Get With the Program: Private Foundations & Program Related Investments

Many foundations are unaware of the numerous options they have in meeting their 5% annual payout. Although grants and contracts substantiate a majority of those payouts, Program Related Investments (or “PRIs”) are an alternative means by which foundations can get creative in how they administer their yearly goals.

What Is a PRI?
Although considered an investment, the primary purpose of a PRI is charitable rather than financial. The end goal is to further the organization’s exempt purpose. To be considered a PRI, the investment generally cannot be entered under the same terms a commercial investor would enter into an investment agreement. This means that the risk associated with the investment is higher than that of a commercial investment.

Despite this fact, foundations can still financially benefit from their investment as long as the primary purpose of the initial investment were charitable. This gives foundations a lot of leeway in choosing the type of entity it chooses to invest in (e.g. for-profit, non-profit or hybrid!).

What Are the Legal Requirements of PRIs?
There are three basic legal requirements associated with PRIS: (1) as stated above, the investment must be made to further the foundation’s purpose, (2) the production of income is not a primary consideration in making the investments, and (3) the investment cannot be used to support lobbying or electioneering. The most important requirement comes with satisfying the first element of furthering the foundation’s purpose. You should review your bylaws and organizational documents with your attorney to figure out if an investment meets this requirement.

What Do PRIs Look Like?
PRIs come in many flavors. Some of the more common forms include: (1) loans, (2) deposits, (3) guaranties, (4) equity investments, and (5) fixed income. This is by no means a comprehensive list and a non-profit attorney can help you parse out the particulars of your foundation’s situation. The model your foundation chooses to make is dependent on the needs and goals of the PRI organization. For example, a direct deposit might be the best course of action if the PRI organization can pay the initial investment back quickly. In contrast, equity in the PRI organization might be more beneficial in instances where the PRI organization is still in its infancy.

Good Example
The IRS would consider the following to go towards the annual payout: Providing a below-market interest rate loan with comparable commercial risks of a traditional loan.

Bad Example
The IRS would not consider the following situation to go towards the annual payout: Investing in a for-profit enterprise unrelated to the foundation’s exempt purpose but using the proceeds towards furthering its exempt purpose.

This is a simplistic overview of PRIs and their requirements. Your organization can initiate one or more of the PRI options as well as utilize the traditional contracts and grants approach to any single organization that furthers your foundation’s exempt purpose. If your foundation wants to explore its options in satisfying its annual payout, reach out to the attorneys at Sustainable Law Group by calling (310) 883-7923 or emailing us at info@sustainable-lawyer.com.

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