Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=193058
Story Retrieval Date: 12/10/2013 12:06:35 AM CST
The MacArthur Foundation is in the business of giving money away. It’s how they roll.
But when foundation president Robert Gallucci addressed members of the City
Club of Chicago on Wednesday, he touched on an aspect of the foundation’s work
that lends money instead of granting it.
A question from an audience member about housing prompted Gallucci to mention a funding mechanism called program-related investments, a type of grant that, he said, “May turn out, in some cases, to be a better vehicle to take advantage of a circumstance in which there is a financial incentive.”
In other words, there’s a different and sometimes better alternative to giving money away.
The investments, Gallucci said, are repaid, allowing the foundation to give the same money to other worthy projects.
It fits in with the foundation’s mission, Gallucci said, because “the effort that we believe is most effective, which is a comprehensive approach rather than just focusing on one variable.” While some foundations focus on a particular issue or area, Gallucci said MacArthur is more holistic in its outlook – working to affect the human condition.
One expert in program-related
investments said although the idea is not new, MacArthur is using it creatively.
“It has its roots in the ’60s but it’s been gaining momentum in the past three to four years,” said Peter Berliner, the managing director at PRI Makers in Seattle, a national network for groups involved in program-related investments. The MacArthur Foundation is a leader in this field, he said.
Also known as venture philanthropy, Gallucci said a PRI “makes money available…where there will be a return, a below-market rate return, so we can regrant the money in some other way.”
“Particularly in these difficult economic times, people are looking for a way to do more with fewer resources,” Berliner said. “The use of investment is a tool that’s available to foundations beyond grantmaking.”
Alison Clark, program officer for the MacArthur Foundation’s PRIs, said the Foundation has been doing this since 1986.
“It’s phenomenally successful,” Clark said. “We’ve been at this the longest and we have a very high repayment rate.”
To maintain an exempt status, the IRS requires foundations to give away 5 percent of their income at terms that no bank or profit-seeking investment company has.
“[The loans] not on terms a bank would make in the sense that we have a lower interest rate and don’t request collateral,” Clark said. A typical PRI loan also spans about 10 years.
PRIs also make certain high-risk investments seem safer and can generate interest from other investors.
“You make good investments and they don’t generate major return, but as the dollars come back they can be reused for multiple uses over time,” Berliner said.
Clark said that loans are the vast majority—about 80 percent—of the PRIs, as opposed to equity investments or other financial investments. She estimated about the foundation has invested $40 million out of the $375 million in credit enhancements and loan guarantees.
Right now, a number of PRIs are closing—meaning the loans are nearly repaid—but there are about 10 newly approved PRIs in the works. The process is long and complicated, Clark said, but there is about $275 million nationally in outstanding PRIs right now.
Clark said most PRIs go to community development financial institutions such as the Chicago Community Loan Fund, the Illinois Facilities Fund and other non-bank lending institutions that work to preserve housing.
For example, by lending to housing developers to support existing rental housing instead of constructing new buildings, Clark said. A smaller piece of the foundation’s investment portfolio goes to ending foreclosures in Chicago.
The only time it makes sense to do a PRI is for an organization that has a revenue model, Clark said. The organization, because it is bringing in income, inherently can generate the money to repay the loan.
In the case of housing developers, they earn developer fees, which they use to make payments. In the case of non-bank lenders, they can borrow from the MacArthur Foundation at 2 percent then lend at 6 percent, using that interest to repay the money, Clark said.
It’s difficult for social service organizations to participate in PRIs because they’re not earning revenue, Clark said. They may charge fees for services, but those go toward operating costs and there isn’t much left to repay a loan.
The Community Investment Corporation, a nonprofit mortgage lender that rehabs multifamily apartments, just closed its second PRI with the MacArthur Foundation, Clark said. It lends to property owners so they can retrofit their apartment buildings with energy efficient appliances and lighting. Then property owners pay back with what they save from energy costs.
The CIC has expanded from Cook County to the entire metro Chicago area. It was so successful with its first $1 million PRI that the MacArthur Foundation gave them another for $5 million, Clark said.
She said PRIs are a great way for organizations to leverage other capital. “It lets them operate very differently in the capital market.”
“We’re always happy to proselytize about PRIs,” Clark said.