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On April 5, 2021, New America’s Open Technology Institute and the Johns Hopkins Center for Civil Society Studies, which I direct, released a joint proposal in which we make the case that the nation needs to invest a portion of the windfall proceeds from recent and anticipated auctions of public airwaves to seed a new Digital Futures Foundation dedicated to addressing digital equity gaps in education, telehealth, access to government services, and other critical areas.

This proposal is based on a concept I have dubbed “Philanthropication thru Privatization,” or “PtP,” which involves the formation of endowed charitable foundations out of the proceeds of transactions in which a private, for-profit business acquires ownership or control of assets that the government formerly owned, regulated, or substantially subsidized.

Over 650 such PtP foundations have been identified around the world, including at least 240 health conversion foundations in the US created from the assets of pre-existing, tax-exempt nonprofit hospitals and health insurance organizations when these entities were converted into for-profit businesses. Multiple types of assets have been used to seed PtP foundations, including state-owned enterprises, debt swaps, royalties from regulated industries like lotteries, recovered stolen assets, and penalties for corporate misdeeds.

What does this have to do with digital equity? As it happens, quite a bit.

First, the asset: proceeds from government auctions of airwave frequencies, or spectrum, represent one of the nine asset classes that have lent themselves to such PtP transactions. These auctions essentially privatize the air, or at least the airwave spectrum frequencies in it, by auctioning off portions of it to private companies. And because of skyrocketing cellular network usage and the development of a whole new “5G” cellphone technology, the demand for spectrum has ballooned, creating huge windfall returns from spectrum auctions.

You might be forgiven for not noticing this amid a pandemic and a historic uprising against anti-Black police violence, but just this January an auction of digital spectrum licenses generated over $80 billion in proceeds. Additional sales of at least $50 billion more are expected in the coming months or years. Under the Federal Communications Act, these funds are routinely dumped into the federal general fund, where they are promptly lost from view, rather than being used to address the significant inequities in our digital system.

While these digital inequities have long been recognized, the COVID-19 crisis has thrown them into sharp relief and added urgency to their elimination. For one thing, the crisis has demonstrated how critical broadband access, like electricity before it, has become for every aspect of contemporary life, from education and remote work to health care, public safety, commerce, communication, social interaction, and much, much more. But this has only intensified the unfairness of a digital structure that effectively denies internet access to tens of millions while channeling investment into ever faster and more expensive private internet connections for those able to pay.  Hence, personal video games and digital entertainment are ubiquitous, even as innovative applications for telemedicine, education, access to government services, digital literacy training, and other beneficial uses lag badly behind.

Under these circumstances, the current practice of dumping the proceeds of spectrum auctions into the general federal budget no longer makes sense. Rather, we suggest that the nation should apply the PtP concept and devote a significant portion of recent and forthcoming spectrum auction proceeds to endowing a Digital Futures Foundation that will enhance the usefulness of digital access for all.

But won’t President Biden’s infrastructure plan end these digital inequities? Why do we need additional resources? And why create a foundation?

It is true that Biden’s infrastructure plan would devote $100 billion to broadband. But even if this proposal survives in Congress, the package addresses only two of the three legs of the digital inequity stool: expanding digital access by building out digital infrastructure and promoting digital affordability by subsidizing digital cost. Largely missing, however, is a strategy and resources for addressing the third leg of this stool—enhancing digital usage by closing the serious gaps in public-serving digital applications and training needed to put the access and affordability to use. As New America’s Michael Calabrese noted in the press release announcing our joint proposal, “Getting everyone online will not solve the equally critical challenge of improving the public-purpose applications and training needed to enable full digital inclusion.”

It is these latter objectives that our proposal seeks to achieve by tapping into the resources generated by the windfall proceeds of frequency auctions and using them to endow an independent, private, charitable foundation. Experience in this country and around the world provides strong evidence that such an institution would best have the flexibility, research focus, long-term time perspective, ability to engage other partners, and strong public-benefit orientation that this task will require.

