Increasing the Impact of Charitable Capital

Pretty straightforward, right? Maybe we can end the webinar right now, but just in case you're like me and you have questions about the requirements and how they're developed, Jeff will make the picture crystal clear for you in just a little bit. Aggregated. PRI data is somewhat limited. Since each PRI is essentially its own transaction, publicly available data can be hard to surface and categorize even so it's reasonable to assume 1% or less of capital is deployed through PRIs each year. Additionally, most PRIs have been historically driven by private foundations. Individuals cannot directly establish A PRI. But today we'll walk through how that isn't the barrier it seems to be.

To give an overview of where charitable capital currently is, let's take a look at what happened last year in 2024. Listed on this slide are the common routes. Charitable capital normally moves around the economy. Those routes of course include private foundations, donor-advised funds, corporate foundations, community foundations, individual giving, religious institutions and bequests. You can also see in the chart what the makeup and distribution of charitable capital looks like in 24 in large buckets. So where do PRIs fall? Well, as I mentioned before, they primarily fall into the private foundation pie slice as the individual slices by far the largest. We're excited to talk about possible pathways for individuals to help fund PRI.

So you might be thinking we have significant funds already helping in supporting causes. 2024 saw over 590 billion in total. Is that enough? Is charitable capital a solve problem? What should we expect for the next couple of years? Well, no discussion of capital would be complete without at least one graph from Fred, the St. Louis Federal Reserve data tool. This slide is a summary of the net worth of nonprofit organizations and households in America. And while it's not a perfectly straight line, I would say that is going up and into the right, I think it's, and we won't even get into the expected flows and plannings that's arising from the retirement of our experienced workforce members. I think it's fair to say there's going to be capital looking for a way to be useful over the next several years, especially if donors find a way to do so that makes sense to them and supports their cause. All right. Hopefully the stage has been set because now I'm going to hand it off to Derek to walk us through DAFs how they can support PRI while being a key tech strategy and other concepts to keep in mind as you develop your path to deploying charitable capital. Take it away, Derek.

Derek Dockendorf:Great, thanks Bill. Good morning and good afternoon everyone. Derek Dockendorf, tax partner here at EisnerAmper. I work in our private client service group and this donor-advised funds highlight a little bit of what they are and really kind of talk about how it's a tool, especially this time of the year that we use to help mitigate tax strategies for, or use it as a tax strategy mitigation for a lot of our clients, we're looking at doing some year end planning. So as Bill mentioned with an individual can't do it, but a donor-advised fund actually is a vehicle that can support prri and you can use some of that inside of your DAF to support those organizations, which Jeff will get into in a little bit. But to set the stage, what is a donor-advised fund? So for those who don't know, a donor-advised fund is a charitable account that allows you to contribute assets to it and receive an immediate income tax deduction for the fair market value of those assets, right?

So bullet point number one right there that talks about being a useful vehicle for tax management. We use this quite a bit as we're helping clients strategize at the end of the year, what do they have going on, what does their income look like at any point in time? And as we're trying to pull on the various levers that we have available to us to help mitigate their taxes, oftentimes charitable intent and donor-advised funds are one of the topics that we always keep on the table. DAFs have really gained a lot of popularity, I would say in the last 10 to 15 years. They've become more and more mainstream. You'll find it at any major brokerage or custodian firm that you'll be able to set up your own donor-advised fund. A lot of community local foundations have their own donor-advised funds that you might be able to set up directly with them.

So there's a lot of avenues, a lot of sources that you could go ahead and create these donor-advised funds to help with your philanthropic giving as you move forward. These are also really helpful tools if you might have complex assets that you're looking to transfer, right? If you've got cash or some of those things, that's oftentimes very easy to have that go directly to the charity of your choice. But if you've got more of a complicated asset like appreciated securities, a closely held business interest, crypto real estate, you can still donate that asset and oftentimes you can able to get that to your daf and they're used to it. They see it all the time with taxpayers. They know what's going on, they know how to take that asset in, figure out how to leverage the value of that asset so they can then deploy that capital out into the community that you're looking to help support everything.

Another thing to keep in mind that we often talk about, like it says, they're appreciated security. So not only do you get an income tax deduction for the fair market value of the asset that you're putting in, you also avoid the recognition of any unrealized appreciation, right? So if I had a stock with a thousand dollars a basis, a fair market value of 10,000, if I wanted to make a $10,000 donation, if I contribute that stock directly to the donor advised fund, I get the $10,000 fair market value deduction and I don't have to recognize the $9,000 of appreciation where if I were to sell the security myself and then contribute to cash, I recognize the $9,000 of gain. But then I also still have my $10,000 charitable deduction. So these are oftentimes I work with clients trying to identify what assets may make sense to contribute to their donor-advised fund.

