Program-related investments and impact funds

Private foundations must use their money for charitable purposes. Most of it is invested for income, but tax law lets a foundation make a program-related investment (PRI): a loan, loan guarantee or investment whose main purpose is the foundation's charitable mission, where making money is not a significant purpose. The test the IRS points to is whether an investor looking only for profit would invest on the same terms. A PRI is not a gift: you repay a loan, and a foundation can take shares.

The IRS and its regulations give examples of PRIs to businesses:

• Below-market loans to small businesses in low-income areas, or owned by members of economically disadvantaged groups, when banks will not lend on workable terms.
• Loans to a business, even one not owned by low-income people, whose jobs matter to a struggling area, or to a large company to open a plant there.
• Buying shares in such a business when lenders want more equity before they will lend.
• Loans to nonprofits, for example to buy a building for community arts, and investments for environmental purposes.

A PRI can earn a good return without losing its status, as long as making money was not a significant purpose when it was made. A foundation can also accept shares alongside a below-market loan.

Mission-related investments: separately, the IRS has said a foundation may invest in things that further its mission at a lower expected return than its other investments, as long as its managers act with ordinary business care and prudence. Some foundations invest this way as well as, or instead of, making PRIs.

Finding one: no public body keeps a list of foundations that make PRIs. A PRI must serve the foundation's own charitable purpose, so start with the foundations that already fund your field (for example jobs, housing, health, the environment or the arts) or your region. Community development financial institutions (CDFIs) are another source of mission-driven loans.