By contrast, these attributes are far less evident in the existing institutional structures in the broadband arena. The major private holders of broadband spectrum licenses lack the incentives or expertise to promote digital inclusion or to develop best-in-class public-benefit applications, which are likely to be less profitable than their commercial applications. The Federal Communications Commission (FCC), which oversees spectrum auctions and the broadband system, is legally focused on sustaining a vibrant and competitive broadband service sector and has no particular expertise or authority for developing public-purpose applications, tools, or training resources. Nor does the option of establishing a trust fund within the government offer a reliable way forward. Legislatures have a habit of raiding such funds for other purposes once political fortunes or priorities change, as was starkly demonstrated in the disappointing experience of the state-run funds established to curtail tobacco addiction in the 1999 Tobacco Master Settlement Agreement.

Fortunately, the policy environment for a Digital Futures Foundation is now more receptive than ever before. The pandemic has made affordable access and improved public-benefit uses of the country’s digital system a top priority. In addition, in 2012 Congress established a precedent for using auction revenues for a public-policy priority, setting aside $7.5 billion to create FirstNet, an interoperable communications network for use in disasters.

More recently, legislative proposals to dedicate a portion of the proceeds of a recent spectrum auction to a general “Digital Divide Trust Fund,” were introduced by leading senators from both parties. Significantly, moreover, a virtual replica of the proposal being proposed here has been established at the state level in the California Emerging Technology Fund created to address digital inequities, seeded by funds the California Public Utilities Commission mandated two cell phone companies to pay to offset any ill effects from their merger. Finally, the auction authority of the FCC is up for renewal in 2022, opening a convenient opportunity to authorize the recycling of auction revenue back into the digital system to promote greater equity and expanded public purpose uses.

The enormous equity gaps in America’s increasingly vital digital system present a serious challenge. Fortunately, the PtP concept of a foundation seeded with spectrum auction sale proceeds offers the country a sensible path to address this challenge—to put in place, in the form of a foundation, a reliable vehicle to address the public-use gaps that exist, backed by a meaningful financing strategy to sustain its activities. Now is the time to seize this option and begin investing the proceeds that broadband auctions generate in a Digital Futures Foundation that will help foster digital public goods and the skills to access them, and thus open our digital future more fully to all.

Lester M. Salamon is an emeritus professor and director of the Center for Civil Society Studies at Johns Hopkins University, and director of the Philanthropication thru Privatization Project at the East-West Management Institute.

This article originally appeared in the Nonprofit Quarterly. See the original article here.

“Philanthropy is a team sport,” observed David Risher at a webinar sponsored by the Boston-based nonprofit United for a Fair Economy earlier this month. As NPQ reported last year, spurred by the pandemic, Risher, an Amazon executive in the late 1990s and early 2000s, and his wife Jennifer, launched their #HalfMyDAF campaign in May 2020 to encourage donor-advised fund (DAF) holders to distribute at least half of their DAF holdings to nonprofits by September. To sweeten the pot, the Rishers organized a $1.4 million fund to match disbursements up to a cap ($10,000 in most cases), with winning nonprofits selected by lot.

As NPQ has regularly noted, the past year has seen a record shift in income and wealth from low-income individuals to people at the top, marked by record stock gains for the well-to-do. Even as US households in the bottom quartile have faced mass unemployment (above 20 percent), the Dow Jones last week briefly passed a record 34,000. Many among the wealthy have held onto their gains, but some have been galvanized by the crisis to step up.

In 2020, the Rishers noted that, “Too often, money remains in funds due to inertia or to the ‘paradox of choice.’ In those cases, the money sits untouched, waiting for the original donor to step forward and put the money to work.” The match, they hoped, would dislodge that inertia. Making giving a team sport might help too. (The same concept informs the rapidly growing giving circles movement.) The 2020 results for the Rishers can be seen on this spreadsheet. All told, the $1.4 million match helped spur 922 grants to 753 nonprofit totaling $7.26 million, with 340 of those donations receiving donation matches.

It is a valiant effort, and, as the Rishers point out, they aim to inspire many more people who might not register with #HalfMyDAF but who might nonetheless be induced to increase their DAF payouts. DAFs are a big target. As NPQ reported last month, as of the end of 2019, DAF holdings totaled $141.95 billion. In 2020, it appears that about one in four of those dollars—a record percentage—made it into the hands of nonprofits. That still means roughly three in four were rolled over into 2021.

