The primary reason that relatively few real toll projects have been procured using the DBFO concession model in the United States is the fact that public agencies are able to obtain cheaper, tax-exempt debt. Using this type of debt keeps interest costs low and generates attractive opportunities for both private and corporate investors. Recently, a number of highway and transit projects have been funded by debt issued by non-profit corporations, which, pursuant to Internal Revenue Service (IRS). Rule 63-20 and Revenue Proclamation 82-26, are able to issue tax-exempt debt on behalf of private project developers.
In order to meet their financing needs, state and local governments can issue tax exempt toll revenue bonds through either established conduit issuers or creation of not-for-profit corporations pursuant to Internal IRS Revenue Ruling 63-20. While governments normally prefer to utilize an established entity for conduit issues, IRS Revenue Ruling 63-20 provides a viable alternative and has been used to finance a number of major projects around the country. Examples include toll roads in Virginia and South Carolina, Massachusetts Route 3 North, and the Las Vegas Monorail.
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 DBOM agreement with a private contractor to design, build, operate, and maintain the project for a pre-determined franchise 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 then 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 DBOM partner would likely play an important role in assembling the financing package for this type of lease-back transaction. This model is similar in certain ways to shadow tolling.
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 non-profit 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 the State Attorney General for compliance with the Non Profit Corporation Act, by state tax authorities for compliance with the requirements relating to their 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 non profit 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 non-profit corporation to issue tax-exempt debt, it must satisfy the following criteria established by the IRS:
The corporation must engage in activities which are essentially "public in nature."
It must not be organized for profit.
The corporate income must not inure to any private person.
The State or political subdivision must have a "beneficial interest" in the corporation while the indebtedness remains outstanding.
The corporation must be approved by the State or the political subdivision, which must also approve the specific obligations issued by the corporation.
Unencumbered legal title in the financed facilities must vest in the governmental unit after the bonds are paid.
The rules for determining whether the governmental unit has the requisite "beneficial interest" in the nonprofit corporation are likewise quite straightforward.
The governmental unit must have exclusive beneficial possession and use of at least 95 percent of the fair market value of the facilities; or
If the nonprofit corporation has exclusive beneficial use and possession of 95 percent of the fair market value of the facilities, the governmental unit appoints 80 percent of the members of the board of the corporation and has the power to remove and replace members of the board; or
The governmental unit has the right at any time to get unencumbered title and exclusive possession of the financed facility by defeasing (paying off or providing for payment of) the bonds.