Oftentimes we're looking at something that's appreciated in value compared to the basis that you initially acquired it for. Like I said here too, it's also a very simple form of donation right after you've done the paperwork, opened up the account, working with these donor-advised funds is really pretty seamless. You are able to log in, see the account, but the nice thing is all the red tape, all the maintenance that you would normally need to do with a private foundation is handled by the organization who supports that donor-advised fund. So you don't need to file any of the income tax returns, you don't have to do a lot of the compliance reporting behind the scenes. They take care of all of that for you. So just a couple of quick statistics. There's currently about 1.8 million donor-advised funds accounts in existence with an estimated value inside those donor-advised funds about 250 billion, right?

So significant capital that's sitting inside of those donor-advised funds that's ready to be deployed. A unique thing about donor-advised funds versus say a private foundation is a donor-advised fund does not have a requirement to distribute a certain percentage of the assets on an annual basis. So you can put the money in and really what it allows you to do is lock in an immediate tax deduction and then really take your time to think about how you want to deploy that capital, the organizations that you want to support and the community that you also want to help at that same time. So as Bill talked about on a couple of slides ago, the funds that were the sources of those capital, charitable capital during 2024, 50 billion of that came from donor-advised funds going up to the organizations that they want to help support at that point in time.

So a couple of things about the donor-advised fund, right? A key consideration that for individuals to be mindful of, you are giving up control of that asset so you are transferring that particular asset, whether it's appreciated securities or cash to that supporting organization that had set up the donor-advised fund. However, in our experience, the individuals as they work with their donor-advised funds, they get to direct and make recommendations on where those funds are to be deployed and who they want to help out. And in my experience working with clients with this, as long as the organizations that they're looking to support also meet the qualified charitable organization requirements right from the IRS, the you, typical 5 0 1 c threes, rarely do they get resistance from the organization while completing that request to have that money go out to that particular organization. So oftentimes you might even be able to just log in, you can see your account value, say, Hey, I want $5,000 to go to my local church, identify that, make the request.

And again, as long as that organization meets the IRS requirements, that supporting organization supporting the donor-advised fund will make that contribution. Something else to keep in mind is we get the tax benefit when the money goes into the donor-advised fund. So you get that immediate deduction right up front when the money's there. So as you think about it and you're taking your time and you're deploying your capital over multiple years, we don't get additional contribution deductions as the money comes out of your donor advised fund. So a question that oftentimes we ask our client as they're making donations and they're providing us with receipts, we need to make sure that we ask the additional question of where did this money come from? Did it come from your donor advised fund or did you make an additional separate contribution to that organization, right? If it came from the donor advised fund, we can't take another income tax deduction as the money's going out to the organizations that you want to support.

Just a real quick example of a strategy that some of you may be familiar with. We talk about it with clients quite a bit, is trying to bunch their charitable organization or charitable contributions. And with that launching, we put that money into the donor-advised fund to continue their giving, right? So the example here, we've got a married couple combined adjusted, the gross income is 350,000 all taxed at the ordinary rates. So they're roughly in the 24% tax bracket, ignore the word maximum there with the second point. But they have a state and local tax, the salt deduction of 10,000 this year and they paid $2,500 of interest on their mortgage in 2025. So generally this couple donates anywhere between five to $10,000 a year directly to the charity of their choice. So they're writing checks to these organizations, maybe they're transferring securities, but they're not doing large lump sums at any point.

They're just continuing to support the organizations that they want to in a very consistent manner in that first column or the middle column there with the no donor-advised fund contributions. If I look at our state tax deductions, our mortgage interests and how much we're donating to charity, we're going to either be right at or below what the standard deduction is for that married couple. And why is that important? We as individuals, taxpayers, you get the greater of either the standard deduction or the itemized deduction. So if we're below that itemized deduction threshold, we're going to get that max. And so if they keep donating at the level that they are, they're going to maybe tip into where they could itemize, where they're maybe getting a little bit of an additional income tax benefit for their charitable contributions. Now, in my conversations with clients, the income tax deduction is not the sole reason that they're making charitable donations.

There's a lot of philanthropic intent goals. It lines up with their values, they want to support these organizations. If we just change the approach and the philosophy a little bit, we can keep them on that same consistent pattern but actually help leverage some income tax deductions that comes through bunching, right? So in that conversation with this client or this married couple saying, Hey, let's take five years worth of contributions, save $35,000 and let's put all of that into the donor-advised fund in 2025, right? Money's inside of that account that sort of becomes your new checkbook that you're going to use to make future contributions out to the organizations that you want to support. So it's not really changing what they're going to do or how much they're going to donate, we're just sort of trying to strategize around how we get more in at one time to maximize that income tax deduction. And you can see from that far column with a $35,000 donor-advised fund contribution, it actually produces an additional $6,000 roughly of savings at the federal level in 2025. The money's inside of that account, they can continue to donate how they normally would. We just changed up the approach and doing so allowed them to save $6,000 at the end of the day in this example.