In 2021, the Rishers have launched #HalfMyDAF again, which is why they were at the UFE webinar. This year, with their daughters and two other families contributing to the match pool, the overall match fund has been increased to over $3.1 million, with the goal of spurring $20 million in DAF disbursements. This time, too, $2 million of the $3.1 million-plus in matching funds is focused specifically on providing matches for donations that support “racial justice, climate & environment, education in underserved communities, and reproductive health.”

The Rishers, of course, are hardly the only ones seeking to free up wealth for social benefit. Another group—one that has been pursuing this path for over two decades—is Resource Generation (RG), which defines itself specifically as “a multiracial membership community of young people (18–35) with wealth and/or class privilege committed to the equitable distribution of wealth, land, and power.”

The politics of RG are far more explicit, but it also faces a gap between charitable intention and actual donations. As the RG website details, “we know that there are large amounts of invested capital held by our members and their families. Participants reported giving $68 million in 2020, but in the 2018 survey (the most recent) RG constituents reported assets of $1.9 billion individually.”

In other words, in 2020, RG members donated about 3.6 percent of net assets. Relatively speaking, that number is high. By comparison, a report based on 2018 data of America’s top ten billionaires found that the average billionaire donated only 0.94 percent of net assets. But still, RG members believe they can do better. In particular, if 3.6 percent of net assets are donated, that means 96.4 percent are not—and, if those assets are invested on Wall Street or in private equity, then, much like many foundations or giving pledgers, the good work done by the donor hand could be undone by the investing arm.

To avoid this loophole, RG has pledged to “move boldly around investments as a complementary strategy to social justice philanthropy” with the aim that members will invest a sizeable amount of that $1.8 billion-plus in member assets in alignment with their social justice goals. The group’s transformative investment principles, announced earlier this month, read as follows:

At a national Zoom convening to celebrate the release of these investing principles, Nwamaka Agbo of the Kataly Foundation noted that the investment principles align with the projects Kataly is supporting, which “are rooted in building political power.” Agbo adds that the principles provide a “helpful grounding point,” making the movement “accountable to our commitment to redistribute our land, wealth and power.”

Another speaker at the event was Jessica Norwood, founder of Runway, an effort to raise startup loans and technical assistance for Black-owned businesses. Norwood noted that her remarks came “at a time of distress” marked by mass closures of Black-owned businesses, many of which were owned by women. “I wonder what we will call this moment in history,” she asked. “An economic extinction,” she answered.

The past year, Norwood points out, shows why the principles matter. “We know investing can be extractive,” she adds. Norwood emphasized the fifth principle of right relationship, noting that her nonprofit “sent universal income payments to our entire portfolio” to cushion the blow of COVID-19.

For his part, Michael Johnson, director of advancement for the NDN Collective, highlighted the principles for redefining “what a return in investment can be” and called for a goal of “generational community prosperity.” Kate Poole of Chordata Capital called for centering “reparative” investments, while her Chordata partner Tiffany Brown lifted up RG’s vision of an “equitable distribution of land, wealth, and power.”

There are overlaps between the two efforts. Sara Sargent, Resource Mobilization Director at UFE who was master of ceremonies for the #HalfMyDAF event, is herself an RG member. Another UFE event attendee commented on the shift in mentality required. This participant expressed surprise at “people who let money sit in their DAFs,” adding that, “If you want to walk your talk, you’ve got to grant it out.”

This article originally appeared in the Nonprofit Quarterly. See the original article here.

Shaun Leonardo: I’m seeing a number of these questions regarding power dynamics that play out with the welcoming—or “acceptance,” maybe, is more appropriate—of a co-director. And I want to make one thing very clear: I didn’t take on this invitation to fulfill tasks that Allison [Freedman Weisberg] did not want to do. Nor did I take on this invitation, or accept this invitation, to be the public-facing Brown person of the organization.

