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.]

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  • Joanne Hubbard Cossa

    Ian,
    There is precedent in the arts. Symphony Space worked with the Ford Foundation on a PRI in the 1980s and ’90s.
    But it is a cool model.
    Joanne

    • http://createquity.com Ian David Moss

      Thanks, Joanne! This is exactly the sort of information that’s hard for me to dig up on my own.

  • http://www.nonprofitfinancefund.org Kim Cook

    Ah, access to capital! You mention Heron Foundation, now led by the founder, and former CEO of Nonprofit Finance Fund, Clara Miller. In recent years, at NFF we’ve been talking about philanthropic equity, change capital, and we’ve always talked about access to capital. Congratulations to ArtSpace, I think we will see much more of this kind of investment. While it may seem just too much self-promotion, I offer the following links for related information from the NFF website:
    For Social Impact Bond information (again an investment type instrument for social purpose) here: http://nonprofitfinancefund.org/social-impact-bond-initiative
    On PRI coaching to funders:
    http://nonprofitfinancefund.org/capital-access-services
    and the results of the first four years of Capital Partners’ work in stimulating nonprofit equity markets here: http://nonprofitfinancefund.org/capital-services/portfolio-performance-report

  • http://www.artsjournal.com/jumper/ Diane Ragsdale

    Hey Ian,

    I think there have been at least a few of these in the arts. When I was at Mellon we made a PRI to Nonprofit Finance Fund to make cash flow or working capital loans to small-to-midsized arts organizations in NYC in the midst of the economic downturn beginning in late 2008 … It was primarily aimed at helping organizations (many of which did not have reserves or access to lines of credit) weather the storm a bit until they could figure out how to adjust their budgets and plans and find new sources of support. As a secondary benefit, I believe it gave some a first opportunity to demonstrate responsibility with debt, and so may have strengthened their ability to get lines of credit in the future. The fine folks at Nonprofit Finance Fund could tell you more about it.

  • http://createquity.com Ian David Moss

    I received this comment by email from Art Thompson, President of the Cooper Foundation in Omaha Lincoln, Nebraska. I’m sharing it here with his permission:

    You asked this question:
    “Is this the first example of a program-related investment in an arts organization?…I have not previously heard of the tool being applied directly to the arts…”

    I do not know the answer to your question either, but can add that in May of 2005 the Cooper Foundation approved a $260,000 PRI for the Kansas City based Mid America Arts Alliance (MAAA). This PRI was in the form of a commercial loan guarantee.

    Mid-America, one of the nation’s six regional arts organizations, provides regional, national and international programs, arts and humanities exhibitions, performing arts and professional and community development programs. Its member states are Arkansas, Kansas, Missouri, Nebraska, Oklahoma and Texas.

    MAAA had purchased a building in Kansas City, Missouri in which it would consolidate its office and exhibition fabrication operation. As part of the loan approval process the lender encumbered $260,000 of MAAA’s cash as collateral. MAAA planned to embark on a capital campaign to raise funds to pay off a portion of the loan and in the meantime needed access to the cash for operating purposes. Our board approved a loan guarantee for that purpose with the caveat that MAAA apply the first $260,000 raised to pay down the loan. By June of 2006 MAAA had met that condition, obviating the need for the guarantee.

    The benefit to MAAA was the availability of working capital. The benefit to Cooper was the ability to assist without making a grant, thereby extending our effectiveness. An important lesson learned in the process is that it takes more to make a PRI than the desire to do so. In our case it was considerable pro-bono legal advice and work.

    A good resource for those interested in PRI’s and in mission investing is the PRIMakers of Seattle, Washington. That organization has been very helpful as we have endeavored to learn more.

    Sincerely, Art Thompson, President
    Cooper Foundation

  • http://www.cooperfoundation.org Art Thompson

    Ian, thanks again for publishing my response to the story about the Ford Foundation’s PRI. One small correction…the Cooper Foundation is in Lincoln, not Omaha, Nebraska. Thanks. Art

    • http://createquity.com Ian David Moss

      Thank you, Art. My apologies for the error.