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Friday, 04 December 2015 15:50

Federal legislation eases burden on foundations investing in aligned businesses

Written by  Josh Veal
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Foundations can become lost in red tape when it comes to investing in certain for-profits or nonprofit entities that support their missions, but new federal legislation aims to help cut through that bureaucracy.

The federal Philanthropic Facilitation Act, co-sponsored by Sen. Cory Gardner, R-Colo., and Sen. Gary Peters, D-Mich., would streamline the process for foundations to make investments in businesses or nonprofits involved in activities that align with their missions.

The approval process for the so-called Program-Related Investments (PRIs) currently requires upwards of $19,000 in application fees and attorney costs, along with a waiting period that can last months. The proposed bill would cut these costs dramatically and give the Internal Revenue Service a 120-day time limit to review the application.

The Council of Michigan Foundations has been working with Peters on similar bills for three or four years since his time as a Congressman, said President and CEO Rob Collier.

Collier and Peters even approached the IRS with ideas on how to expedite the process without the use of legislation, as passing bills can be challenging given the current environment in Washington, D.C.

“As you know, getting bills through Congress is not easy, even if it’s a simple thing like getting more money for charitable organizations,” said Collier, who thinks PRIs can be very useful tools.

Other nonprofit executives tend to agree.

“It has a much more social purpose behind it,” said Laurie Craft, program director for the Grand Rapids Community Foundation. “I think as time goes on and people recognize the value of local investment — in keeping their dollars in the community around them — the popularity of mission investing will increase.”

Nationally, some foundations have used PRIs to provide financing, loans and grants to entrepreneurs and small businesses, a practice fitting with their missions to invest in their local communities, Peters said in announcing his support for the bills.

“Charitable foundations are playing a significant role in the economic recovery of cities across Michigan by branching out into investment in economic development,” Peters said in a statement. “This legislation will encourage philanthropic investments in our hardest hit urban and rural areas across the country to help organizations grow, create new jobs and continue giving back to our communities.”

While the Grand Rapids Community Foundation has made PRIs in the past, grantmaking remains its primary focus, Craft said. The investments made so far have been exclusively into other nonprofits, such as affordable housing developers. This could be due to the current cumbersome process or the difficulty in finding a for-profit organization whose actions align with the foundation’s mission. Either way, Craft said she’d like to see a change.

“It would be nice if we could have an easier process,” Craft said. “It would help us be able to better measure the impact we’re having on the community, to be able to say, ‘Not only did we support this many charities, but we kept our dollars local and invested directly into the community.’”

While some larger organizations, like the FB Heron Foundation of New York, are making a large effort to shift their assets into investment-related activities, most foundations struggle to find the right opportunities and instead focus on grantmaking, said Mike Goorhouse, president and CEO of the Community Foundation of the Holland/Zeeland Area.

He attributes that disparity to a few factors, namely cost.

“When you do these, you tend to do bigger amounts. You don’t do a PRI for ten grand — you’re usually doing it for a quarter of a million dollars,” Goorhouse said. “Given that, you’re inevitably going to do (fewer) of them.”

Tack on $19,000 in IRS fees, and the cost of making the investment really adds up. Possibly the largest hurdle, then, is uncovering the rare investment opportunity that’s worth undertaking the PRI process, he said.

“You have this kind of weird space in the middle,” Goorhouse said. “It’s either a for-profit that’s doing some kind of social mission, or a nonprofit that has some revenue generation going on. That’s the kind of middle-ground we’re talking about. But the thing is, the more you have available, the easier it is for these dollars to flow, and then this middle-space will grow. This legislation could help that.”

Some watchdogs have warned of the risks associated with the increased opportunity for corporations to receive money from foundations. Goorhouse admitted the bill could “blur the lines” in some way for what a charity can and can’t do with its assets.

“How do you measure social impact in charitable programs when you mix in for-profits?” Goorhouse said. “How do you determine what counts?”

Still, Goorhouse and other nonprofit leaders consider these challenges to be minor in the face of the potential benefits the Philanthropic Facilitation Act could produce.

“In the long run, the positives outweigh those potential challenges. We can develop a reliable system for identifying and evaluating what counts as social and what doesn’t,” Goorhouse said. “It opens up an opportunity for people and organizations to focus on making a difference, no matter what their structure is.”

Read 2610 times Last modified on Wednesday, 16 December 2015 00:06

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