And so, in assessing power dynamics, what is critical is that we—Allison and I—are collaborating to expand capacity. One with imagination, one with possibility that, yes, is messy; yes, might be slower. But then I would reverse the question and say, “What did a top-down, hierarchical methodology that centers speed and perfectionism…who did that serve in your organization?”

And I’ll get to this later when we get to a final question, but I think intentionality means that shared power opens possibility. It means that you are asking yourselves, in collaboration, “What is it that we’re not seeing? Is this the best way to do things? How do we call people into a practice so that this organization reshapes and evolves toward a community of care and accountability, toward a community of possibility?” And that’s a very different starting point.

This article originally appeared in the Nonprofit Quarterly. See the original article here.

Excerpted from Letting Go: How Philanthropists and Impact Investors Can Do More Good by Giving Up Control. Copyright © 2021 By Ben Wrobel and Meg Massey. Self-published by the authors and reproduced here with author permission.  The following section draws on portions of Chapter 2, “The Room Where It Happens,” pp. 26–27, 29–32, 34.

Editor’s note: In Letting Go: How Philanthropists and Impact Investors Can Do More Good by Giving Up Control, Ben Wrobel and Meg Massey call for philanthropy and impact investment elites to cede decision-making power to community groups. Later in the book, they outline specific ways to make this shift a reality, but here they very persuasively outline what’s at stake—and how the status quo in philanthropy often works to control and strictly limit genuine community participation.

From Diversity to Accountability

In philanthropy, there’s a tendency when talking about representation to start and end the conversation with staff and board diversity. In politics, business, or any other field, the demographic makeup of the room—the all-white board, or the all-male panel—is a justifiable flashpoint for activists. But the issue of diversity (who is in the room) only addresses one part of the equation. The other part is accountability, or how the people in that room consult with those outside it.

[…]

Accountability is always an important part of the conversation. On the level of city politics, diversity is about whether the city council members look and sound like their constituents; accountability is about whether they hold open town meetings or make important decisions behind closed doors. In business, diversity is about scrutinizing the demographic makeup of the board or C-Suite management, while accountability is about challenging a corporation to commit to involving external stakeholders in governance.

[…]

The Ladder of Participation

The concept of participation is a little bit like the concept of democracy: vague, abstract, and easy to co-opt.

Most philanthropists, if asked, would probably say that they make an intentional effort to engage people with lived experience. They could probably point to specific examples—a site visit, community panel or feedback survey. As one grantmaker told us, “No one in philanthropy has anything bad to say about participation.”

But what does authentic participation actually look like? And how can we measure it? Edgar Villanueva is one of many critics pointing out that grantmakers tend to talk a bigger participation game than they practice. Authentic knowledge, he writes, can’t come from “a site visit to the community or interviewing someone from the affected community. It comes from living inside that community and experiencing that issue for oneself. Period.”

Fortunately, there’s a framework for measuring participation that comes in handy: the Ladder of Citizen Participation. The framework comes from the world of public policy. In 1967, US President Lyndon B. Johnson tasked a policy analyst named Sherry Arnstein with developing a strategy to integrate citizen feedback into a new program for revitalizing slums and blighted neighborhoods. Local officials were given primary control over how funds were spent, but not all were committed to engaging residents. To the extent that town hall meetings or surveys were used at all, they were viewed as a necessary evil rather than as an opportunity to gather meaningful information. As Arnstein met with local officials, she saw repeatedly how decision-makers dismissed resident concerns, even ones they’d solicited, as ill-informed or just plain wrong.

This experience led Arnstein to publish an eight-page treatise in the academic Journal of the American Planning Association laying out her ladder of participation. The ladder was a visual framework to illustrate how decision-makers can engage community members in any civic process.

The lowest rung is nonparticipation. This refers to any time where power holders make decisions with minimal input: a one-way information flow with no feedback channels. An example of this might be a government office that holds a monthly press conference to share what they’ve been working on but takes no questions.

The next rung up is tokenism. The most common example of tokenism is the dreaded feedback survey. People may have the opportunity to fill it out and share their opinion, but there’s no way of knowing whether it’s going to be seriously considered or put straight into the recycling bin.

