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| Best Practices: Philanthropy |
Giving Due Credit
Matthew Schuerman
01/01/2005
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Their hybrid nature makes PRIs appealing asset-management tools. During lean years, a foundation can essentially squirrel away a portion of its corpus in the form of a PRI, helping it to meet the 5 percent disbursement requirement, with the prospect of that portion coming back a few years later. Foundations can also use loans to supplement grants. In the stock market’s bearish years of 2000 and 2001, the Annie E. Casey Foundation looked at PRIs as a way to keep increasing distributions even though its budget was flat. Trustees determined that the foundation could go safely above the 5 percent payout if it had some hope of getting that money back someday. In 2002, the foundation set a goal of putting $100 million into PRIs. “It’s simple,” says Christa Velasquez, senior fellow for social investments at the Casey Foundation. “It’s a way to bring more resources to bear on what we do.”
TOP VIEW
Foundations & philanthropists are increasingly adopting the idea of lending business capital to help beneficiaries become self-sufficient. These loans can be alarmingly risky from a business standpoint, requiring donors to practice judicious selection and early intervention to prevent defaults. |
Such charitable loans can take the form of loan or equity positions in for-profit ventures as well, so long as the foundation invests to further its social aims. The Helen Bader Foundation, a family foundation that gives away approximately $6 million a year, closed a $75,000 deferred, low-interest loan to a Ponderosa restaurant in an impoverished Milwaukee neighborhood last fall. The restaurant’s owner, Stella Love, is part of a family that has long operated a chain of liquor stores and is well respected for her business savvy. When she floated the idea to open a suburban-style restaurant in an inner-city neighborhood, however, she found that construction costs quickly ran over the estimates, the utility bills were outrageous and the health code dictated that she keep two employees on duty at the buffet, whereas Ponderosas in the rest of the country needed none.
Love had already mortgaged the place down to the silverware. She needed a lender with something more than profit in mind. Her bank contacted the Bader Foundation, which funded other ventures in the same neighborhood and recognized that the restaurant would create jobs.
“It would not serve the community well to have a successful entrepreneur build a building from scratch and to go out of business in two years,” says Kathryn Dunn, Bader’s community investment officer. “People are already talking about how there’s a lack of successful African-American entrepreneurs in Milwaukee.” While she knows the loan looks risky, she also believes that Love has the experience to make the venture work. Like pretty much everyone else in the optimistic PRI business, Dunn fully expects to get the foundation’s money back. De-Precedent
Franklin’s early experiment did not fare so well. By 1837, the town fathers overseeing his funds declared it a disaster. The chairman of the Philadelphia committee reported that 10 percent of the fund’s beneficiaries had never repaid a ha’penny, and that another 47 percent were in arrears. His counterpart in Boston wrote: “It is apparent ... that the intentions of the donor have not been realized” and went on to question the wisdom of young, married artisans borrowing money they later had to repay, and even of artisans marrying young in the first place. Eventually, the Industrial Revolution swept away the craftsmen the overseers sought to assist. Once the terms of Franklin’s will allowed it, the two funds founded a technical college in Boston, a science museum in Philadelphia and various public libraries and small-town fire departments.
Additional Information
 Reducing Risk: Three Proven Techniques
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