Wednesday, February 3, 2016
NEW TAX-EXEMPT BOND ACCOUNTING AND ALLOCATION RULES SET TABLE FOR INNOVATION IN INFRASTRUCTURE AND HEALTH CARE FINANCE
Wednesday, February 3, 2016
Introduction. On October 26, 2015, the Treasury Department and Internal Revenue Service released final allocation and accounting regulations. These rules can be expected to encourage the financing of projects through public-private partnerships (P3s) and joint ventures involving healthcare organizations. In an age of crumbling infrastructure and rapid change in healthcare delivery, these rules can be expected to promote creative financing methods for public projects and to promote the financing of innovative healthcare delivery systems, such as regional care organizations. The new regulations generally apply to bonds sold on or after January 25, 2016.
The new regulations provide rules for the measurement of private use of a project that is financed in part with tax-exempt bonds and in part with other funds of an issuer or borrower. The new regulations also facilitate the use of tax-exempt bonds in certain public-private partnerships. The new regulations apply to both bonds issued for the benefit of state and local governments and for borrowers that are 501(c)(3) organizations.
The Internal Revenue Code generally restricts the amount of “private business use” of projects to small amounts (generally, 10% for governmental bonds and 5% for qualified 501(c)(3) bonds). The new regulations provide guidance on how to allocate bond proceeds and other funds of the issuer or borrower (referred to herein as “equity”) to private business use in order to comply with these limitations.
Floating Private Business Use Permitted. The new regulations permit an issuer or borrower to treat the privately used portion of a mixed-use project as if it comprised a separate portion of the project and to treat any equity used to finance the project to be allocated first to the separate, privately used portion. The new regulations then permit the privately used portion of the project to “float” or to change in location over time.
Flexible Definition of “Project”. The new regulations have a flexible definition of “project”, which is potentially helpful given that the new regulations permit private business use to “float” within a mixed-use project. The new regulations permit an issuer to treat as a single “project” one or more facilities, including land, buildings, equipment, or other property financed in whole or in part with the proceeds of a bond issue. This more flexible definition of “project” has the potential to ease the burden of ongoing compliance by issuers and borrowers with the tax-exempt bond rules.
Favorable Treatment of Public-Private Partnerships. The new regulations facilitate “public-private partnerships” by treating a partnership as an aggregate of its partners rather than as a separate entity. This permits the governmental (or 501(c)(3)) partner in a partnership that includes private persons to use tax-exempt bonds to finance its portion of the partnership assets. Under the old regulations, partnerships were automatically treated as private entities unless all of the partners were public. Under the new regulations, the amount of private use by a private person resulting from the use of property by a partnership is the nongovernmental partner’s greatest percentage of any partnership item of income, gain, loss, deduction, or credit during the time the partnership uses the property during the measurement period. The result is that ownership by a partnership does not violate the requirement that all bond-financed property needs to be owned by a 501(c)(3) organization or a state or local government. This favorable rule for partnerships expressly applies to qualified 501(c)(3) bonds. This new rule can be expected to expand the use of tax-exempt financing to certain public-private partnerships and joint ventures not previously eligible for tax-exempt bond financing.
Next Steps. Maynard & Gale’s public finance attorneys have experience with public-private partnerships, healthcare joint ventures, and tax-exempt financings by governmental and 501(c)(3) organizations. Please contact us if we can provide advice or assistance with respect to the newly effective allocation rules that are the subject of this alert or with other public finance questions.