How Much Interest Should we Charge?

There are no hard and fast rules governing PRI interest rates, but there are some guidelines. The important thing to remember is that, in order to meet the IRS charitable purpose requirement, a PRI must generate below-market returns on a risk-adjusted basis. There are two general approaches to calculating interest and returns:

1. Set a ceiling. Many foundations set a standard below-market interest rate for all loans at a certain percentage of the total value of the equity investment. A flat 1 percent interest rate, for instance, ensures that almost any loan is below market. A uniform interest rate can also streamline reporting and repayment.
2. Discount market risk. Other investors calculate the return a given investment could expect to generate in the private market, and then discount it according to the recipient’s needs and IRS guidelines. “We take seriously that we must demonstrate that our pricing is concessionary compared to what a socially indifferent investor or lender would require,” one investor explained. “But if that means that we get 5 percent or percent return, and that is clearly below market for that particular investment, then that’s fine.”