PRI Q&A

Below, we share some recent member questions and answers from Dana Pancrazi, Senior Program Officer of The F.B. Heron Foundation.

PRI Makers Network also offers a members-only online posting board where members can ask questions, respond to their colleagues and view past conversations.

Q: Are any foundations making grants to CDFIs for their loan loss reserves (LLR)? We would welcome Information on grants made for this purpose, including size ranges of grants, what conditions may have applied (were the loan loss reserve grants made only in tandem with PRIs for lending capital, were they only for certain lending programs, etc.), and whether the grants were matching funds for CDFI Fund or other awards.

Dana Pancrazi (DP): Some foundations are making grants to CDFIs for loan loss reserves. We have made at least two grants to existing grantees/PRI recipients for this purpose. One was a $100,000 grant specifically targeted for LLR related to the organization’s homeownership lending over and above the organization’s regular $125M annual general operating support grant and an existing $500M PRI that had already been on the books for a handful of years. The organization was able to demonstrate that every $1 of LLR raised could be leveraged into $20 of loans and that strengthening its LLR preserved its net asset position so that it was able to not only continue making individual homeownership loans, but was also able to be a more effective partner with government in leveraging additional private dollars for affordable housing. Another was a three year grant, with the last two years accelerated into a single payment made to an existing grantee to help it rebuild its balance sheet, avoid covenant violations, and strengthen its ability to sustain itself until credit markets thaw. It’s noteworthy that the Opportunity Finance Network recently said that nearly half of CDFIs saw the need to raise LLR, but that they fear “…reducing available capital to lend, causing operating deficits and, to a lesser extent, causing net assets to drop below the level required in existing loan covenants.”

Q: We're reviewing our policy for setting PRI interest rates. We leave it to the applicant to propose a rate; the rate is established on a case-by-case basis. We take into consideration the project, financial strength of an organization, and risk. Our rates have ended up between 2% to 3%. PRIs are part of the program budget, so there is not much incentive to generate income and/or recoup carrying costs. We're contemplating establishing a set rate for ease of administration (not that we would not look at the project, organization's strength, and risk). We're wondering what others do.

DP: We also use risk-based pricing and if you assume, as we do, that PRIs are a useful tool to help move organizations toward “investment readiness,” or the ability to utilize traditionally available market-rate capital, then this pricing is appropriate. We believe pricing at a flat rate risks diminishing the value of the PRI by not reflecting realistic pricing. For example, risk-based pricing helps organizations to understand and operate in an environment where subordinate debt is more expensive than senior debt; ten year money is more expensive than five year money, and so on. That said, we also recognize the desire to limit administrative burden relative to pricing. However, if one were to switch to a flat rate, it might be useful to think of something other than, say, 1% and use a rate that more closely approximates a risk-based price or alternatively does not provide a greater subsidy than the project requires.

Q: What type of software do various foundations use to monitor, track, invoice and report out on their PRI and MRI investments? This foundation is not having much luck looking for a package.

DP: Ahhh, the holy grail. Unfortunately, despite much searching, we are unaware of any off the shelf product that is able to facilitate a PRI program. To our knowledge, groups are using everything from Excel spreadsheets to patched modifications to GIFTs or other grant administration software. Some also use variations of loan administration software used by commercial banks, but one would have to have a sizable volume to make this cost effective. There was a point in time several years ago when we attempted to assemble a GIFTs user group to create a modification for GIFTs so that it was more adaptable to PRI uses with the explicit intention of submitting it to Microedge. Given that the field has grown and self-organized, perhaps it’s time to think about PRI Makers trying to renew and coordinate a similar effort?

Q: Also, how do foundations coordinate any internal PRI and MRI tracking with any tracking that they may outsource to intermediaries or others?

DP: If foundations manage their PRI portfolio as part of the overall investment portfolio, then aggregate reporting is an important tool. Prior to each reporting period, Foundation staff provides the outside investment consultant with the data related to the outstanding PRIs. Market rate MRI managers customarily provide financial data directly to consultants, as do more traditional asset managers. In turn, the outside investment consultant incorporates the MRI and PRI data into the overall performance and asset allocation reporting that it provides to the Foundation.