CDFA // BNY MELLON DE DEVELOPMENT FIN FINANCE WEBCAST SE SERIES P3s That Fuel The Economy The Broadcast will Begin at 1:00pm Eastern Submit your questions in advance using the GoToWebinar control panel View previous webcast recordings online at www.cdfa.net WWW.CDFA.NET / / WWW.BNYMELLON.COM
Hello! Welcome to the webcast. Allison Rowland Coordinator, Research and Technical Assistance Council of Development Finance Agencies Columbus, OH Are you a CDFA Member? Members receive exclusive access to thousands of resources in the CDFA Online Resource Database. Create your unique login today at www.cdfa.net WWW.CDFA.NET / / WWW.BNYMELLON.COM
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P3s That Fuel The Economy Panelists Jennifer Fr Fredericks, Mod oder erator Vice President & Principal of Corporate Trust – Business Development The Bank of New York Mellon John Sem Semeniak Ed d Ra Ray Partner Chief Financial Officer McGuireWoods LLP Natgasoline Se Seth Crone John Fin Finke CDFA Training Institute Vice President of Client & Business Development President The Bank of New York Mellon Public Facilities Group 16 courses in development finance designed for all skill levels. Learn more and register today at www.cdfa.net WWW.CDFA.NET / / WWW.BNYMELLON.COM
P3s That Fuel The Economy Jennifer Fredericks Vice President & Principal of Corporate Trust – Business Development The Bank of New York Mellon Chicago, IL Are you a CDFA Member? Members receive exclusive access to thousands of resources in the CDFA Online Resource Database. Create your unique login today at www.cdfa.net WWW.CDFA.NET / / WWW.BNYMELLON.COM
P3s That Fuel The Economy John Semeniak Partner McGuireWoods LLP New York, NY CDFA Training Institute 16 courses in development finance designed for all skill levels. Learn more and register today at www.cdfa.net WWW.CDFA.NET / / WWW.BNYMELLON.COM
P3s – Basic Considerations for Tax-exempt Financing of Energy Related Projects Council of Development Finance Agencies CDFA // BNY Mellon Development Finance Webcast Series: P3s That Fuel The Economy February 18, 2020 www.mcguirewoods.com DISCLAIMER: NONE OF THIS PRESENTATION CONSTITUTES ADVICE OF ANY KIND; CONSULT YOUR TAX ADVISOR.
Overview ➢ Governmental & Non-governmental Projects ➢ Private Activity Analysis ➢ Management Contract Safe Harbor ➢ Remedial Actions ➢ Qualified Private Activity Bond – Key Requirements The purpose of this presentation is to provide a general reference point and framework only for the topics mentioned herein. McGuireWoods | 2 CONFIDENTIAL
Governmental Tax-exempt Projects ➢ Pre-pay transactions: ➢ Bond proceeds are used to purchase electricity or natural gas from generator in advance of delivery ➢ Purchase is made by or for a governmental utility for use in the utility’s service area ➢ Output facilities (e.g., generating, distribution and transmission facilities) - proceeds of bonds are used for capital expenditures for such facilities: ➢ $15 million limitation: generally, not more than $15 million of a bond issue for an output facility may be used for a private business use ➢ Private business use is use directly or indirectly in a trade or business that is carried on by any person other than a governmental unit. Governmental use is any use other than a private business use. ➢ Purchase pursuant to a contract by a non-governmental person of available output of an output facility may be taken into account under the private business tests McGuireWoods | 3 CONFIDENTIAL
Non-governmental Projects – Tax-exempt Private Activity Bonds ➢ Solid waste: new treasury regulations eliminate “no value” test and allow for energy conversion projects subject to limitations ➢ Limitations: first useful product rule or useful energy ➢ Manufacturing: financed assets in production of tangible personal property ➢ Sewage and water facilities ➢ Local furnishing of electricity or gas: 1997 “in operation” rule is limiting ➢ Local district heating or cooling: limited to pipelines and networks providing hot water, chilled water or steam ➢ Environmental enhancements of hyrdroelectric generation: fish ladders and related fish protective improvements ➢ Qualified 501(c)(3): project must be owned by the 501(c)(3) entity ➢ Other “exempt facilities: include high -speed rail, P3 educational facilities, green building (expired) and highway/surface freight McGuireWoods | 4 CONFIDENTIAL
PAB Analysis ➢ IRC § 141(a ) provides that the term “private activity bond” means any bond issued as part of an issue (1) that meets the private business use test and private security or payment test, or (2) that meets the private loan financing test. ➢ IRC § 141(b)(1) provides generally that an issue meets the private business use test if more than 10 percent of the proceeds of the issue are to be used for any private business use. ➢ IRC § 141(b)(6) defines “private business use” as use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit. For this purpose, any activity carried on by a person other than a natural person must be treated as a trade or business. McGuireWoods | 5 CONFIDENTIAL
PAB Analysis (cont.) ➢ Treas. Regs. § 1.141-3(a)(1) provides, in part, that the 10 percent private business use test of § 141(b)(1) is met if more than 10 percent of the proceeds of an issue is used in a trade or business of a nongovernmental person. For this purpose, the use of financed property is treated as the direct use of proceeds. ➢ Treas. Regs. § 1.141-3(a)(2) provides that, in determining whether an issue meets the private business use test, it is necessary to look at both indirect and direct use of proceeds. Proceeds are treated as used in the trade or business of a nongovernmental person if a nongovernmental person, as a result of a single transaction or a series of related transactions, uses property acquired with the proceeds of an issue. McGuireWoods | 6 CONFIDENTIAL
PAB Analysis (cont.) ➢ Treas. Regs. § 1.141-3(b)(1) provides that both actual and beneficial use by a nongovernmental person may be treated as private business use. In most cases, the private business use test is met only if a nongovernmental person has special legal entitlements to use the financed property under an arrangement with the issuer. In general, a nongovernmental person is treated as a private business user as a result of ownership; actual or beneficial use of property pursuant to a lease, a management contract , or an incentive payment contract; or certain other arrangements such as a take or pay or other output-type contract. McGuireWoods | 7 CONFIDENTIAL
Management Contract // Rev. Proc. 2017-13 ➢ Management contracts may result in private business use of governmental bond-financed property under § 141(b) or under the modified private business use test for qualified 501(c)(3) bond-financed property. ➢ Rev. Proc. 2017-13: ➢ General effective date – Rev. Proc. 2017-13 applies to any management contract entered into on or after January 17, 2017. ➢ Can apply old safe harbors to contracts entered into before August 18, 2017, and not materially modified or extended on or after August 18, 2017 (other than pursuant to certain renewal options). ➢ Generally permits any type of fixed or variable compensation that is reasonable compensation for the services rendered under the management contract. ➢ Service provider cannot share in the net profits or bear the burden of any net losses from the operation of the managed property . McGuireWoods | 8 CONFIDENTIAL
Rev. Proc. 2017-13 – Scope & Def’ns ➢ Applies to management contracts involving managed property financed with the proceeds of an issue of tax-exempt governmental or qualified 501(c)(3) bonds. ➢ Management contract means a management, service, or incentive payment contract between a qualified user and a service provider under which the service provider provides services for a managed property. A management contract does not include a contract or portion of a contract for the provision of services before a managed property is placed in service (for example, pre-operating services for construction design or construction management). ➢ Managed property means the portion of a project (as defined in Treas. Reg. § 1.141-6(a)(3)) with respect to which a service provider provides services. McGuireWoods | 9 CONFIDENTIAL
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