Real estate developer Artspace is the recipient of a whopping $3.75 million from the Ford Foundation’s Supporting Diverse Arts Spaces program. The investment is comprised of a $750,000 grant plus, more interestingly, a ten-year, $3 million low-interest loan. The loan is a program-related investment (PRI), a less common variant of charitable support by which a foundation uses a portion of its endowment to buy debt or equity in socially responsible businesses or nonprofits at below-market rates.
Under United States law, a private foundation (i.e., one that relies primarily on an endowment rather than raising its own money from public sources) is required to distribute 5% of its assets each year to charitable causes in order to remain tax-exempt. While most meet this requirement through grantmaking, a growing number of foundations are experimenting with program-related investments as a way to meet the distribution requirement. A few make PRIs a centerpiece of their resource allocation strategy; for example, the F. B. Heron Foundation invests about 10% of its assets in PRIs and nearly half in what it calls “mission-related investments” (market-rate but with substantial social benefit), seeing the strategy as a way to dramatically increase its impact.
The Artspace PRI will primarily be used for pre-development activities (such as hiring architects) for up to a dozen artist housing projects and arts centers across the United States. A list of Artspace’s current developments is available here. Artspace will pay back the debt over ten years at an interest rate of 1%.
Is this the first example of a program-related investment in an arts organization? While it is not uncommon to see PRIs used to support small businesses in economically disadvantaged areas, low-income housing, and the like, I have not previously heard of the tool being applied directly to the arts. (Some predicted that the L3C legal form would be a boon to the arts in the form of providing foundations with a more formalized way of making program-related investments in hybrid businesses, but that promise has yet to materialize in any real way and faces practical roadblocks so long as the IRS fails to give preferential treatment to the L3C.)
[UPDATE: I've received several comments in the past couple of weeks indicating that, though PRIs to the arts are not common, this is by no means the first example. Please click through to read them if you're interested.]