Funding Community Development
By Loren Renz
As foundations and corporate funders search for new ways to extend their
assets and increase the impact of their programs, a growing number have
begun to provide financing through program-related investments (PRIs).
A PRI, broadly defined, is a foundation investment to support a charitable
project or activity involving the potential return of capital within an
established time frame. PRIs include financing methods commonly associated
with banks or other private investors, such as loans, loan guarantees,
linked deposits, and even equity investments in charitable organizations.
Foundations commonly make PRIs as a supplement to their existing grant programs. In most cases, funders make PRIs to organizations that have an established relationship with the funder as a grantee. When the organization seeks additional funding possibly for a project with income-generating potential the foundation may suggest a PRI in place of a grant.
For the funder, one obvious benefit of making a PRI is that the repayment
or the return of equity can be recycled for another charitable purpose.
For the recipient, the benefit is access to capital at lower rates than
may be otherwise available. Most organizations receiving PRIs use them
to finance their own projects. However, some intermediaries or loan funds
raise capital and, in turn, make it available to other borrowers.
The increased use of PRIs reflects three recent trends: first, the growth
of the not-for-profit community development/low income housing field, with
its large-scale capital needs; second, the increasing emphasis in the nonprofit
sector on raising revenue through earned income ventures; and finally,
the need to leverage foundation resources to meet increased demands.
Despite the increase in PRI funding, relatively few organizations have
experience seeking PRIs, compared to grantseeking. Organizations considering
seeking funding in this manner should assess the situation carefully to
determine whether a PRI is appropriate for their capacity and goals.
When to Seek a PRI
Organizations typically seek PRI financing to purchase or construct facilities,
develop housing projects, cover predevelopment costs, purchase land or
equipment, capitalize a loan fund, start a business venture, or refinance
debt. Nonetheless, PRIs have funded a wide range of other projects. You
should consider seeking a PRI for your organization:
After reviewing these criteria, if you decide your project or organization
would be a good candidate for a PRI, you should consider contacting both
funders that have previously made grants to your organization and those
that have financed similar projects. But remember that PRIs, like grants,
must further the funder's charitable purpose. You should not appeal
to foundations that explicitly prohibit loan-making or do not fund PRIs
in your project's program area.
After you have explored all other possible sources of support, including
grants, public sector financing, commercial financing, intermediaries (e.g.,
loan funds, credit unions, development banks, venture capital funds), and
religious funders. Many foundations consider themselves 'lenders of
When you believe a foundation can provide more favorable terms of investment.
If the funds will be used to leverage other resources. Foundations are
often more eager to invest in projects in which their resources will be
used to attract additional investment. This is especially true for corporate
If the project has the potential for returning revenue. Funders may be
less inclined to provide PRI support if your projected income will ultimately
cover only start up and operating expenses.
If the project falls within your funder's guidelines, but the amount
of funding needed for your project exceeds the size of the funder's
typical grant. (Some funders make small loans, particularly for cash flow
and bridge loans, to provide short-term capital in cases where another
funding source often government has been committed but the transfer of
funds is delayed. Check to see whether your local community foundation
operates such a loan fund.)
After a foundation declines your grant request by stating that a PRI would
be a more appropriate funding vehicle.
For-profit organizations face additional considerations, as many funders
only grant PRIs to nonprofits. To qualify for a PRI, a for-profit project
or business venture should also: be strongly related to the funder's
charitable interests, e.g, creating microenterprise in a poor neighborhood
or producing an educational film; have relatively little prospect for making
a large profit; and be unable to attract commercial backing.
Developing a PRI Request: Funder Requirements
Because PRIs are of a speculative nature and have a measurable financial
return, funders generally seek more comprehensive information, including
more detailed financial information, than with grant requests. Typically,
funders ask for:
A detailed business plan, including a description of the project, the amount
requested, term, proposed interest rate, and repayment approach.
Financial projections, including cash flow statements.
Names of your other funding sources.
In some cases, collateral (including future revenues) or the rights to
assignment of acquired collateral.
For intermediaries, a status report on your current loan portfolio
Negotiating the Terms of a PRIPRIs require more staff time than grants, to prepare the proposal and negotiate the terms and conditions of the agreement. Those who do not have an experienced manager on staff who can handle a negotiation will need to look for professional assistance usually a lawyer to help negotiate. You can often find such assistance through your board members or by networking in your community. One recipient, who is also an experienced lender, suggested looking for 'pockets of volunteerism' for the needed expertise. In communities without resources, the church community may be a source of such expertise.
The terms of PRIs vary widely according to funders' perspectives
on returns and interest rates. Some funders charge no interest; others
charge just below market rate. Recipients note that the better your track
record, the better the terms, since you are perceived as a lower risk.
In general, financial arrangements with foundations involve less risk,
and the terms are easier to negotiate. As with any negotiation, however,
be prepared to walk away. If the funder sets terms that are too hard to
meet, or if the deal is too complex, do not take it. Ultimately, the cost
to your organization could be great if you cannot meet your obligation.
Managing a PRI
The most typical income sources named by PRI recipients for paying interest
and repaying principal include earned income, capital campaigns, foundation
grants, government funding, or, in the case of intermediaries, loans repaid
by secondary borrowers. Regardless of what your principal source will be,
one organization advises borrowers to have multiple sources of income to
pay interest and to plan in advance for repayment of principal.
Advice from Recipients
Recipients offered a number of suggestions to other borrowers for seeking
and negotiating PRIs:
[ Sidebar 1: PRIs for Community Development
and Housing ] [ Sidebar 2: Measuring the
Do your homework. The funder has a legitimate need for detailed information
on your organization, and you must be able to respond accurately to that
Have a good business plan and recognize the difference between a plan and
a typical grant proposal.
Make sure you know your field inside and out. The funder will have experts
review your proposal and proformas. Unless they believe you have a high
likelihood of success, you will not be funded.
- Learn about the experiences of other borrowers in the field so as not to reinvent the wheel.
Seek the broadest possible purpose for your PRI; your plans may change
in five to seven years.
Use a highly experienced loan manager to negotiate and administer your
loans and experienced managers to train your staff in marketing and loan
- A PRI is often a long-term commitment. The funder needs to know that the leaders in your organization will be there to see the project through repayment.
Be financially prepared for PRIs to take a long time to close.
Develop a means to measure and quantify the success of your PRI-funded
- Be professional pay your debts.
Loren Renz is vice president for research at the Foundation Center, 212-807-3601. This article draws heavily on the recent report Program-Related Investments: A Guide to Funders and Trends, co-authored by Loren Renz and Cynthia W. Massarsky, from the Foundation Center (to order call 800-424-9836). Thanks to the Center for Community Self-Help, Nonprofits Insurance Alliance of California, Northeast Ventures Development Fund, Rensselaerville Institute, Structured Employment Economic Development Corporation (SEEDCO), and Self Help Ventures Fund for tips and advice included in this essay.
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