Program-Related Investments

DEFINITION

 An investment in which the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation of property, shall not be considered as investments which jeopardize the carrying out of exempt purposes.

BEST PRACTICE   

 Though commonly a Private Foundation investment approach for charitable impact, Public Charities can also meet charitable purposes through the distribution of Program-Related Investments.

 A Program-Related Investment (PRI) must meet three requirements to qualify as such:

1. Advance the primary exempt purpose of the organization.
2. Have no concern of the production of income or appreciation of property.
3. Not be used directly or indirectly to lobby for political purposes.

First, a PRI must be made to support an exempt purpose under section 501(c)(3).

Examples:

1)     Making an investment to a for-profit researching an “orphan drug” to help cure a disease that primarily affects people in developing countries. There is no commercial marketability or potential for the production of income.

2)     Making investments to for-profit utility companies to develop power grids in developing countries. Again, there is no potential for gain in income in providing this service.

3)     Loans made to blind persons who desire to establish themselves in business and are unable to secure traditional lending.

Second, the PRI should not be focused on earning income, but rather accomplishing the exempt purpose through its distribution. The accomplishment of the exempt activity may also not be profitable. This is where, such investments may be made to for-profits to provide their service or develop a product which they would not normally do, because there is no commercial viability for the for-profit to earn money. In this way, charitable populations can be served without existing commercial equivalents. Such investments can provide economic development and combat community deterioration.

Such investments have lower returns than traditional lending with low interest rates, being below the market rate of traditional lending. These investments can also lead to the acquisition of an equity interest of the recipient entity. When this is the case, the investor disposes of the interest upon the success of the recipient business.

Third, program-related investments cannot be used directly or indirectly to influence legislation or support any political candidate or campaign. Expenditure responsibility from the recipient to the investing entity will ensure funds are only used for their intended purposes, in meeting an exempt program under IRC Section 501(c)(3).

RESOURCES

IRS Notice 2015-62

Revenue Ruling 78-90

Revenue Ruling 74-587