Over a thousand US public finance attorneys converged on the City of Chicago last week for the annual National Association of Bond Lawyers Bond Attorneys Workshop. The conference, the oldest and largest of its kind, featured a number of breakout sessions devoted to a wide range of issues facing the public finance legal community, including the new management contract rules recently issued by the IRS, Revenue Procedure 2016-44 . As I wrote sometime ago, NABL was a major influence proposing changes to the rules to make them less formulaic and more flexible given the range of business arrangements and asset types being explored in the US, particularly in the emerging social infrastructure P3 space.

Since the release of the new rules, which by the way are less hard and fast rules and more guidance about what types of management and operating agreements with private entities will constitute “private use”, there has been much discussion about them within the P3 community, particularly whether they will lead to a greater use of tax exempt financing for P3 social infrastructure projects. In this blog, I’m not going to speculate on that issue (though I may comment on that topic in future blogs)—I believe before anyone can do that in an informed and thoughtful way they need to better understand the requirements of the revenue procedure. And what better place to get clarification on the points of the revenue procedure then at the NABL conference where the leading practitioners in the area as well as representative of the Service can analyze practical issues relating to the rules and give their thoughts on how to resolve them. Here is what I learned regarding several of the financial considerations set forth in the new rules that for me anyway raised a number of questions (NOTE: these are not the only factors to consider under the new rules and in future blogs I may discuss the others).

Is it Safe? As I mentioned above, these are only safe harbors, meaning contracts that comply with the requirements will not be deemed “private use” and projects that are the subject of a qualified contract could be eligible for tax exempt financing. That said, a leading muni bond tax attorney was of the view that strict adherence to the rules may not be the end of the analysis—what’s important is to understand the principles espoused in the rules. Therefore, slight variations from the rules (which themselves have a fair amount of flexibility by the way) may still get you to an unqualified tax opinion. That said, a clear principle of the rules is qualified contracts must NOT be subject to characterization as long-term leases for tax purposes.

Tax Ownership. Another key principle of the rules is that for tax purposes, ownership of the facilities must be maintained by the entity entering into the management contract with the private entity. So private entities cannot take depreciation or otherwise take a position contrary to this characterization.

Risk Allocation. Risk of loss relating to the bond financed facilities must be retained by the owner; however, the contract can require the private manager to purchase insurance for the facilities, though an interesting question is who has to pay the deductibles. An important point here: it was made perfectly clear at the conference that risk of loss for purposes of the rules relates to damage or destruction of the project, not “economic loss” or a loss in profits to the private operator if they’ve guessed wrong regarding the life cycle cost of the project or fail to maintain the project in accordance with the contract standards.

Term Limits. The new rules drop the old formulaic approach of setting specific term limits to the contract based on the compensation method and instead, consistent with the “don’t be a lease” and tax ownership principles described above, set a limit to the term of the contract of the lesser of 80% of the useful life of the managed property or 30 years. It’s clear in the rules that the construction period would not count against the operating term limit. But what about projects that include not just construction and operation of buildings but the purchase and installation of equipment that may have a useful life of 10-15 years? The panelists all agreed that the management contract rules could be used in conjunction with a separate set of tax exempt bond rules that allow for a reasonable allocation of project costs between those paid for with bond proceeds and those paid from other sources, including equity and milestone payments.