But Arnstein was more than just a critic; she wanted to offer a positive vision for how to authentically engage people whose lives will be affected by decisions you make. The highest rung on her Ladder of Participation is citizen power. This refers to processes that authentically engage the community, whether it’s inviting citizens onto a budget committee or handing the entire job of planning and managing a revitalization project over to a neighborhood group.

Arnstein’s ladder is a useful framework for quantifying the level of authentic engagement between a decision-making body and the general public. As one contemporary example, consider civilian review boards, a mechanism that’s become increasingly popular for holding city police departments to account. In theory, a review board is a powerful way to hold officers and political appointees accountable for abuse and brutality. But in practice, some boards have more power—more “teeth”—than others. There are nearly 150 oversight boards in the United States; the ones that have some sort of formal enforcement power get high marks from criminal justice reform advocates, while others are clearly designed to be little more than democratic window dressing.

With this framework at our disposal, we can speak more directly about decision-making at most foundations. But first let’s take a step back to talk about the funding process. This gets to the how of philanthropy—how money moves from the grantmaker to the nonprofit.

[…]

The Funding Process

The first decision point involves developing a hypothesis, or a theory of change. A theory of change is a mini manifesto that lays out what the grantmaker thinks is wrong with the world and how they want to go about solving it. It might sit on a foundation’s website or in its marketing materials. It can get revisited every year or stay the same for a century. Either way, a theory of change defines the foundation’s values, priorities, and vision for the future.

With the theory of change in hand, the next step in the funding process is to build a pipeline of ideas. The grantmaker will usually post a call for applications to solve a problem aligned with its theory of change. It’s a lot like a job application, with specifics about location and past experience, and a request for a well-written cover letter. Some grantmakers receive hundreds of applications in their pipeline.

Finally, there is the all-important stage of vetting options and deciding who to fund. This vetting process can be as simple or complex as the grantmaker wants it to be. Many foundations have long lists of criteria and multi-stage approval processes; on the other hand, an individual donor might decide who to fund based on nothing more than their gut.

[…]

Every one of these decision points offers an opportunity for grantmakers to engage people outside of their organization. But most of the time, that doesn’t happen.

[…]

Arnstein wrote that one of the most persistent dangers for any citizen was that a process that sits near the bottom of the ladder could be disguised as one that sits at the top. “There is a critical difference between going through the empty ritual of participation and having the real power needed to affect the outcome of the process,” Arnstein wrote in 1969. Participation without redistribution of power “allows the power holders to claim that all sides were considered but makes it possible for only some of those sides to benefit.” For the powerless, it is an “empty and frustrating process.”

…

Ben Wrobel is Director of Communications at Village Capital, a pioneer in participatory investing. He started his career as chief speechwriter for the NAACP, and later raised money for voter registration campaigns including Stacey Abrams’ New Georgia Project. He has edited two best-selling books: REACH: 40 Black Men on Living, Leading and Succeeding and The Innovation Blind Spot.

Meg Massey is a journalist covering social impact and social justice in the world of finance. Her writing has been featured in Time, Fortune, Impact Alpha, and others. She began her social sector career at the Obama White House, and later led strategic communications for the Global Steering Group for Impact Investment and the Urban Institute’s Research to Action Lab. She is a graduate of Mount Holyoke College and Georgetown University.

This article originally appeared in the Nonprofit Quarterly. See the original article here.

In addition to grants, foundations have been increasingly using Program Related Investments, or PRIs, to support nonprofits. PRIs can be a powerful tool to support foundation and nonprofit missions, but they only fit some projects. Understanding their value and uses can be useful for both foundations and nonprofits. For foundations, knowing the ins-and-out is vital to use the tool effectively. For nonprofits, understanding how PRIs work can help your organization assess whether this tool is right for you. For both, it is important to understand when PRIs are good funding sources, what they can be used for, and what good PRI terms look like. 

What Is a PRI?

A PRI is a loan, equity investment, or guaranty made by a foundation in pursuit of its mission, rather than to generate income. The recipient can be nonprofit or for-profit, although most PRI recipients are nonprofits. The US Internal Revenue Code treats PRIs similarly to grants. In contrast to ordinary, market-based investments from their endowments, foundations do not expect PRIs to produce market-rate returns.

