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Advance your nonprofit's objectives with investments made by foundations

Nonprofits have long had a narrow set of choices when it comes to funding. Beyond grants, philanthropic giving and traditional loans, another option has gained traction in recent years — program-related investments, commonly referred to as PRIs.

What are PRIs and how are they used?

PRIs are low-interest investments made by foundations to support charitable activities that align with their philanthropic goals. Many PRIs support affordable housing and community development projects, but they're also used to fund arts and cultural organizations, education initiatives, child care centers, economic development projects, social services and health programs, sustainable agriculture initiatives and many other projects.

Funds may be used for a variety of purposes, including:

  • Capital projects, such as renovations, repairs and historic preservation
  • Equipment purchases
  • Emergency loans
  • Low-interest or interest-free loans to students in need
  • Property acquisition
  • Job creation and business development in low-income communities
  • Development or expansion of services

PRIs vary greatly in amount — from thousands to hundreds of thousands or even millions of dollars, depending on the foundation and the need and capacity of the recipient. Most PRIs are structured as loans, but capital may also be offered in the form of loan guarantees, cash deposits, linked deposits, equity investments and others.

Regardless of the size or form of a PRI, it differs from other investments in that its primary goal must be to further the foundation's mission objectives — not generate financial return. That said, PRIs may legally generate financial returns if those returns are secondary to furthering the mission.

The IRS defines a PRI as any investment by a foundation that meets the following criteria:

  • The primary purpose is to accomplish one or more of the foundation's exempt purposes
  • The production of income or appreciation of property is not a significant purpose
  • The funds do not support or influence legislation or political campaign activities

What are the repayment terms and interest rates?

Unlike grants, which don't require repayment, PRIs are expected to be repaid according to agreed-upon terms. The terms may range from a few months to 10 years or longer. Interest is typically charged, but at a rate that's below market on a risk-adjusted basis (as required by the IRS). For example, depending on the foundation's desire to generate interest and the borrower's ability to make payments, interest rates may range from 0 percent to just below the prevailing market rate. Once repayment of a PRI has been made, the foundation is required to recycle the money into grants or new PRIs.

Can PRIs be a win-win for foundations, borrowers and communities alike?

PRIs provide foundations with a way to advance program goals, support significant projects and meet federal payout requirements to commit at least 5 percent of assets to mission-related activity. As such, increasing numbers of foundations are setting aside a portion of their assets to fund PRIs, from small and mid-sized family, community, corporate and private foundations to some of the country's biggest foundations, including the Bill and Melinda Gates Foundation.

Borrowers enjoy access to much-needed funding at lower rates than may otherwise be available. In addition, PRIs can be a powerful way to build productive, long-term partnerships with foundations based on mutual objectives. PRIs also help borrowers establish a credit history, which could increase eligibility for financing from other lenders.

Most importantly, from supporting job creation in low-income communities to improving housing, child care, the environment and more, the effects of PRIs on communities can be significant — making them a low-cost and effective way to achieve greater good.

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MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.

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Seasoned writer covering a spectrum of industries, including nonprofit, financial services, health care, insurance and technology