Program Related Investments: FAQs
Q: How do you ensure program alignment of Program Related Investments (PRIs)?
A: We use the PRI Evaluator Tool to document this alignment. This tool requires – among other things - answering the following program due diligence related questions:
- How does this investment align with the Programs of the Foundation? In what area(s) does the Foundation believe this investment will contribute the greatest degree of Program Impact?
- Are there any elements of this investment which are contrary to any value(s) of the Foundation? If so, how is this addressed?
- What conditions exist that suggest this PRI is a more effective or appropriate vehicle for achieving the Foundations programmatic objectives versus a grant?
- Have other Foundations recognized this as a PRI or social investment? Do other respected partners of the Foundation have a relationship with or experience with this investment?
- What is the form and level of personal commitment by the investment principals and/or founders to the Programmatic Impact of the investment?
- What approach will be used to evaluate the Program Impact of the investment? What is the proposed nature and scale of the Program Impact, e.g., in 1 year, 3 years, long-term?
- Does the investment scale, accelerate, support or re-enforce other SMSIs in the investment or grant portfolios?
Q: Why are most PRIs structured as loans with concessionary terms?
A: Even though PRIs can be done as loan guarantees, lines of credit, equity investments, etc., most PRIs today are structured as loans, usually with concessionary terms. As with any loan, a PRI usually repays both principal and interest. However, IRS Section 4994c states: "The production of income or the appreciation of property cannot be a significant purpose of the investment." Consequently, many loans are structured to redeem principal first and foremost, while receiving nominal interest as a secondary consideration.
Mark Kramer and Sarah Cooch state the following in their recent report on 'Aggregating Impact':
"Nearly all Program Related Investments are below market-rate investments even though legal requirements do not explicitly stipulate below-market returns. In fact, the tax code states that a significant return does not in itself disqualify an investment as a Program Related Investment (see IRS Web site http://www.irs.gov/charities/foundations/ ): "If an investment incidentally produces significant income of capital appreciation, this is not, in the absence of other factors, conclusive evidence that a significant purpose is the production of income or the appreciation of property." However, many foundations have interpreted the IRS rules to mean that they are not permitted achieve market or near-market returns with their Program Related Investments, and they therefore only classify below market-rate mission investments as Program Related Investments."
Kramer and Cooch go on and observe that "due to the primary focus on charitable benefit, some foundations view Program Related Investments as extensions of their grant making efforts."
Our Foundation does not view PRIs as extensions of our grant making, but rather as investments which are aligned with the programs and the mission of our Foundation. For PRIs, we are willing to make a trade-off of up to 5% in economic return for a proven program and mission related return.
Q: What are the benefits of PRIs?
A: PRIs can enhance the asset base and donation potential of a foundation over time. For debt based PRIs, which are often interest-bearing, these investments count towards the foundation's 5% annual required charitable distribution (if the foundation claims an investment as a PRI on its annual IRS Form 990-PF). Additionally, PRIs structured as loans are not considered to be part of the foundation's total assets when calculating the annual charitable distribution requirement. When and if the investment is repaid, the foundation's payout for the repayment year increases by the amount of the principal recovered.
Another major benefit of PRIs is they enable social benefits in ways grants cannot. For example, a loan can help a not-for-profit entity build credit history, and an investment in a social venture capital fund can spur economic development.
PRIs not only expand the impact of limited funds, build recycled resources, and tackle larger projects with leverage, but can also be used as an enabler to bring more players to the table and develop more meaningful long-term relationships with recipients.