So a couple last things before I turn it over to Jeff is how we think about or how I talk to clients about managing their charitable capital. It's not just another investment account. Oftentimes when I have clients that'll log in, they'll see the donor-advised fund that's there and it's up just like the rest of their investment accounts, which is great, which means we have more money at our disposable for charitable intent, but we also want to see that get out and get deployed into the community. We want to see that be helping the organizations, helping the individuals that they may need some of these funds for their everyday lives and everything. So it's not a change in your philosophy, it's just a change in your order operations. So instead of getting used to writing that check personally out of your checkbook, think about how we can strategize and put money into our donor-advised fund and then George is exercising or retraining kind of that muscle memory around instead of writing a check, I'm logging into my account, still directing where I want that money to go and who I want to support and then submitting the grant that way.

Something else, just real quick, a quick touch point on donor-advised funds that people seem to like is you can treat it almost like your own family or private foundation. You can name it kind of whatever you want. You can have it be something that you're doing with your kids, your grandkids, it can be a legacy piece for you. But using the donor advise fund, especially if you're, you're not making significant seven figure contributions to charitable organizations, a donor-advised fund will help you avoid all the administrative red tape, but also give you that same field that you're looking for. And DAFs can be utilized as a tool regularly to mitigate taxes just because we fill it in once and fill it up and we deplete it, we can always go back and fill it out more every single year. So there's a strategy around we can continue to come back and utilize it to increase or continue to fill up that philanthropic bucket.

So with that, Jeff, I'll turn it over to you. Oh, actually, nope, sorry, I got one polling question there. Sorry about that. Which of the following is a requirement of a donor-advised fund and your four choices are on the screen there and like I mentioned as everyone's answering this and just providing a little more color, this is something that we look at, especially this time of the year with clients, this we're doing a year end tax planning, what do they have that's going on? And if they're new to this space and don't have a donor-advised fund, they're very easy to set up. Something to keep in mind is the custodians may have their own dates and time where they will stop taking contributions before the end of the year. So just make sure you're asking that question along the way to make sure that you've got plenty of time to make that decision as you're looking at that before your end. If it's something that's on the table and

Bill Bodner:I'll jump in quick just to address some of the questions we see coming through. How can I tell if donations are nonprofit receives as a PRI or not? I would just speak with management or the fundraising representative. It should be a relatively easy question. People will know for sure whether or not a PRI was involved with any significant donation. Just clarification on the DAF values. So 50 billion was the disbursement in 2024 from the overall population of DAFs, which Derek mentioned, I don't know if that's at the end of the year or some point during the year. Stood at 250 billion of potential disbursement capital sitting in DAFs. Derek, real quick, there's a question about the 40 K salt update in 2025. You could take a look at that.

Derek Dockendorf:Yeah, yep. And just real quick, yes, as part of the bill, that was in July, right? The salt cap potentially could go up to 40,000 for certain individuals. That is an income threshold that's there. But in my example to not get into that, the client that I used for that illustrative purposes just had $10,000 of state and local tax deductions. Perfect. Okay, Jeff, over to you.

Jeff Ochs:Hello everyone. My name is Jeff Ochs and I am the CEO of Venn Foundation. It's an honor to be here today speaking with you about program related investments. I wanted to just start by sharing a little bit about my background because it's an important context for the work that we do at Venn Foundation. I'm a cross sector entrepreneur, so I've had a number of different entrepreneurial experiences, both starting up nonprofit organizations as well as traditional businesses. I've also worked in capital in both traditional sectors. I ran an angel investment network for a couple of years. I ran an equity fund at the University of Minnesota, so I've had traditional equity experiences as well. And I have for about 15 years, been really excited about this tool called program related investments and have been really pleased to be able to bring kind of the experiences that I've had in both traditional sectors into this work.

And as you'll see, it's at this really interesting intersection of charity and investing today. We have prepared, just a second. Got to, there we go. We've prepared a list of topics that we can work through and I'm going to just start at the top and I'm going to work through each of these. I will spend a little bit more time on some of them than others. A few of them are a little bit more in the detail, but if that's something you'd like to double click on or add more information, ask a question about, please do so in the chat. The topics that I prepared for this section, answer these questions, what are ps? We'll start with the basics of that. Why use program related investments? We'll talk about the PRI rules, PRI tax treatments, and then we'll give a little bit more background about what Ven Foundation does in this space. So that's what we'll move through. We'll give it a start. What is a program related investment? What is A PRI?

Well, we're all probably pretty familiar with the fact that there are two traditional sectors of capital. We have sort of our charitable giving and granting, and then we have our for-profit investment. So think about 'em almost as two buckets and they're kind of on the extremes of the spectrum of risk and return. So with charitable grants and gifts, we give them away. We never want the money back. We expect in financial terms a negative 100% expected financial return. And we do that kind of financial activity in order to do good things. That's the way that that sector of capital works. On the other extreme, we have a bucket of money that we invest, and the reason we do that is to maximize our return on a risk adjusted basis. All of the products are designed to do that. And so we have these two traditional sectors, charitable granting and gifting and investments.

