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Program-Related Investments

Program-related investments (PRIs) are those in which:

  1. The primary purpose is to accomplish one or more of the foundation's exempt purposes,
  2. Production of income or appreciation of property is not a significant purpose, and
  3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it is relevant whether investors who engage in investments only for profit would be likely to make the investment on the same terms as the private foundation.

If an investment incidentally produces significant income or capital appreciation, this is not, in the absence of other factors, conclusive evidence that a significant purpose is the production of income or the appreciation of property.

To be program-related, the investments must significantly further the foundation's exempt activities.  They must be investments that would not have been made except for their relationship to the exempt purposes.  The investments include those made in functionally related activities that are carried on within a larger combination of similar activities related to the exempt purposes.

Examples

The following are some typical examples of program-related investments:

  1. Low-interest or interest-free loans to needy students,
  2. High-risk investments in nonprofit low-income housing projects,
  3. Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,
  4. Investments in businesses in low-income areas (both domestic and foreign) under a plan to improve the economy of the area by providing employment or training for unemployed residents, and
  5. Investments in nonprofit organizations combating community deterioration.

The regulations under section 4944 contain several detailed examples of investments that qualify as program-related investments.  Those examples reflect current investment practices and illustrate certain principles, including

  1. An activity conducted in a foreign country furthers an exempt purpose if the same activity would further an exempt purpose if conducted in the United States,
  2. The exempt purposes served by a PRI may include any of the purposes described in section 170(c)(2)(B) are not limited to situations involving economically disadvantaged individuals and deteriorated urban areas,
  3. The recipients of PRIs need not be within a charitable class if they are the instruments for furthering an exempt purpose,
  4. A potentially high rate of return does not automatically prevent an investment from qualifying as program-related,
  5. PRIs can be achieved through a variety of investments, including loans to individuals, tax-exempt organizations and for-profit organizations, and equity investments in for-profit organizations,
  6. A credit enhancement arrangement may qualify as a PRI, and
  7. A private foundation’s acceptance of an equity position in conjunction with making a loan does not necessarily prevent the investment from qualifying as a PRI.

Investment changes

Once an investment is determined to be program-related, it will continue to qualify as a program-related investment if changes in the form or terms of the investment are made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation of property.  A change made in the form or terms of a program-related investment for the prudent protection of the foundation's investment will not ordinarily cause the investment to cease to qualify as program-related.  Under certain conditions a program-related investment may cease to be program-related because of a critical change in circumstances, such as serving an illegal purpose or serving the private purpose of the foundation or its managers.

If a foundation changes the form or terms of an investment, and if the investment no longer qualifies as program-related, it then must be determined whether or not the investment jeopardizes carrying out its exempt purposes.

An investment that ceases to be program-related because of a critical change in circumstances does not subject the foundation making the investment to the tax on jeopardizing investments before the 30th day after the date on which the foundation (or any of its managers) has actual knowledge of the critical change in circumstances.


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