What are program-related investments for private foundations?

Under the rules relating to program-related investments (PRIs), private foundations can make debt and equity investments in both for-profit and non-profit ventures and have it count towards the 5% minimum distribution requirement. The primary purpose of the PRI, however, must be to further the foundation’s stated charitable goals—the production of income can only be a secondary goal.

When set up and structured correctly, PRIs take the place of grants in meeting the 5% distribution requirement but with a substantial difference—the foundation expects to get the money back in the future. After the initial determination that an investment qualifies as a PRI, it will continue to be considered a PRI as long as the primary purpose of the investment continues to be the furtherance of the foundation’s charitable purpose; it does not matter if the investment undergoes a change in terms or form.

The most common way for foundations to employ PRIs is to lend money at below-market rates to support causes like affordable housing or the preservation of historic buildings and wildlife habitat. When the loan principal is repaid, the foundation can recycle the same capital to other causes creating a virtuous circle (in fact, it must re-grant any returned principal within one year). Additionally, private foundations have the option of simply guaranteeing the loans of other organizations that otherwise would not meet a bank’s lending criteria. With loan guarantees, the foundation can work towards its philanthropic goals without spending a single penny from its endowment. The only downside here is that loan guarantees do not count towards meeting the 5% distribution requirement.

The following video, produced by the Ford Foundation, provides a great visual summary to how program-related investments work.

Below are some examples of program-related investments based on those published by the IRS in the Treasury Regulations.

Examples of program-related investments – equity

  • Investing in equity shares of a start-up research company working to develop a vaccine to treat a widespread tropical disease primarily affecting poor countries. Other for-profit companies have reduced their research spending to develop a similar vaccine because the victims of the disease come from poor countries causing the potential financial return to be dampened. Nonetheless, if a vaccine is developed, there is still a reasonable chance the start-up company could become very profitable. Although the investment may one day pay off, it qualifies as a program-related investment because the primary objective of the foundation is to promote health and well-being and the pursuit of profit is of secondary importance. 
  • Investing in equity shares of a non-operational fledgling recycling collection business with a business plan to gather recyclable solid waste materials that are currently disposed of in landfills. Without the additional seed money provided by the foundation, the business may not be able to start its operations. Making this investment qualifies as a PRI as long as the primary purpose is to combat environmental deterioration and the potential investment return is of secondary importance. The medium to long term performance of the company does not affect the determination of whether the investment is a PRI. 

Examples of program-related investments – debt

  • Making small commercial loans at below market rates available to poor people to enable them to start small businesses like roadside food stands. The foundation’s primary purpose in making the loans should be to provide relief to the poor and distressed rather than seeking the production of income through a strong loan portfolio. Nonetheless, it is perfectly acceptable for the foundation to earn a profit from loans of this kind.
  • Making a commercial loan at below market rates for a public charity to buy and renovate a building to provide temporary housing to the homeless. The public charity has not been able to secure conventional financing through banks and other financial institutions and the loan by the foundation is instrumental in making the project happen. This qualifies as a PRI because the primary purpose is to help the homeless rather than make a profit from loan interest.

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