Now, program related investments literally legally lie at the intersection of these two ideas. They are both charitable and they're both investments, and so they push a little bit at the way that we think about capital. What do I mean by that? Well, every program related investment has to meet two tests, and we'll talk about that in a little bit in bit more detail. But at a high level, think about it as it has to be part of the charitable circle, meaning that it has to advance an IRS charitable purpose. You're dealing with the same tax deductions associated with charity. So it's part of that sector legally speaking. It also hover is not deployed in the form of a grant or gift like a traditional charitable gift is. It's actually deployed in the form of an investment. And that investment has to by definition, take on a concessionary or below market structure, meaning that a for-profit investor traditionally wouldn't make an investment like that.

So the more disadvantaged the terms are to the investor, the more clearly it's meeting the second test. And so this is why we're called ven foundation in the promotion of this idea of program related investments. They literally are a charitable investment that is advancing a charitable purpose and then to structure it as in a below market way beyond that common definition of those two tests, you can really do anything with you. It's an incredibly versatile tool. You can advance any IRS charitable purpose. You can make them to any type of recipient. And that includes public charities of course, but even government agencies, individuals, businesses, et cetera can receive program related investments. Again, if you're advancing a charitable purpose and are structured correctly, and you can also design them with any investment structure in mind. So we often think about program related investments as loans to nonprofits and that's wonderful, but you can also make them as equity investments, convertible debt safes even. You can structure them as guarantees. So really anything is possible with regard to structuring a program related investment. And then you can also make them anywhere geographically. So as long as you're meeting the two tests of a program related investment, you can do anything you'd like.

There are a number of examples historically of program related investments and the impacts that they've had. These tools have been around since the 1969 Tax Reform Act. So they are not new to the ecosystem, but they're new to many because traditionally speaking, they're mostly used by a sophisticated small group of private foundations. Folks like Ford Foundation in this example, very early on, Ford Foundation was a pioneer of program related investments. They helped make a program related investment to the Grameen Bank in 1981 that basically helped to launch the microfinance movement in international development. And for anyone who knows that space, it has really mainstreamed and it's something that's very significant now in finance internationally. And so that all had its roots in a program related investment by the Ford Foundation to the Grameen Bank. In that example, it was a three and a half year term, 0% unsecured loan, which basically served as loan loss reserve and it helped reduce the risk for commercial capital coming into the loan fund.

Another more recent example and also a totally different type of recipient example, is the Gates Foundation made an equity investment into a biotech company, a company, a for-profit company called BioNTech. And their strategy and the purpose of it was to help develop mRNA vaccines for tuberculosis and HIV. That was the initial thrust of the purpose behind it. However, when the pandemic hit, obviously mRNA became a really important platform for the COVID vaccine. And so what ended up happening with this particular program related investment, BioNTech ended up doing a joint venture with Pfizer and ended up using a lot of the research that they had been capitalizing through the program related investment to support the joint development of the COVID-19 vaccine that Pfizer developed and commercialized. So we all may have a program related investment legacy in our bodies if you end up having that vaccine.

So this is another powerful recent example of program related investment. Interestingly enough, the Gates Foundation actually did go on to make a lot of money from this investment because the value of the company really went through the roof. So that ends the first section of what is a program related investment, and we'll go a little bit more into the details of the regulations in the next third section. But before we do that, I'd like to stay a little bit more conceptual and high level for everyone, which is a key question is why would anyone add program related investments to their philanthropic toolkit? So hopefully got a brief introduction to what they are. Now we'll talk about why would care.

Now, there are a number of different philanthropic types of donors out there. You have individuals, you have businesses, you have private foundations, you have public charities, donor-advised funds. And the nuances of each of these categories are different from a tax perspective, from a strategic perspective. But what we've done here in this presentation is sort of summarize the main advantages for all types of these donors. Whatever you end up being into these three. So the first big advantage, regardless of philanthropic type you are, and again, the nuances are slightly different, but program related investments provide a lot of charitable tax benefits on the way into the investment. These are tax deductible, tax advantage dollars. So if you're itemizing, you're taking tax deductions based on it, and that's a really significant amount of leverage going in. But also people sometimes overlook the fact that because this is now an investment happening within the charitable sector, the tax advantages continue to apply to any gains or returns that you might receive.

So you're not going to be paying income tax on any interest gains, you aren't going to be paying capital gains tax on any gains you might receive from an equity investment. So you're getting benefits both on the way in and on the return of capital as well. So those are significant. And again, depending on the type of philanthropist you are, they're a little bit more nuanced. So a private foundation has different advantages, biggest one being that it counts toward distribution requirements and things like that. The second big advantage is that P offer really only upside compared to the way that we normally deploy charitable dollars today, which is grants. As we talked about briefly at the beginning, grants have a negative 100% expected rate of return. You can't go any lower than that in terms of what you're expecting. And so if I'm making a risky or a below market investment with that dollar, I can only do better.