The concept of PRIs originated in the US Tax Reform Act of 1969. Since then, foundations including Ford, Rockefeller, MacArthur, Packard, and Annie E. Casey have used PRIs creatively to further their charitable missions. More and more foundations across the nation are choosing to use this tool.

PRIs are conceptually and legally distinct from two other kinds of socially minded investments made by foundations: Mission-Related Investments (MRIs) and Socially Responsible Investments (SRIs). MRIs and SRIs are investments made out of the corpus of the foundation. PRIs, by contrast, come out of a foundation’s grantmaking budget.

The US Internal Revenue Code defines PRIs as investments that meet three criteria:

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

PRIs count toward a foundation’s qualifying distributions—the required annual payout of five percent of its endowment.

Who Makes PRIs?

The philanthropic sector is increasingly understanding how PRIs can be used. Some larger foundations have entire departments with large investment portfolios that are dedicated to PRIs. Smaller foundations may have invested in one or two PRIs, either by themselves or in partnership with a larger foundation. The chart below shows some of the top U.S. foundations that use PRIs as a form of investment.

Case Studies

PRIs can seem intimidating to both the recipient and the investor if neither have participated before in a PRI arrangement. It is important that the project be a good fit for this source of capital. Below are two examples of projects that have used PRIs to leverage their impact.

Providing Low-Interest Loan Capital: Rural Women-Led Business Fund

First Southwest Community Fund (FSWCF) is a nonprofit based in Southwest Colorado that provides equitable access to capital for small businesses, startups, and nonprofits. PRIs are an excellent capital source for nonprofit loan funds, as there is a clear source of repayment. First Southwest Community Fund used a combination of PRIs and grant capital to fund their Rural Women-Led Business Fund. This fund is designed to create access to funding for women-led/identifying entrepreneurs and small businesses in rural Colorado, with a focus on serving women of color, through loans, education, and technical assistance. One foundation participating in the Rural Woman-Led Business Fund is providing a $500,000 PRI at a one percent interest rate for a 10-year term (for the loan fund) and a $250,000 grant for programming. Another foundation is providing a $300,000 PRI at no interest for a five-year term and a $100,000 grant for programming. By combining these capital sources, FSWCF is able to provide a low-interest loan fund of $800,000 that offers loans up to $75,000 to women-led businesses in rural Colorado. Loans are provided to businesses at an interest rate between one and three percent—far lower than most bank loans. The PRI structure means that FSWCF can both repay the PRI and cover administrative costs while developing a loan loss reserve. In addition to these PRI loans, grant dollars are used for educational programming and to invest in pipeline development through accelerator programs, mentorship, and high school programming.

Denver Transit-Oriented Development (TOD) Fund

The Urban Land Conservancy, Enterprise Community Partners, the Denver Office of Strategic Partnerships, and several other investors partnered to establish the first affordable housing TOD acquisition fund in the country.

The purpose of the Denver TOD Fund is to support the creation and preservation of over 1,000 affordable housing units through strategic property acquisition in current and future transit corridors where the city’s light rail system is being built. The Fund answers a basic real estate conundrum: when the economy is bad, property values are low and ripe for purchase, but access to capital is poor and affordable housing developers are scarce. These economic down times provide the opportune moment to invest in real estate around proposed transit stations in order to capitalize on lower property values and preserve affordable housing before the city’s light rail system is fully operational.

The partnership of government, quasi-governmental organizations, banks, nonprofits, and foundations, combined with the use of PRIs, grants, equity investment, and traditional loans are critical components of the Denver TOD Fund.

Enterprise Community Partners assembled the initial $15 million in capital that allowed the Fund to begin operations in 2010. The City and County of Denver is the largest single investor, providing $2.5 million in first loss investment. ULC committed the initial $1.5 million equity to the Fund and leads the real estate acquisition, management, and disposition of assets for the Fund. The Rose Community Foundation made the first PRI to the TOD Fund for a Colorado-based foundation. Several other foundations later put in PRIs as the Fund expanded. Since then, the Denver TOD Fund has been seen as a model throughout the country.

