of their annual required distribution. Further, the enactment of the Philanthropic Facilitation Act of 2011 has significantly increased the potential for philanthropic investment by foundations in PRIs to further their charitable aims and to vastly simplify the registration process for approval of a PRI by the IRS. The nonprofit entity seeking a PRI can register for approval of their project by the IRS and once received, the approval can be relied on by multiple foundation investors rather than the individual foundations spending time and money on separate approval.


What constraints does the government place on PRIs?

Private foundations are allowed to make "program-related investments" that may generate limited or no financial return, provided they met three criteria:

  1. The investment's primary purpose must be to advance the foundation's charitable objectives.
  2. Neither the production of income nor the appreciation of property can be a significant purpose. This generally means that the foundation accepts higher risk or lower returns than an ordinary investor seeking only to invest for profit.
  3. Funds cannot be used to fund lobbying or to support or oppose a candidate for public office.

In practice, these rules require PRIs to offer capital at below-market rates and make them subject to the same scrutiny as grants regarding their charitable purpose.


What forms can a PRI take?

Most PRIs are low-interest loans. They also can take the form of loan guarantees, credit lines, equity investments, the purchase of buildings or other real estate, and "linked deposits" (low-interest-rate deposits with a financial institution, linked to lending for a charitable purpose).


What purposes do PRIs serve?

PRIs can support community development by providing low-cost loans to fund affordable housing and other facilities serving charitable purposes, such as child care centers, health clinics, and charter schools. They can be used to make loans to small businesses with potential to create jobs and improve the quality of life in distressed communities. Other examples include short-term loans to buy land for conservation purposes or to help social service agencies cover operating costs while awaiting government payments. PRIs can be used to help low-income families obtain home mortgages on reasonable terms, and to provide them with traditional banking products such as checking and savings accounts. They are used to fund capital projects, bridge loans and loan funds; to support microfinance institutions and promote economic development through loans to small and medium-sized businesses; to help organizations acquire property; to create jobs; and to develop new products or expand services.

What are the benefits of PRIs?

Foundations and other donors make PRIs in order to stretch their financial resources and enhance their philanthropic impact. PRIs are often part of a larger philanthropic strategy that may include grants, PRIs and market-rate mission-related investments (MRIs).

  • PRIs offer foundations flexibility and leverage, augmenting their grants and extending the reach and impact of their philanthropic programs:
  • Foundations can make more and larger awards, knowing that the capital is likely to be returned and available for recycling into new grants and PRIs.
  • Foundations appreciate the ability of PRls to unlock additional, conventional financing for the charitable projects they support. By taking real or perceived risks that traditional investors are unlikely to accept, PRls often attract new resources to a project or organization.
  • PRIs enable foundations to manage and increase their distributions through economic cycles.


In addition, PRIs allow recipients to gain credibility and strength.

  • They offer recipients the opportunity to build a track record and demonstrate that they are financially disciplined, well managed, and creditworthy. PRIs thereby foster the
    independence and sustainability of their recipients.
  • PRls also fill financing gaps that might otherwise impede viable projects.
  • PRIs attract public and private contributions and leverage commercial financing for high value projects and initiatives.
  • They strengthen the capacity of recipient organizations by improving cash flow, increasing access to capital, building financial capacity, and fostering long-term sustainability.


Who are the best candidates for PRIs?

Because PRIs are investments intended to be repaid, recipients should have significant revenue-generating capacity (for example, through fees and other income, including public subsidies) or assets that will appreciate. A good example would be real estate projects, where rent payments generate a predictable income stream. Loss reserves, buildings, endowment, or receivables can provide additional security and alternative repayment sources.


What kinds of foundations make PRIs?

All kinds of foundations make PRls, including private, family, corporate, and community foundations, both large and small.


How do PRIs differ from social or mission-related investments?

Social investments combine financial return with social benefits. PRls are a special form of social investment, defined within the Internal Revenue Code, in which the foundation's charitable goals must dominate and financial return is secondary. Some foundations make market-rate investments that advance social goals. Often called "mission-related investments," they remain fully subject to the rules governing prudent investment of a foundation's assets.


What is the Right Size and Duration for a PRI?

PRIs range in size from as little as $1,000 to several million dollars. Generally, the amount of the PRI depends on the need and capacity of the recipient as well as the scope and size of the foundation, and its tolerance for risk. The duration of the PRI may be from a few weeks to five or even ten years. For example, a foundation may establish a revolving fund to provide short-term bridge payments that are required to be repaid within a few weeks. Conversely, PRIs may be used to support a multi-year community development project or to fund a new business that requires long-term, patient capital.


What is the Expected Return on a PRI?

To qualify as a PRI, the IRS requires rates to be below market on a risk adjusted basis, but the actual rate of return or earnings on PRIs can vary. While PRIs are often made with the expectation of a rate of return between zero and three percent, the rate may be higher depending on the level of risk involved. The rate is generally based on the borrower's ability to make principal and interest payments over a specified period of time. A foundation's desire to generate income from its PRIs may also affect rates, provided that earnings are not a significant reason for making the PRI.


How often are PRIs Repaid?

Most PRIs are repaid on time with interest. Repayment rates may vary depending on the type and level of risk foundations choose to take in making their PRIs. For that reason, some foundations establish a loan loss reserve of as much as 15 percent of their PRI portfolio and/or mitigate risk by making loans through intermediary organizations such as community development financial institutions (CDFIs). In addition, risks can be eliminated by limiting PRIs to deposits in FDIC insured banks and credit unions.


How do Foundations Account for PRIs?

Private foundations claim PRIs on their Form 990s to mark the transactions as charitable activities. This allows PRIs to be counted as part of a foundation's minimum payout in the year of distribution. Outstanding PRIs remain on a foundation's balance sheet as a separate asset category until they are repaid or written off. Periodically, adjustments may be made to the carrying value of PRIs depending on the likelihood of collection. Return of PRI principal is equivalent to a refund of a grant and, thus, increases the annual payout requirement by the amount of principal repayment. Interest income or earnings from PRIs are treated the same way as earnings from any other foundation investment. Other entities, including community foundations, social investors and corporate giving funds may use the term "PRI" to refer to a concessionary investment for a charitable purpose, but there is no legal requirement for them to use the term "PRI".

Is special financial or legal expertise needed to make PRIs?

Because PRIs are subject to special tax regulations, Foundations making PRIs should be sure to consult with qualified tax, accounting, and legal experts.


Where can I find more information about PRIs?

Organizations interested in a Program Related Investments from the Dunham Fund, may contact the Fund's Executive Director, Robert Vaughan, at Dunham Fund; 8 E. Galena Boulevard,Suite 202, Aurora, Illinois 60506; (T) 630-844-2774; (F) 630-844-4405 or at rvaughan@dunhamfund.org.

Many answers to the Frequently Asked Questions above have been taken from the MacArthur Foundation and the PRIMakers websites.

PRI Makers Network is an association of more than 100 members that provides a forum for net-working, professional development, collaboration, and outreach among foundations experienced with or interested in PRls. Its website is www.PRIMakers.net.

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