For private foundations interested in a “return on investment” on the distribution of their foundation’s charitable dollars (that is, a return beyond the satisfaction of doing good), Program Related Investments (“PRI’s”) are generally the tool of choice. A PRI can be counted as part of the foundation’s required 5% annual distribution provided that the investment accomplishes one or more the foundation’s charitable purposes, is not made to achieve a significant investment return, and is not used for lobbying or political campaigns. While outstanding, a PRI does not count as part of the entity’s net investment assets for purposes of determining the 5% minimum in future years. A PRI is also excluded from jeopardizing investment and excess business holdings excise tax rules under the Internal Revenue Code. If a PRI is repaid it must be recycled in the year of repayment either as an outright grant or into a new PRI.
PRI’s are typically structured as loans with terms significantly better than those that could be achieved on the open market. That could include lower (or no) interest, less security, easier payment terms, etc. PRI’s have historically been commonly used in areas such as seeding microfinance funds, urban development, and providing financing for construction of affordable housing. PRI’s are also commonly seen as catalysts to entice other investors to provide funding for a particular social impact purpose or enterprise.
A PRI can be utilized for almost any purpose that is charitable in nature, even if the loan is made to a for profit entity. For example, it may be possible to make a PRI to a for profit drug maker toward the development of a drug to be used for treatment of certain tropical diseases that the company would not otherwise develop because of the lack of a profitable market among the more economically developed countries. Other examples of qualifying uses for a PRI provided by the IRS include loans to urban development corporations, including minority businesses located in economically disadvantaged areas, and investments for community agriculture development. IRS Proposed Regulations clarify, among other things, that PRI’s may be used for activities in foreign countries and may take the form of equity or debt.