Public sector agencies in the United States may finance capital projects by issuing tax-exempt debt, often making it more cost-effective for public project sponsors to issue debt than their private sector partners. Using this type of debt keeps interest costs low and generates attractive opportunities for both private and corporate investors. One method of reducing the borrowing costs to the private partner is to issue debt through a nonprofit public benefit corporation pursuant to Internal Revenue Service (IRS) Rule 63-20 and Revenue Proclamation 82-26. The nonprofit corporation is able to issue tax-exempt debt on behalf of private project developers.
In general, to facilitate the financing needs of a third party, state and local governments can issue tax-exempt revenue bonds either through established conduit issuers or creation of nonprofit corporations pursuant to IRS Revenue Ruling 63-20. While governments normally prefer to utilize an established entity for conduit issues, such as a state finance authority, IRS Revenue Ruling 63-20 provides a viable alternative and has been used to finance several highway and transit projects around the country.
Two primary models have emerged for using 63-20 tax-exempt debt to finance transportation projects procured as public-private partnerships. For revenue generating projects, the 63-20 corporation can issue debt by leveraging future toll or farebox revenues, with the public benefit corporation entering into a concession agreement with a private contractor to design, build, operate, and maintain the project for a pre-determined period. In these cases, the private partner usually assumes responsibility for arranging financing as well, but does not actually issue the debt. The financing package would be submitted to the board of the 63-20 corporation for approval and the debt would be issued on its behalf by a brokerage agency.
Lease back arrangements can also be used as a revenue source to back 63-20 debt. In this case, a department of transportation or a transit agency would agree to lease the transportation asset to be developed by the 63-20 corporation for a designated period of time. The 63-20 corporation would then leverage the future lease payments to issue its debt. As with toll-backed 63-20 financings, the private partner would likely play an important role in assembling the financing package for this type of lease-back transaction. This arrangement is similar in certain ways to the use of availability payments.
A nonprofit corporation is a private, non-stock corporation formed under the nonprofit corporation act of a state. The formation does not require special legislation, nor does it require a referendum in the local or sponsoring jurisdiction. A nonprofit corporation may be formed for any lawful purpose other than for pecuniary profit, including, without limitation, any charitable, benevolent, educational, civic or scientific purpose.
Nonprofit corporations are regulated by a state’s attorney general for compliance with the state’s Nonprofit Corporation Act, by a state tax authority for compliance with the requirements relating to state income tax exemption, and by the Internal Revenue Service for compliance with the use of a nonprofit project sponsor, which may also enable a project to receive public funds since the revenues generated by the project will not benefit any private party. It may also be possible for the nonprofit sponsor to issue public or privately-placed debt if it can enter into long-term contracts for the use of the facility or if the facility generates revenues from direct user fees.
In order for a nonprofit corporation to issue tax-exempt debt, it must satisfy the following criteria established by the IRS:
The rules for determining whether the governmental unit has the requisite "beneficial interest" in the nonprofit corporation are likewise quite straightforward.