So legally speaking, we have to talk about PRIs as being below market investments, meaning not as good as a traditional market rate investment. But when you compare it to average philanthropy, normal philanthropy, it's actually above market. And so there's only upside. Now that's a very important reframing of PRI and it allows for capital to do things that it normally wouldn't. The third big advantage is that any money that does come back from a PRI can be recycled for another charitable use. And that is really when you get down to it, the most important advantage of a program related investment, you get to recycle that money potentially over and over and over again. Where normally we are just using a charitable dollar one time to do good one time with one cause and that's really what the key strategic advantage is.

But I'm going to step back even further and just kind of get a little bit more strategic and conceptual when we're thinking about how to use PR as a lever for change and impact. First and foremost, I think it's important to recognize how important capital is to our economy. It's the lifeblood of the economy. It touches everything, it goes everywhere. All of our systems depend on it. And so it's a very important dimension of our world. Additionally, it also drives behavior and it shapes our systems in many different ways. So if I'm an entrepreneur in the for-profit sector, I'm driven to do certain things to attract capital to the business that I'm setting up. If I'm a nonprofit executive director, there's a certain prescribed way of going about getting grants. And so that drives the way that I set up our programming. So all of the time capital is driving behavior and it's shaping our expectations.

It's also really determining what business models are possible. So it touches everything. It drives behavior. It's really an important tool. And it goes then almost without saying that if I can change the way capital is working, if we can think differently about the way money moves, then that can be a lever for changing the world. And that's really what I get excited about with program related investments. It's a way to think about capital differently to try to get things to happen differently in the world, specifically for impactful purposes. And to just think about this in form of expected rates of return, we have those two buckets of money that I talked about early on when you put them on a spectrum of return for profit capital, which is by far the larger one is gravitating as high north as it possibly can get on a risk adjusted basis, especially given risk and liquidity preferences.

So we're trying to drive as much return as we possibly can on our principle. And then of course on the other extreme, we have our donations, which as I said before is expected negative a hundred percent return. What we don't really have in our system right now is anything in between. And that is exactly where program related investments are working and working to create a new below market category of capital that has not really been available in mainstream today. And so that's the strategic opportunity within sort of that spectrum of capital is the big space, the big blank space between never getting your money back and trying to make as much as I can on a risk adjusted basis.

Why would we care as a philanthropist in that middle ground? Well, as I was talking about earlier, one of the key advantages of A PRI is that you can reuse the money and a normal investor doesn't necessarily think about just getting my principal back as being successful. They want to make as much as they can on the principle. But if I'm a philanthropist and I normally just give my money away and I use it one time and that's my status quo, I can only do better than that. And so if we just think about a 0% rate of return, you could call it real rate of return, I can use that money forever infinite use, right? I can get infinite use of my dollar compared to one-time use, and there's a lot of impact potential in that infinite use. But even when I lose a certain percentage of my principle, I still get multiple turns of the dollar. So at a negative 10%, I get to turn my dollar 10 times before it dissipates into nothing. So there's still even really powerful leverage for philanthropists even when there's loss of principle. And that's the really powerful revelation here around why PIs are something we should be pursuing as philanthropist.

Now a lot of people ask me, well, okay, I get the idea of A PRI, but where's the demand for it Is nobody's asking for that. Well, I like to respond in sort of saying there's two different types of demand. The first is visible, this is all the different projects or entrepreneurs or whatever is seeking capital that are trying to go to the for-profit markets, but failing to get that traditional financing. Essentially the market is telling them you're not a good opportunity for our traditional capital. By definition, that would be a below market opportunity. So there is visible demand that is not succeeding at getting capital. However, even more interestingly and importantly, there's an incredible latent or hidden demand, which is just all the projects that aren't even being conceived of or attempted because they're below market because they know no one offers any capital based on that kind of set of constraints.

And so we don't design systems around negative 10% loss accepting principle because that doesn't exist anywhere in the world and it's a waste of time design around it in today's economy. But what if there was right? And what could we do from a business model perspective if that kind of capital was available? So we would argue that there's near infinite demand, even if we're not aware of it and seeing it today. Just to summarize, program related investments really are an opportunity to make capital go or a traditional investor is going to give you the hand and say, Nope, we're not interested. And that's the really powerful opportunity in it. And then we also often call it the Starship enterprise of capital and it goes where no other capital has gone before. So those are just some kind of quippy things to keep in your mind as you think about program related investments. So that ends kind of the first couple sections here, and I'm going to just ask a quick question to test the crowd, which statement about P is correct. Please take a minute to consider the options and choose your answer.

