By the Council on Foundations and the Americans for Community Development
ARLINGTON, VA ”The Council on Foundations ”a nonprofit membership association of grant-making foundations and corporations and Americans for Community Development ”the organization for the Low-Profit Limited Liability Company (L3C) ” have announced that Representatives Aaron Schock (R-Ill.) and Jared Polis (D-Colo.) have introduced a bipartisan Philanthropic Facilitation Act of 2011 (H.R.3420) to the U.S. House of Representatives. The act simplifies the utilization of program-related investments (PRIs) that provide unique ways to stimulate economic growth while furthering social missions at no cost to government.
In this challenging time for the American economy, the Philanthropic Facilitation Act of 2011 significantly increases the potential for philanthropic investment by foundations in PRIs to further charitable activities. Also, it will vastly simplify the process.
“Most people who find a job during a down economy are hired by a small business with fewer than 500 employees,” said Congressman Aaron Schock. “Startups rarely make money in their first five years. Those that have a charitable purpose or are located in economically depressed areas have an even tougher time. Program related investments by foundations address this latter group of businesses and substantially improve the possibilities of their success. This act recognizes the need to facilitate PRIs by foundations by streamlining the process for securing IRS approval to access much needed capital from foundations for local companies to grow, hire workers, help bring down unemployment and provide a benefit to the communities in which they operate.”
It time we utilize innovative ways to stimulate the economy and create jobs without using government dollars, said Congressman Jared Polis. The Philanthropic Foundation Act of 2011 will spur the growth of socially responsible business by simplifying partnerships between nonprofit foundations and for-profit investors. The existing L3C and other for-profit financial tools can generate a vast pool of investment funds needed to develop companies dedicated to the public good.
The Philanthropic Facilitation Act is another great vehicle through which to attract more capital to investments that improve society and encourage economic growth, said Jeff Clarke, Interim CEO of the Council on Foundations. Today, program-related investments are a key ingredient in the process of rebuilding American cities, re-employing workers and helping create new business models at a time when the economy needs fresh ideas.
PRIs include interest-free or below-market loans, loan participations or guarantees, letters of credit and equity investments. Since 1969, private foundations have been allowed to count PRIs as charitable expenditures, and these investments also are exempt from other federal laws that apply to private foundations. The Philanthropic Facilitation Act of 2011 is expected to make PRIs more prevalent by providing for a simple registration and approval process by the IRS. Although not required, many foundations have sought approval from the Internal Revenue Service before entering into a PRI. However, the present legal process for obtaining approval, the private letter ruling, has been extremely costly and lengthy, discouraging the creation of vital programs and their potential for jobs.
The act will increase the efficiency of this system because the process can be initiated by the entity that seeks to receive PRIs. Once granted, multiple foundation investors could rely on the approval rather than each having to spend time and money on a separate approval. The measure will also improve transparency by requiring entities that go through the voluntary registration process to report separately and publicly on the PRI dollars they receive. A relatively new financial tool that benefits from PRIs, an L3C is the for-profit with the nonprofit soul. An L3C is a for-profit company with a stated exempt purpose as its primary reason for being. It also has the flexibility and access to capital of a for-profit business. PRIs are particularly important in tough times because they often leverage market rate investments into missions that further a charitable purpose, said Robert Lang, CEO of Americans for Community Development and creator of the L3C. The Philanthropic Facilitation Act of 2011 will increase the frequency and efficiency of this system.
Some examples of PRIs:
In Milwaukee ”where unofficial unemployment in some neighborhoods exceeds 30 percent ”one foundation is using PRIs to help minority-owned firms grow and hire more city residents. The Helen Bader Foundation has invested more than $6 million in Generation Growth Capital, a community development venture fund with a portfolio of firms connected to construction, manufacturing, and other vital industries. These PRIs contribute to local economic growth and play a role in employing hundreds of local residents.
In 1981 the Pearl M. & Julia J. Harmon Foundation trustees decided to experiment with offering program-related investments in the form of zero-interest loans. It was a time of hyperinflation, and charities had to borrow at high rates just to begin building so rising costs would not make their buildings more expensive faster than they could raise money. The foundation’s goal was to establish a revolving fund of loan principal, which would enable the foundation to support more and larger projects than it could with its normal distribution. Bringing this pool of
charitable capital into existence was a significant aspect of the decision to make loans. Since it began its program-related investments, the Harmon Foundation has made 103 program loans for a total of about $20 million. Not one loan has defaulted.
Endless Sky L3C is a for-profit business being created to supply food for the Montana Food Bank Network (MFBN). Endless Sky will manufacture a high-end gourmet food line, the revenue from which will support the MFBN pogram. A foundation PRI is paying the costs associated with the initial set up of the company. Other investors, including additional foundation investors, will eventually be sought to share membership in Endless Sky.
The Council on Foundations (www.cof.org), formed in 1949, is a nonprofit membership association of grant making foundations and corporations. The Council mission is to provide the opportunity, leadership, and tools needed by philanthropic organizations to expand, enhance, and sustain their ability to advance the common good.
Americans for Community Development (http://americansforcommunitydevelopment.org) is a non-equity membership organization created to facilitate the passage of L3C legislation on the state level and proposing supporting legislation at the federal level while providing extensive education on the L3C, a structure for for-profit companies that have a primary goal of performing a socially beneficial purpose, not maximizing income.