What are program-related investments for private foundations?

Program-Related Investments (PRIs) are financial investments made by private foundations with the primary aim of furthering their charitable missions, rather than generating profit. These investments can take the form of loans, equity investments, or loan guarantees, and are designed to support projects that align with the foundation’s philanthropic goals. The IRS mandates that the primary purpose of a PRI must be charitable, and no significant purpose can be the production of income or the appreciation of property. Income generation can be a byproduct but must always remain secondary. Failure to adhere to these guidelines can have serious consequences. If a PRI fails to meet the IRS criteria, the foundation could face penalties or even risk jeopardizing its tax-exempt status.

PRIs provide flexibility for private foundations, as they are permitted to engage in both debt and equity investments, whether in for-profit or non-profit ventures. One significant advantage is that PRIs count toward fulfilling the 5% minimum distribution requirement, just like grants to public charities. However, unlike grants, PRIs have a distinct feature: the expectation that the invested capital will be returned in the future. Once an investment qualifies as a PRI upon initial assessment, it retains this classification as long as the primary purpose continues to further the foundation’s charitable mission, regardless of any changes to the investment's terms or form.

Common uses of PRIs include making loans at below-market rates to support projects like affordable housing or environmental preservation. Foundations can also provide loan guarantees for organizations that might not meet traditional lending criteria, leveraging their financial strength without depleting their endowment. However, it's important to remember that loan guarantees do not count toward fulfilling the 5% annual distribution requirement.

PRIs also provide the opportunity for capital recovery. When a PRI is repaid, the foundation can reinvest the funds into new charitable initiatives, creating a sustainable cycle of support. This strategy not only amplifies the foundation’s impact but also allows for ongoing, strategic reinvestment in future projects.

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

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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 dedicated to developing a vaccine for a widespread tropical disease primarily affecting impoverished countries. Other for-profit companies have reduced their research spending for a similar vaccine due to the disease primarily impacting poorer regions, which may limit potential financial returns. Nevertheless, if the vaccine proves successful, there remains a reasonable chance that the start-up company could achieve substantial profitability. Despite the possibility of financial gains, this investment qualifies as a program-related investment because the foundation's main objective is to promote health and well-being, with profit-seeking as a secondary consideration.
• Investing in equity shares of a non-operational fledgling recycling collection business with a business plan focused on gathering recyclable solid waste materials currently destined for landfills. By providing essential seed money, the foundation plays a crucial role in enabling the business to commence its operations. This investment qualifies as a PRI, given that the primary purpose is to combat environmental deterioration, with potential investment returns being of secondary importance. Moreover, the company's medium to long-term performance does not affect its status as a PRI.

Examples of program-related investments – debt

• Offering small commercial loans at below-market rates to underprivileged individuals, enabling them to start small businesses such as roadside food stands. The foundation's primary purpose in providing these loans should be to offer relief to the poor and distressed, rather than prioritizing income generation through a robust loan portfolio. Nevertheless, it is entirely acceptable for the foundation to earn a profit from loans of this nature.
• Extending a commercial loan at below-market rates to a public charity seeking to acquire and renovate a building, creating temporary housing for 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 assist the homeless, not to generate a profit from loan interest.

PRIs offer private foundations a valuable means to leverage their financial resources in pursuit of social good. These investments, whether in the form of debt or equity, allow foundations to fulfill their 5% minimum distribution requirement while advancing their charitable goals. Through strategic and purpose-driven PRIs, private foundations can make a lasting difference in the lives of those they aim to serve while maintaining their financial strength.

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