Great. 66% answered it correctly. The primary purpose is to advance an IRS design charitable purpose. Alright, so I'm going to give, this is going to go somewhat quick and if anybody is interested in asking follow-up questions on this, please feel free to reach out to me afterwards as well if we don't get to it. I am not a lawyer, so please don't accept this as legal advice. There are plenty of folks who you can hire to really go deep on it. But I do want to give you a little bit of a grounding in how these hub program related investments are actually defined in the regs. I've tried to start a little bit more conceptually so that everyone, it's a little bit more accessible. Initially, program related investments are actually defined in private foundation statutes, specifically section 4 90 44 C as an exception to jeopardizing investments.

And the way I like to describe this is that generally speaking, private foundations have a corpus or an endowment of assets that have been given a tax advantage on the way into that foundation. And so the IRS expects that the managers of those assets that corpus are going to treat it with reasonable business care and prudence. So private foundation investment managers and in different officers of the organization are required to think about business care and prudence when they make investments. Otherwise, if they're shown to not be doing that, the investments that they made can be classified as being jeopardizing. And if they do that, there can be fines for the organization and the managers even individually and personally if they've found to be not doing those things correctly. And so jeopardizing investments are a risk for foundation managers. And so what the IRS did is they said, Hey, if you're going to make a below market or concessionary investment, which by definition would be considered imprudent, if you're going to do that, that is fine and we will make a carve out and a safe harbor for those below market rate investments.

If the primary reason you're making it is to advance your exempt purpose, the reason for which you receive the tax exemptions to begin with because that's why the money was tax advantaged and you're not being imprudent if you're making that deliberately that PRI deliberately to advance that charitable purpose. So they are essentially a carve out from traditional prudent investor rules. I hit on a couple of these, but I'm going to hit on a little bit further. There are three main requirements for PRI under these rules. The first is what we call the charitable purpose test. I mentioned this earlier. The primary purpose is to accomplish one or more of the organization's exempt purposes. So importantly here, there are many different exempt purposes, but the organization is what's important and what they have received exemption for. So if a foundation that focused on education in their form 10 23 makes a PRI, they need to focus on education as the issue they're advancing.

When they make PIs, they can't go do a different thing like environmental if it wasn't part of their original exemption. Second test is what we call the below market test. This is basically that the production of income and the appreciation of property is not a significant purpose. That's the formal language. And then the third is political test basically says you can't influence legislation as part of making API or politics. So I'm going to look a little bit closer at each of these tests. We'll start with that charitable purpose test. The quote that is from the reg says that the PRI must significantly further the organization's exempt purpose. As I mentioned the organization is the unit of analysis there. And Bill mentioned this language early on that the investment would not have been made, but for the relationship to that exempt purpose, meaning that is the reason, primary reason that they would've made this investment, especially on those below market terms.

The below market test, a little bit more of a deep dive on that. I said this kind of earlier, but for-profit investors would not likely make the investment on the same terms. So the more disadvantaged the terms are to the investor foundation, the more clearly it's a program related investment. And this is important, especially when you consider the Gates Foundation example I brought up incidental significant income or appreciation is not a factor after the fact. So if an investment was made at the time and rationalized and reasoned to be below market when it was made, that does not prevent that investment from actually in the future earning an incredible return for that foundation. That the presence of return does not itself in the end, does not itself undo the argument when it was made. And so it would still be classified as a program related investment even if it had a great return.

Now there's this concept called expenditure responsibility that a lot of people in the ecosystem know with regard to program related investments. Basically, expenditure responsibility is an additional level of oversight that a private foundation has to provide when it makes grants or program related investments to recipients that are not themselves exempt organizations. So you hear a lot of, and it came out in Derek's part of the presentation that you have to, in order for most DAF sponsors to provide a grant from your DAF, the recipient must be a 501-C3 public charity. That rule is not actually the legal rule in the IRS standards. It's a rule that most donor-advised fund sponsors and private foundations apply because it makes sure that they have for sure checked the charitable purpose box. When you make a charitable distribution in the form of grant or a PRI to an agency or an organization that is not itself exempt at the organization level, that is when you have to accept what's called and exercise what's called expenditure responsibility.

And I like to think about it as this analogy of driving in the light in the daytime versus driving at night in the dark. You can absolutely do both. It's legal, but there are a lot of different things that you have to do at night when you're driving to manage the different risks associated with the environment that you're working in because you can't rely on the bright lights, the fact that you're clearly in your lane. You can see the lane line markers. You need to be doing other things to take precautions to make sure you stay in your charitable lane. And that's really what expenditure responsibility is about. More specifically, you need to see that the grant or the PRI is spent only for the intended exempt or charitable purpose. Number two, you have to obtain full and complete reports from the recipient on how those funds are spent.

And number three, you have to make detailed reports on those expenditures to the IRS. So there's some additional responsibility when you're making PIs outside of exempt recipients. That also involves a pre grant inquiry. You're required to do essentially in other terms, it's called diligence. You also need to have certain written commitments included in your agreements. And then you have to take actions with respect to violations of expenditure responsibility requirements. So if they do not use dollars in the agreed upon way, you are required to take action to get those dollars back. And so there can be things that the IRS requires for response to issues that come up. So that's expenditure responsibility and that's again, a concept that does not typically apply. If the recipient is a C3 public charity, it does apply when that's not the case.

