Program Related Investment

Program related investment--or PRI--is a potential source of funding for both nonprofits and for-profit social enterprises. A program related investment is an investment made by a tax-exempt private foundation that furthers the foundation's charitable purpose while providing the foundation with a potential for financial return. The popularity of the program related investment is on the rise, but there are specific requirements that must be met to qualify.

Program Related Investment, a Growing Trend

Over the past two decades, the popularity of program related investments has been on the rise. The total amount of program related investment dollars increased from around $130 million in 1990 to over $690 million in 2010. The average dollar amount of each program related investment has nearly tripled, from $635,756 in 2005 to over $1.5 million in 2009.

Still, only a few hundred private foundations engage in program related investing. For this reason, it is critical for social enterprises to have a firm understanding of the rules for program related investments and have a strategic plan for attracting them.

Requirements for Program Related Investments

Specific requirements must be met to satisfy the definition of a program related investment.

The primary purpose of the program related investment must be to accomplish the foundation's exempt purpose(s).

The private foundation's exempt purposes are laid out in its corporate charter and the tax-exempt application it submits to the IRS. Under the Internal Revenue Code, exempt purposes include:

• charitable
• religious
• educational
• scientific
• literary
• testing for public safety
• fostering national or international amateur sports competition
• preventing cruelty to children or animals

The term "charitable" includes the following specific purposes:

• relief of the poor, the distressed, or the underprivileged
• advancement of religion
• advancement of education or science
• erecting or maintaining public buildings, monuments, or works
• lessening the burdens of government
• lessening neighborhood tensions
• eliminating prejudice and discrimination
• defending human and civil rights secured by law
• combating community deterioration and juvenile delinquency

As long as your social enterprise advances one or more of the above exempt purposes, you may identify and reach out to foundations with PRI programs that work in that area.

Production of income cannot be a significant purpose of the program related investment.

A tricky aspect of the program related investment is that while, by definition, it includes the potential for financial return, production of income or appreciation of property cannot be a "significant purpose." To figure out if production of income is a "significant purpose," the relevant question is: would an investor seeking only profit make the investment on similar terms.

Because program related investments are made at below-market terms, they carry additional financial risk over traditional investments. For this reason, they tend to take the shape of low-interest loans. According to the IRS, common examples of program related investments include:

• Low-interest or interest-free loans to needy students,
• High-risk investments in nonprofit low-income housing projects,
• Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,
• Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents, and
• Investments in nonprofit organizations combating community deterioration.

A program related investment cannot influence legislation or political campaigns.

The requirements for program related investments strictly prohibit any part of a PRI being used to influencing legislation or to take part in political campaigns or elections.

Benefits of Program Related Investment

Program related investment provides benefits to both private foundations that make the investment and the businesses that receive it.

Benefits to foundations include:

1. PRI can be used to satisfy the foundation's 5 percent payout requirement, which requires private foundations to distribute at least 5 percent of their net investment assets to charitable causes each year.
2. Income generated from PRI is not subject to unrelates business income tax--or UBIT--because it directly furthers the foundation's exempt purpose(s).
3. Income generated from PRI can be used to continue and expand the foundation's charitable programs.

Benefits to social enterprises and nonprofits include:

1. PRI provides access to needed capital.
2. Receiving PRI can help attract additional capital from other foundations and investors, as it can signal that the enterprise is worthy of investment.
3. If the PRI is in the form of a loan, repayment can help establish a credit profile.

Strategies for Attracting Program Related Investment

A social enterprise or nonprofit organization may take certain steps to improve its chances of attracting the growing but competitive pool of program related investment.

Identify Private Foundations to Target

Thousands of private foundations exist, but only a few hundred make program related investments regularly. While it is certainly possible to program related investment from foundations that do not have established PRI programs, it is much more difficult to do so. The best approach is to identify foundations with established PRI programs whose exempt purpose (such as education, relief of poverty, etc.) are directly in line with the enterprise seeking the investment. Foundation Center has an excellent website with information on every private foundation and their program related investments.

Once you identify private foundations that have established PRI programs and have exempt purposes that are in line with your activities, it is most effective to aim your outreach at those foundations where you have personal and professional connections.

Craft a Business Model that Balances Social Mission with Operational Profit

Since a private foundation making a program related investment is seeking a potential for financial return, a social enterprise must be able to demonstrate an established and consistent revenue stream. If the enterprise is not currently profitable, it must be able to show a clear path to profit via a thoughtful and realistic business model. The most challenging part of creating your outreach plan--and indeed forming a successful social enterprise--is being able to balance operational profit with having a measurable social impact. Taking the time to think through your business model is critical for achieving the balance.

A fantastic resource for developing and revising your business model is Business Model Generation by Strategyzer.

Contact us to discuss how we can incorporate program related investment as part of your funding strategy.

DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.