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Special Purpose IRS 63-20 Alternative Project Delivery

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.

Pairing 63-20 Nonprofit Debt and P3s

Two primary models have emerged for using 63-20 tax-exempt debt to finance transportation projects procured through alternative project delivery or a public-private partnership. 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 an agreement with a private contractor to design, build, operate, and/or 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.

Forming a 63-20 Nonprofit Corporation

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.

Regulating a 63-20 Nonprofit Corporation

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.

Criteria for a 63-20 Nonprofit Corporation to Issue Tax-Exempt Debt

In order for a nonprofit 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 5 percent or more 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.

Resource Documents

  • The Use of "63-20" Nonprofit Corporations in Infrastructure Facility Development
  • IRS Section 63-20


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