All In The Mission

A private foundation typically makes investments to increase or maintain the size of its endowment and to generate income so that it may make grants and otherwise engage in charitable programs and activities.

However, in addition to making “social purpose” investments from its endowment, a private foundation can consider making a program-related investment or “PRI” in commercial ventures from its grant-making budget.

PRIs are mission-driven investments that are not subject to the normal prudent investment standards. PRIs are legally considered to be more akin to grants because they are made purely to further a charitable purpose without regard to any return on investment. PRIs, by definition, do not have to be prudent, and they are not subject to an excise tax for jeopardizing investments.

There are three typical types of PRIs: loans, loan guarantees and equity investments in for-profit organizations, such as corporations, limited partnerships and limited liability companies. This article will focus on PRI equity investments because they are less understood than the other two varieties.

Under what conditions  can a foundation make a PRI in a for-profit entity?

In order to make a PRI, a foundation must meet three requirements:

• The primary purpose of the investment must be to further one or more charitable purposes of the foundation. This is a determination specific to each foundation, its mission, and the proposed PRI. Take, for example, a foundation whose mission is to improve the health and well-being of people living in poverty. The foundation invests in an organic fruit and vegetable stand that would not otherwise be built in a very poor neighborhood. Although there is nothing inherently charitable about operating a fruit stand, having the fruit stand in this neighborhood furthers the foundation’s charitable purpose.

• The production of income or the appreciation of property cannot be a significant purpose of the investment. In the previous example, the foundation is not investing in the fruit stand because it expects to turn a profit.

• As is true of any foundation grant, the PRI cannot be used to fund electioneering or lobbying activity.

How does the IRS determine whether  an investment in a for-profit entity  furthers a foundation’s  charitable purpose?

Not every investment that furthers a charitable purpose automatically qualifies as a PRI.

In order to do so, an investment must pass the “primary exempt purpose” test. There are two parts to this test: First, the investment must significantly further the accomplishment of the foundation’s charitable purpose. Second, the investment must be such that it would not have been made but for its relationship to the foundation’s charitable purpose.