Program-related investments are under-used yet offer a positive way of “multiplying the use of funds,” says Daniel Mielnicki of the law firm Berger Singerman.

Despite having a bad reputation for being too risky for the average private foundation, program-related investments are under-used and offer a positive way of “multiplying the use of funds,” Daniel Mielnicki of the Florida-based business law firm Berger Singerman told Family Wealth Report.

Berger Singerman has around 75 attorneys working from offices in Boca Raton, Fort Lauderdale, Miami and Tallahassee. Mielnicki’s area of focus is estate and tax planning for high net worth individuals, as well as: estate and trust administration; capital preservation and wealth transfer; drafting wills and trusts; and charitable tax planning.

Speaking from Berger Singerman’s office in Boca Raton, Mielnicki said that PRIs are an “exciting area” which he has gotten more involved with recently, particularly in light of escalating awareness about mission investing and social enterprise.

PRIs - defined by the Tax Reform Act of 1969 - are investments in a venture, enterprise or charity that are within one’s “programmatic mission” and, significantly, which satisfy a foundation’s 5 per cent annual minimum distribution requirement. They take their most common form as loans, loan guarantees or equity investments that typically yield below market-rate returns, and are also exempt from the excess business holding tax.

For the recipient, a PRI provides access to capital at lower rates than otherwise likely available. As previously highlighted by Foundation Source, they can also attract other lenders or investors, sharpen fiscal management practices and boost credit history. For the grantor, the principal benefit is that the repayment or return of equity can be recycled for other charitable activities. PRIs can also be used by senior members governing the foundation to teach younger generations about social and financial responsibility, Mielnicki noted.

“The PRI is one vehicle of involving the whole foundation in the grant-making process, beyond just making a grant. It’s a continuing link, if you will, with the grantee,” he said. “Foundations like the notion of continuing involvement from a control point of view and it also allows them to get their hands dirty.”

Apprehension

However, it has been observed by many that - even with growing interest - foundations have been apprehensive when it comes to using PRIs as vehicles for their philanthropic endeavors.

According to a report by the Lilly Family School of Philanthropy, entitled Leveraging The Power Of Foundations, less than 1 per cent of US foundations made PRIs each year over the past 20 years or so.

“Even in 2004, the peak year of PRI activity in terms of the total number of PRIs, as shown by the data, only 137 foundations made PRIs, totaling $312.6 million, which accounts for only a small portion of the country’s over 66,000 foundations with $510.5 billion in assets and $31.8 billion in grant dollars that year (Foundation Center, 2011),” the report said.

Mielnicki cited two main reasons for this. First, he said, “like most things that are not simple,” many smaller foundations are intimated by the concept of PRIs. “They don’t believe that they have the ability to formulate such a program,” he said. Then there is the fact that, a lot of the time, many “simply don’t even know that such a thing exists.”

While PRIs are used - and have been for a while - by large foundations such as the Bill & Melinda Gates Foundation, these organizations are supported by a large number of staff and have more resources than would a smaller foundation. Meanwhile, insufficient IRS guidance on what counts as a PRI has also been cited as a reason why many foundations are holding back; indeed, they may face penalties if a PRI doesn’t meet the vehicle’s qualifying criteria.

Ultimately, foundations must ensure that their PRIs - just as is the case with any other grant - are charitable and compliant in their legal structure.

As a rule of thumb, Mielnicki outlined the three strands to a qualifying PRI: The primary purpose of the investment must be to accomplish a charitable purpose; the production of income must not be a significant component; and the investment must not be used for political purposes.