Program-Related Investments


Program-related investments (PRIs) are investments (different from strictly donative grants) made by private foundations in which:

  1. The primary purpose is to accomplish one or more of the foundation’s 501(c)(3) exempt purposes (other than testing for public safety),
  2. Production of income or appreciation of property is not a significant purpose, and
  3. Influencing legislation or engaging in political campaign intervention is not a purpose.

While PRIs are not used widely by the vast majority of private foundations, PRIs can be an effective alternative strategy to grantmaking in advancing the foundation’s charitable purpose and meeting its minimum distribution requirements. One reason why PRIs are not used more broadly is the difficulty in interpreting whether a particular investment would qualify as a PRI and not subject a foundation to penalties for making a jeopardizing investment or failing to meet its distribution requirements (if it relied on the investment being part of its qualifying distributions). Some foundation rely on legal opinions to mitigate such risks, but this may not always be cost-effective, particularly for smaller investments. But legal opinions are not always necessary provided that the the foundation has a sufficient understanding of the PRI rules and how they are applied and is comfortable accepting and managing a modest amount of risk. The trade-off can be key in allowing a private foundation to use PRIs to “get more bang out of their buck.”

The following examples and principles are listed on the IRS webpage on program-related investments:

5 Examples of PRIs

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

7 PRI Principles

  1. An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose if conducted in the United States,
  2. The exempt purposes served by a PRI may include any of the purposes described in section 170(c)(2)(B) are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas,
  3. The recipients of PRIs need not be within a charitable class if they are the instruments for furthering an exempt purpose,
  4. A potentially high rate of return does not automatically prevent an investment from qualifying as program-related,
  5. PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations,
  6. A credit enhancement arrangement may qualify as a PRI, and
  7. A private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.

Two Sticky Issues

  1. When a private foundation makes a particular investment, like a loan to a for-profit, can the foundation reasonably justify that such investment was made primarily to advance the foundation’s specific exempt purpose? According to the regulations: “An investment shall be considered as made primarily to accomplish one or more of the purposes described in section 170(c)(2)(B) if it significantly furthers the accomplishment of the private foundation’s exempt activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the foundation’s exempt activities.”Beyond the PRI rules, can the foundation also show that any private benefit it provides to the for-profit is incidental, quantitatively and qualitatively, to furthering its exempt purpose? An interesting example of an investment target would be a local for-profit newspaper. If the private foundation makes a high risk $1 million loan to the newspaper company at below market interest, is that consistent with the foundation’s educational goals? Is the newspaper company only incidentally benefited by the loan primarily extended to help assure the local public remain informed of important issues?
  2. If the production of income or appreciation of property is a secondary purpose for making the loan (the primary purpose being to advance the foundation’s exempt purpose), how can the foundation tell if such secondary purpose is significant? According to the regulations: “In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it shall be relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation.”Using the newspaper example above, what if, in lieu of a loan, the foundation purchased a $1 million equity stake in the newspaper company? Such purchase may be at below the stock’s market value (particularly if the foundation accepted non-preferred stock), but it could help leverage additional equity investments from other investors seeking more preferential terms, which could ultimately result in a high return for all shareholders. While a high rate of return in and of itself does not signal that the foundation had a significant profit motive at the time it made the investment, how can one tell?


Program-Related Investments: Will New Regulations Result in Greater and Better Use? Nonprofit Quarterly

Strategies to Maximize Your Philanthropic Capital: A Guide to Program Related Investments TrustLaw, Thompson Reuters Foundation for Mission Investors Exchange

Examples of Program-Related Investments – Final Regulations  Federal Register