There can be consequences when you are not managing or exercising your expenditure responsibility correctly. The PRI can be treated as what's called a taxable expenditure under a different statute 4 9 4 5. And that can result in potential excise taxes on the foundation as the organization or on the manager's individually. So not something to take lightly. And then in addition to expenditure responsibility, there are absolutely other twists in the road. There's a bunch of other things that you want to be thinking about. Section 4 9 4 1 is all about self-dealing and you have to make sure when you're doing distributions of any kind, especially in a private foundation and DAF context, that you're not providing self-dealing or impermissible benefits to disqualified persons. 4, 9 4 3 talks about excess business holdings, which importantly PRS actually are exempted from if you've executed them correctly. You can also consider the costs associated with administrating program related investments as charitable expenses with regard to your distribution requirement as a private foundation. And then the other really neat thing is that PRI gains actually just count as normal investment income for your endowment.

This chart summarizes a few of the things. P are actually formally, as I mentioned, defined in IRS statute under private foundation rules, but they are also defined in tax forms for both private foundations and public charity foundations. There are tax advantages that are applicable to both in different ways. And the exercise of expenditure responsibility is always required for private foundation if you're not giving it to an exempt entity. It's not required for a public foundation unless you're using a donor-advised fund. So there's a lot of nuance to some of the things that I just talked about. This slide is just meant to kind of capture a few of those things in this quick way. Alright, another quiz. Which of the following is not a reasonable use case for take a minute, submit your answer

Great. Everyone who picked the last question, the last option is correct. This would not pass the third test of API. Bill, did you want to take a couple questions now before I moved on?

Bill Bodner:I was just offering up if you wanted to, if it makes more sense to answer them via the slides, that's fine.

Jeff Ochs:Why don't I go just a touch further and then we'll maybe spend the last five minutes on this. Alright, so real quick, I'm going to just touch on a few things around the tax treatment of PIs for private foundations. This is a little bit in the weed, so I will go fairly quick if you have other questions. Again, follow up with me and the afterwards or in this q and a. So private foundations, one of the key features of them is that they are required to distribute a certain percentage of their assets every year for charitable causes. I'm actually going to skip this slide. And what is powerful about PRI is that they can count toward your distribution requirements. And so there are a number of places in which you see P on the nine 90 pfs for private foundations. The first is the balance sheet, which I kind of move quickly through.

It's under other assets. It also appears in part eight B. You actually can put the details there in that section. And so they are publicly disclosed every year by private foundations who make them, and then again, they count toward your qualifying distribution. So in part nine, which is the big part where all private foundations are actually calculating their distribution, it counts under part one B and that makes it unique from any other investment that you're making. So the amount of principle counts toward distribution in the year that it's deployed. Interestingly enough, as I mentioned earlier, the gains or interest income that comes from PRI actually counts as normal investment income. But any principle that gets returned is actually added to the amount counts negatively toward distribution, and then it has to be distributed again in the subsequent year. And so that comes in on part eight. So the principle of PIs always has to be recycled, whereas the gains on them gets counted as traditional end dominant income.

Another interesting factor with private foundation tax is that once you've made and deployed A PRI, it stays on your balance sheet as a charitable use or charitable asset, which then does not get considered for the distribution requirement for subsequent years in which those are outstanding. So it actually has another advantage, a 5% advantage for every year that it's deployed because it's an asset on your balance sheet but isn't counted toward your distribution requirement. So those are some details of that. And I am going to kind of spend the last five minutes just giving you a brief overview of Ven Foundation and bringing the two topics of donor-advised funds and PRS together. So Bill early on explained that individuals and businesses as non charitable entities cannot directly make prs. That's about 60 to 70% of giving every year. Who can't do this directly? Private foundations, public charities and donor-advised funds can make charitable entities, but it's very challenging and a lot of 'em don't know about it and a lot of 'em have other barriers, which I won't go into a lot of detail to doing it.

And so what you generally have is the situation in which even though this has legally been around, this tool has been around for 50 years, most folks don't know about it and most folks aren't using it. So it makes it very hard if you're a potential recipient of A PRI, an organization that would love concessionary capital to help advance their work. It's very hard to go out to the market and shop for it. And so Ven foundation, what we do as an organization is we're all about mainstreaming this tool. We do this through two strategies. The first is field building. That's what I'm doing on a call like this today, just raising awareness, educating folks about it. And then we have a second strategy, which is called PRI syndication using donor-advised funds to do that. And so that's what I'm going to just do a really brief introduction around.