The Denver TOD Fund was capitalized at $15 million but has now grown to $24 million in total loan capital. This revolving loan fund makes capital available to purchase and hold sites for up to five years along current and future rail and high-frequency bus corridors in metro Denver. The $24-million fund leverages over $500 million in local economic activity, supporting construction and permanent job generation in many low-income neighborhoods. The Fund also directly benefits low-income households that on average spend 60 percent of their gross income on housing and transportation. By controlling these expenses and providing access to quality, environmentally sustainable housing, the TOD Fund makes it possible for families to build wealth and access employment and educational opportunities. It also provides employers with access to an expanded workforce.

Nonprofit Considerations for Taking on PRI Debt

PRIs can be of great benefit for many nonprofits, but they are still fairly new to many, and it’s crucial to understand how they work. Some questions a nonprofit should consider when approaching a foundation for a PRI are:

Is your project/organization a good fit for a PRI? Two key matters to consider here are your ability to repay the PRI and how you intend the use the money. Regarding the latter, a PRI most often makes sense when a project requires a high level of up-front capital, such as affordable housing, business start-up, farming, and other large capital projects. Revolving loan funds are also often a good fit for the PRI model.

Do the terms meet your need? Foundations often dictate the term length based on their PRI policy, but it’s important to take into consideration how you plan to use the PRI. If the PRI term is not long enough for you to be able to repay it, it is not a good idea to take on this form of capital.

Who gives PRIs in your local area? Let’s say that your nonprofit is interested in getting a PRI low-interest loan. How do you find a foundation willing to provide one? One key step is to ask your current foundation supporters if they provide PRIs. If not, you can research whether other local foundations provide PRIs or if your project might fit national foundation priorities. You can also sometimes leverage foundations that already provide PRIs to help other foundations consider using this tool.

Assuming you find a wiling PRI provider, other factors to consider include the following:

• Interest rate: Normally, PRI interest rates fall between zero and three percent. Sometimes, the rate varies depending on the level of impact achieved.
• Repayment schedule: These can vary. Some PRIs require monthly payments. Others allow the nonprofit to make payments on a quarterly or annual basis.
• Covenants: Different foundations may require different covenants as part of the PRI terms. Some foundations may require that your project has income that generates a specified debt service coverage ratio, for instance.
• Reporting requirements: Like grants, PRIs require foundation reports, so it is important that the nonprofit knows what these reporting rules are.
• Due diligence: Foundations vary on how much information they require to make a PRI. Some foundations may contract with a consultant to perform a deep dive into the project or organization. At a minimum, you will likely be expected to provide two-to-three years of financial statements.
• Legal documents: This can be challenging for smaller nonprofits, or nonprofits that are not familiar with loan documents. It is advisable to consult with a lawyer or consultant to help you review the PRI documents. Sometimes foundations may help with this. Generally, you can expect that the following legal documents will be required: a) letter of intent, b) PRI loan agreement, c) promissory note. 

Making the PRI Case to a Foundation

PRI investments are driven by impact. However, unlike a grant, they have a risk rating, as the goal is for foundations to at least get their investment back, hopefully with some interest. Key things to consider when making a case to a foundation for a PRI include:

• Impact: Here, it’s important to show how the PRI will help your nonprofit achieve its goals and why achieving those goals matters.
• Risk: Yes, PRIs are supposed to be risk capital. But foundations­—surprise!—are often conservative, so showing a track record of success and strong community partnerships can allay risk concerns.
• Capacity: A foundation will want to know who is on your team and how you will track both social impact and loan repayment.
• Partnership: Taking on a PRI is a partnership—perhaps more so than a grant which can sometimes be a one-time transaction. If the foundation is aligned with your values and mission, it is more likely the PRI-funded project will be successful.

To PRI or Not to PRI?

PRIs are not for everyone. But when you have a project that requires large, up-front capital input, PRIs can be a useful option. They may also allow you to seek funding from a source that might otherwise not be accessible. These days, many foundations are looking to grow their pipeline of PRI investments. Understanding PRIs may help you achieve your organization’s goals.

This article originally appeared in the Nonprofit Quarterly. See the original article here.