Program-related investments (PRIs): A potential funding source for community economic development?

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Program-related investments (PRIs) are a tool that many foundations use to achieve philanthropic goals and financial returns. In contrast to traditional grants, PRIs include loans, equity investments, loan guarantees, or other investments from foundations. Common program areas funded by PRIs include affordable housing, community economic development, and education.

Both for-profit and not-for-profit entities that advance the mission of the foundation are eligible to receive PRIs. However, the IRS dictates that foundations cannot use PRIs for political campaigning or lobbying.

Traditionally, foundations have sought to address community issues primarily through the distribution of grants. The IRS dictates foundations must make annual distributions of at least five percent of the average fair market value of the foundation’s assets. For the most part, these charitable contributions are delivered primarily through grants. The remaining 95 percent of assets are kept in an endowment and invested in order to maintain or increase its value.

Enabled initially by the IRS in 1972, PRIs allow foundations to put more of their resources toward the advancement of their charitable mission through means other than the traditional grants. This tool is particularly useful when grants do not go far enough in delivering a tangible solution, when a time sensitive infusion of capital is needed to spur, grow, or sustain a worthwhile social initiative, or when that capital can be applied toward generating new assets. Steve Berliner, Managing Director of Mission Investors Exchange, identifies loan funds, transit-oriented development, product development, consumer credit and non-profit capacity as examples of circumstances where the use of a PRI can be effective.

Historically, the usage of the PRI by foundations has not been significant. The primary reason why is because many in the legal community have been hesitant to endorse their use due to concerns relating to the lack of IRS direction on what exactly qualifies as a PRI. However, in April 2012, the IRS proposed new guidance about PRIs in 26 CFR 26.4994. This guidance added clarity by providing updated examples of how foundation can use PRIs.

A second reason foundations have not utilized PRIs more is due to their high cost. Most foundations do not have the capacity or expertise to underwrite PRIs. Therefore, foundations must contract with third parties to provide this service.

In its 2010 “PRI Directory” research report, the Foundation Center noted 173 foundations across the country deployed an estimated $734 million in PRIs in 2006-2007. The largest percent of these PRIs were awarded as loans (71 percent) followed by equity investments (9 percent), linked deposits or certified deposits (7 percent), and business startup/expansion (1 percent).

The larger national foundations more commonly use PRIs. For example, the Ford Foundation was the first to use PRIs in 1968 and since has deployed more than $560 million, primarily as loans. One foundation in North Carolina that has been using PRIs, primarily to support Community Development Financial Institutions (CDFIs), is the Mary Reynolds Babcock Foundation (MRBF) based in Winston-Salem. MRBF currently has 16 active PRIs including one it awarded in 2006 to Mountain BizWorks in Asheville. With this $200,000 PRI loan, Mountain BizWorks was able to expand its loan fund to provide additional business loans and increase its earned income and self-sufficiency.

Brian Farkas, a recent graduate from the UNC MPA Program, is a Community Revitalization Fellow at the School of Government.

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