So any individual business, private foundation or public charity donor-advised fund can open up a donor-advised fund in a sponsoring organization like them. We're a sponsoring organization for DAFs. As Derek mentioned early on, when you put dollars in that's tax deductible gift or donation or it's a grant that counts toward your distribution requirement. If you're a private foundation, legally those dollars become the assets of the sponsoring organization, but the donors continue to recommend where they want those to go. So what Ven does in our syndication model is we create customized transactions that meet the PRI requirements with specific recipients, and then we raise dollars from any type and number of donor to actually capitalize those investments legally. Ven is the investor we're holding the paper regardless of if there's one or a hundred different donors who've supported it through their daf, those donors are not legally party to the investment.

If it works, the recipient of the PRI pays Ven. We take the dollars and we put 'em back into those donor-advised funds that supported that transaction on a pro-rata basis. Once the donor-advised fund's PRI holding turns from illiquid PRI to liquid cash, meaning it's been repaid, the donor-advised fund donor can then redeploy those dollars into a new PRI or a grant to a nonprofit public charity. So that's the core of our model. There are a lot of examples that I could share of that I did get see a question about just sharing maybe one of those examples. And so I will do just one of those. I have a bunch of 'em if others were interested. But we worked with a impact investment firm to support the reopening of a ski resort in Rangely Maine called Saddleback Mountain. It had been closed for about five years and it really decimated the local economy in the region.

And this impact investment fund basically worked on a blended capital strategy to reopen it, to acquire the resort and then reopen it. And we were part of that blended capital stack with three different program related investment structures or frameworks. Three of them, they were all unsecured subordinate loans. They were all five to six year terms. There was three to 5% simple interest. And two of those loans actually had conditional forgiveness that if certain milestones were met, interest and principal could be forgiven. Another framework did not have that forgiveness. But all of those frameworks did different things with regard to the recapitalization of this resort. And it was really all in furtherance of rural economic development. And these three frameworks raised about $12 million from six different donor accounts. So that's just one example of a syndication that Ben has done in support of a business entity that was achieving a charitable purpose. I think I will stop there, bill and see if there's other questions.

Bill Bodner:Sure. I think you covered who structures A PRI. Is there any additional detail to speak on for that matter?

Jeff Ochs:Yeah, so I think the key thing to remember with who structures A PRI, normally A PRI can only be made by a private foundation or a public charity. So they have to be the investor in A PRI. But using a donor-advised fund through a sponsoring organization. There's absolutely an ability of an individual to help structure that and to see something that they envision come to life, but you have to work through a charitable entity.

Bill Bodner:Sure. How about the management of returns of P within organizations?

Jeff Ochs:So every PRI is managed based on the terms of PRI and how that gets managed can be different from transaction to transaction. Obviously, loans that have straight line amortization or schedule amortization, that's monthly payments, whatever that might be, that's going to be a much more routine collection of payment versus an equity investment, which may be a liquid for a long time until there's liquidity event of some type. So the way that they're managed depends very greatly on what they're designed to do if expenditure responsibility is involved and then what the structure of the investment is.

Bill Bodner:Wonderful. And we have four minutes here. There is a question. Do you have an example of a successful PRI that resulted in recycling of dollars?

Jeff Ochs:Yeah. A lot of our PIs at Vent Foundation are still kind of outworking. The Saddleback examples have actually absolutely been successful. The ski resort has been opened. It's been continuing to operate, and then the PRIs that are expected to be repaid back are all being paid back on time and has agreed. We also had a wonderful example with the family partnership. If anyone wants to look at my LinkedIn profile, I just shared the story with that for our newsletter in October. That was an 18 month PRI that had some conditional triggers of prepayment based on certain sales of buildings and things like that, but they needed some cash upfront. So there's plenty of great examples of PRI succeeding. The Gates Foundation is also a great one. The Cystic Fibrosis Foundation had a very large PRI that was an equity based PRI that worked very well financially and impact wise. So there's definitely great examples and there's also plenty of examples where they don't work out as hoped. You're doing things in a below market context where you're taking extra risk, you're taking lower return, you're doing things that a normal investor wouldn't do, and so by definition, they're absolutely going to be times in which it doesn't work as anticipated or hoped. But that's also part of the purpose.

Bill Bodner:Thank you. Derek, you might be better for this one. We have a question on if you misclaiming your DAF contributions, can you recapture them subsequently?

Derek Dockendorf:Yeah, I saw that question come through Bill, and if you miss reporting that charitable contribution on your originally filed 10 40, right? We can't take it in the next year. Right. You'd have to go back and amend your return to capture any charitable deductions that you should have been allowed in that particular tax year. Right. So if I missed miss reporting a charitable contribution in 24, I can't claim it on 20 five's return. Right. Because they're locked into those calendar years. So if you miss one for a particular year that you should have captured, I'd recommend going back and looking to amend that return.

Bill Bodner:All right. Any other questions? Otherwise, I think we nailed it. We're at the top of the hour. Just want to thank everyone for their time today again, and I think, Bella, you have a couple of closing remarks.

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