Deciphering Impact Investment acronyms: UPMIFA, UBIT, PRI, and MRI

Jun 1

Where there is money, there are lawyers and consultants. And where there are lawyers and consultants, there are acronyms, deployed as though they are words that everyone knows.

There is a lot of money flowing around the impact investment sector. Therefore, it can be very easy for non-profits, and especially private foundations, to get lost in a sea of letters when they want to invest in a manner that advances their charitable purposes. There’s only so much a blog post can do, but let’s see if we can unpack four of the big acronyms.

UPMIFA: Uniform Prudent Management of Institutional Funds Act

UPMIFA is the law of 49 states, including California, when it comes to the fiduciary duties of directors and investment managers when it comes to investing a nonprofit’s investment assets. (UPMIFA is also the law of endowments — but that’s another post). Naturally, non-profits need to think about UPMIFA when impact investing comes up: either the investment needs to satisfy the requirements of UPMIFA or the non-profit needs to determine that UPMIFA does not apply to the investment.

I’ll save all the details for another post (or check this out if you can’t wait), but here are two key points for impact investment:

Most of the investment factors and requirements under UPMIFA are what you’d expect from any portfolio-based approach to investment (i.e. return, liquidity, diversification), but UPMIFA includes a unique consideration appropriate for non-profits: the investment’s special relationship or special value, if any, to the charitable purposes of the institution. So, if UPMIFA applies, nonprofits can the investment’s impact on mission as a factor, but only as one of many — the investment still needs to be prudent.

“Program-Related Assets” are not subject to UPMIFA. What are program-related assets? Assets held primarily for charitable purposes and not primarily for investment purposes. So, when it comes to impact-first investments, where return is secondary (at most), non-profits do not need to ensure the investment is prudent.

UBIT: Unrelated Business Income Tax

Covering UBIT in a brief blog post is hopeless, so here is a vast oversimplification:

Tax-exempt organizations generally do not pay tax on their income (hence the name)
There is an exception to that rule that says they DO pay tax on income from their actively conducted, regularly carried on, unrelated businesses (there are many exceptions to that exception, and exceptions to those exceptions, ad infinitum)
The fundamental carve-out from UBIT is income from related businesses, i.e., businesses that significantly further the organization’s charitable purposes.

So, if an impact investment sufficiently advances the charity’s purposes, the non-profit generally does not owe UBIT; if the impact investment is not sufficiently impactful, then, depending on the structure, the non-profit might owe UBIT.

PRI: Program-Related Investment

For private foundations, a PRI has a precise legal definition, which is an investment that:

primarily advances the organization’s charitable purposes
has NO significant purpose to produce income or appreciation

There is no precise definition for public charities, so many public charities follow the above definition, though arguably they only need to observe the UPMIFA definition above.

Given this strict definition, a non-profit can generally assume that a PRI:

Will NOT be subject to UPMIFA (which is good because, by definition, a PRI is generally NOT going to be a prudent investment)
Will NOT be subject to UBIT (by definition, the impact on mission is generally going to be strong, so the income will typically be ‘related’)

MRI: Mission-Related Investment

MRI does not even have a technical legal definition — but practically it is used to refer to an investment that has ‘some’ impact on mission, but where return is the primary motivator.

Given this ‘definition’, a non-profit can generally assume that a MRI:

WILL be subject to UPMIFA — that means impact on mission can help, but the investment still needs to be defensible as a prudent investment
MAY be subject to UBIT — most (but not all) of the time, another exception will apply to MRIs (e.g. the passive income exception), in which case the non-profit still will not need to pay UBIT. Still, when a non-profit is considering an MRI, it at least needs to be thoughtful about the potential for UBIT.

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For those who appreciate (very) hand-made charts, see the below diagram that represents a unified theory of impact investment. Hopefully between the above and below, impact investment is at least a little less tangled up in acronyms than it was before.