Program-Related Investments

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 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 last resort.'
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 funders.
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.

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.

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 PRI

PRIs 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:

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 need.
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 maintenance.
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 project.
Be professional – pay your debts.

[ Sidebar 1: PRIs for Community Development and Housing ] [ Sidebar 2: Measuring the Market ]

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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