Program-Related Investments: Extending a Foundation’s Mission

Beyond traditional grantmaking, foundations can support charitable activities through program-related investments (PRIs). These can be used to fund a variety of social or mission-driven projects or complement existing grantmaking.

Enhancing a Foundation’s Mission

Historically, foundations have made an impact primarily by making grants to organizations aligned with the foundation’s mission. The IRS generally requires that grantmaking foundations distribute 5% of their assets each year. Many foundations are now exploring ways to achieve impact with the other 95% of their assets — those not being paid out as grants in a given year.

Foundations of all types and sizes, including family, community and private, can make PRIs. This type of mission or social investment can further a foundation’s purpose and philanthropic goals.

How a PRI Works

A PRI makes inexpensive capital available, typically in the form of deposits, loans or equity investments, to nonprofit or for-profit charitable entities working on social or other mission-driven issues. PRIs generally generate returns for the foundation at below-market rates. There are no additional requirements about an organization’s size or mission that govern their use of PRIs.

Some foundations include PRIs as part of their long-term asset allocation, while others make PRIs out of their grant or program budgets. In either case, PRIs may be counted toward the minimum 5% annual required distribution the year the PRI is made. When a PRI is repaid, it increases the foundation’s distribution requirement for that year by the repayment amount.

How One Foundation Used PRIs
A family foundation had been a longtime funder of a local health center. The health center was looking to expand to a new location and needed financing, which the foundation offered as a loan to be repaid over five years at 2% interest — well below interest rates offered by banks. The health center executed a promissory note, which the foundation held as
an asset until the loan was repaid.

Typical examples of PRIs include:

Low-interest or interest-free loans to underserved students and schools.
High-risk investments in nonprofit low-income housing projects.
Low-interest loans to small business owners who belong to members of economically disadvantaged groups that do not have ready access to commercial funding at reasonable interest rates.
Investments in businesses in low-income areas under a plan to improve the economy of that area by providing employment or training for unemployed residents.
Investments in nonprofit organizations combating community deterioration.

Benefits of PRIs

PRIs can present several benefits for foundations:

Extend their financial resources and enhance their philanthropic impact, while recycling the repayment at the end of the investment for other charitable purposes.
Invest in projects or initiatives specifically related to the foundation’s goals and mission.
Invest in early-stage projects, allowing a foundation to directly support innovative and relevant solutions for
social issues.
Offer more flexibility to support projects that may have a difficult time attracting investment capital.

Considerations

PRIs are often illiquid and should be carefully vetted like any other investment. No matter the size of the organization, there are specific legal, tax and financial implications to consider.

Requirements

PRIs must meet certain IRS requirements:

The purpose of the investment must be to advance the foundation’s charitable objectives.
Income generation or property appreciation cannot be a significant purpose of the investment.
The investment cannot be used directly or indirectly to lobby for political purposes.

Complexity

Because PRIs can range from simple cash deposits in community banks or credit unions to complex financial transactions, they require:

Specialized knowledge in finance and philanthropy.
Legal expertise to navigate legal documentation and regulatory frameworks.
Ability to measure outcomes, which can be difficult due to gaps in data, given a lack of available resources from foundation staff and other factors.

Investment and Tax Related

There are also several investment and tax-related considerations foundations should make before including PRIs as part of their giving strategies:

Since PRIs are typically illiquid, it is important to maintain adequate funds for grantmaking and operations.
The timing of a PRI disbursement and when it should be repaid should be carefully monitored to comply with minimum distribution requirements.
Since PRIs are charitable-use assets, they are excluded from a foundation’s asset base when calculating the 5%distribution requirement.

Integrated PRIs into Your Foundation’s Strategy

The Center for High Impact Philanthropy estimates that fewer than 4% of foundations use PRIs, with community
and family foundations less likely to use them than newer and larger foundations. Further, relatively few PRI funders maintain formal PRI programs or make PRIs on an annual basis. To help remove some of the barriers to entry, foundations that want to use PRIs as part of their broader giving strategies should collaborate with one another, invest in education and training, or join affinity groups to learn more. Work with your advisor to develop a strategy for incorporating PRIs into your giving plan.

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