Understanding Program-Related Investments – Charity Lawyer Blog

Program-related investments (PRIs) are powerful financial tools available to private foundations and public charities, allowing them to further their charitable purposes while simultaneously achieving financial returns. This blend of philanthropy and investment can be a very attractive way to make a social impact.

What is a Program-Related Investment?

Private foundations – as with all tax-exempt organizations – must be organized and operated primarily to further one or more exempt purposes. A program-related investment is an investment made to accomplish one or more of the organization’s exempt purposes whereby the investment yields some type of return. While the predominant purpose of a PRI is to further the foundation’s exempt purposes, it may also produce income or property for the investing organization.

What Qualifies as a Program-Related Investment?

A valid PRI is one that is made for the primary purpose of accomplishing one or more of the organization’s exempt purposes and which no significant purpose is to produce income or appreciation of property. Further, the PRI cannot be such that it constitutes lobbying or campaign intervention activities.

To qualify as a PRI the investment must significantly further the accomplishment of one or more of the organization’s exempt purposes and would not have been made but for such relationship between the investment and the accomplishment of the organization’s exempt purposes.

Asking if other investors engaged in the investment for a profit would have still engaged in the investment on the same terms as the private foundation is relevant in determining whether a significant purpose is to produce income or the appreciation of property.

Advantages to Making Program-Related Investments

PRIs enable organizations to align their investment strategies with their philanthropic missions. By investing in socially impactful enterprises, these organizations can further their exempt purposes beyond traditional grantmaking. Though, unlike grants, PRIs can garner a return for the organization. Such returns can then be reinvested in other mission aligned and exempt activities.

Considerations Before Making Program-Related Investments

1. Financial and Operational Burdens. PRIs can be more complex to structure and mange than traditional grantmaking. Foundations should cautiously evaluate the financial and operational burdens associated with these investments.
2. Administrative Capacity. Ensuring that investments meet the stringent criteria set out by the Internal Revenue Code and corresponding Treasury Regulations can be onerous, especially for smaller organizations with less resources. Non-compliance can result in severe penalties and might jeopardize the foundation’s tax-exempt status so it’s important to plan for the additional administrative work that comes with PRIs.
3. Due Diligence. Thorough due diligence is paramount to assessing the viability and impact of the potential investment. This includes evaluating the investee’s business model, financial wellbeing, and alignment with the foundation’s exempt purposes/mission.
4. Investment Maintenance. Ongoing monitoring and management are necessary to ensure that the investment continues to meet its primary purpose and achieve the desired social impact.

Conclusion

PRIs offer a unique opportunity for private foundations and public charities to advance their charitable missions while potentially earning financial returns. By carefully aligning these investments with their exempt purposes, organizations can maximize their social impact beyond traditional grantmaking. However, the complexity and regulatory requirements associated with PRIs necessitate thorough due diligence and ongoing management to ensure compliance and effectiveness. When executed thoughtfully, PRIs can be a powerful tool in the philanthropic toolkit, enabling foundations to sustainably further their missions and create lasting positive change.

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Kyler Mejia is an associate (bar admission pending) with Caritas Law Group, P.C. Kyler counsels nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising matters nationwide and advises donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.