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Program-related investments, part one: When grants just won’t do

Posted on August 1, 2012 by Tom Trinley

Despite my office-bound duties at the foundation, I get away from my desk a fair amount of time – attending conferences, serving on nonprofit boards, and simply bumping into guests at our offices. After introducing myself, I often get the response: “Oh, you’re the guy who cuts the grant checks.” Well … yes, but I go on to explain that the foundation uses many tools beyond grants in support of its land conservation and arts mission: convening, communications, direct charitable activities and program-related investments (PRIs). “Program-related what?”  

PRIs are bank-like investment products – loans, credit enhancements, equity and guarantees – made by private foundations to not-for-profit organizations. Unlike grants, PRIs are expected to be repaid. Interest rates and fees (if any) are set below current market pricing, offering low-cost bridge financing to vital social causes.

The IRS allows foundations to make these types of investments only under the following circumstances:
• The primary purpose of the investment is to accomplish one or more of the purposes described in Internal Revenue Code section 170(c)(2)(B) (religious, charitable, scientific, literary or educational purposes);
• No significant purpose of the investment is the production of income or the appreciation of property; and
• No purpose of the investment is to accomplish one or more of the purposes described in Internal Revenue Code section 170(c)(2)(D) (lobbying or political campaign activity).

Like many other foundations that make PRIs, GDDF believes a good PRI is dependent on the transaction meeting certain requirements:
• A grant is not the right tool for the project.
• The project falls within one of the foundation’s programmatic and geographic areas.
• The foundation has a funding history with the organization to which the PRI is to be made.
• There is a designated cash stream for the payback or return of the PRI (for loans and equity) or for the relinquishment of obligations secured by guarantees and credit enhancements.

Using as an example a GDDF PRI, let’s take a look at how IRS and foundation criteria were applied.

The McHenry County Conservation District planned to purchase a private, 100-acre campground located adjacent to one of its existing holdings [charitable purpose; the project falls within one of the foundation’s programmatic and geographic areas]. While the district had referendum funding on hand [designated cash stream for payback], it was not allowed by county law to submit bid bonds, which were required by the seller through a sealed bid process [a grant is not the right tool]. To obviate this restriction, GDDF provided a no-fee, no-interest, 6-month $100,000 bridge loan [no significant purpose of the investment is the production of income] to Corlands (now part of Openlands), a third-party land trust [the foundation has a funding history with the organization the PRI is to be made] that used the loan to submit a bid on behalf of the district. When Corlands’ bid was accepted it was immediately transferred to the district, which purchased the land and reimbursed Corlands for the bid bond using referendum funds. Corlands paid back the foundation’s $100,000 loan with the funds it had received from the McHenry County Conservation District. In the end the last undeveloped parcel along a scenic and biologically diverse stretch of the Fox River was preserved.

In Part 2, I’ll explain the foundation’s PRI review, approval and monitoring process.

Comments

A great summary of a creative response to a time-sensitive preservation opportunity.  Cheers!

Peter Berliner September 5, 2012

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