The new Congressional session is heating up, and we’ll cover two new pieces of proposed legislation below. For the first time in several years, we can avoid giving the usual disclaimer that any new piece of legislation is “likely going nowhere.” Tax reform appears to be a real possibility for the first time in many years, and it will probably involve expansions of some areas of the tax-exempt bond world and contractions of others. The two bills discussed below are an example of each.
The first bill would allow tax-exempt private activity bond financing for public buildings that have too much private involvement. The second bill goes in the other direction, and would forbid governmental bond financing for stadiums, which, as we’ll see, would have the effect of preventing tax-exempt financing of any kind for stadiums.
We are continuing to work with our industry-leading public policy group to study the many new legislative developments that are sure to arise, and we will use the blog to provide resources and reactions to them.
Public Buildings with too much Private Business Use
The tax-exempt bond universe can be divided into two types of bonds – governmental bonds and qualified private activity bonds, with qualified 501(c)(3) bonds straddling those two. The distinction is based first on the nature of the users of the assets financed with the bonds, and second, if there is private involvement above a given threshold, on the nature of the use of those assets. If you can pay for an improvement with governmental bonds, that’s the better way to go, because those bonds come with far fewer restrictions.
The types of projects that will permit qualified private activity bond financing are what you would expect – projects that Congress determines provide sufficient public benefits to justify providing the subsidy inherent in tax-exempt bonds to those projects, even though there is significant private involvement in the project. These permitted projects include solid waste disposal facilities, sewage facilities, airport facilities, etc. However, there is not a permitted qualified private activity bond category for plain old public buildings (or “social infrastructure,” to use the fashionable term) that have more than the permissible amount of private business use to be financed with governmental use tax-exempt bonds. So, if you hire a private company to manage city hall, and the management contract gives rise to private business use, taxable bond financing may be the only option. These sorts of arrangements, referred to as “concessions,” are becoming more common as state and local governments look to enter into public-private partnerships to pass operation and maintenance responsibilities off to private parties. In a typical case, such an “operate/maintain” arrangement may have a term of up to 30 years.
Two solutions to this problem have popped up in the last year. The first solution is the new safe harbor from private business use that allows contracts with a much longer term – sometimes up to 30 years, which matches the typical length of a concession. If a contract can meet the new safe harbor, then no private business use arises, and the facility won’t be barred from governmental use bond financing because of the management contract with the private manager. (A reminder to read the Squire Patton Boggs analysis of these topics prepared by Bruce Gabriel, Roddy Devlin, and Bob Eidnier earlier this year, if you haven’t already.)
A recent bill introduced in the House of Representatives (H.R. 960), with a companion bill in the Senate, would provide a second solution, if the concession arrangement can’t fit within the safe harbor from private business use. This bill follows previous proposals, such as The Public Buildings Renewal Act (H.R. 5361 and S. 3177) in the previous Congress; the difference is that now the legislative environment is much more conducive to the success of the legislation.
The bill would allow tax-exempt private activity bond financings for “qualified governmental buildings,” which would include the following facilities, assuming that a governmental entity has ownership under federal income tax law, which may differ from state law title ownership: elementary and secondary schools, state college or university facilities used for educational purposes, public libraries, courts, health care facilities, public safety facilities (police and fire departments, jails, etc.), and government office buildings. As is often the case with qualified private activity bonds, there are some specifically excluded facilities: facilities that have as their primary purpose retail food and beverage services or the provision of recreation or entertainment, or any facility that includes a private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard, and ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack, convention center, or sports stadium or arena. The bill would impose a special $5 billion volume cap regime that would require issuers to submit an application to Treasury for approval – not the most efficient approach.
The bill seems to fill a logical gap in the private activity bond rules. If the concept behind tax-exempt private activity bond financing is that some projects are “public enough” to deserve tax-exempt bond financing despite significant private involvement, what’s more public than a public building?
The exclusion of private activity bond financing for sports stadiums also dovetails with the second bill in today’s post.
No Tax-Exempt Bonds for Stadiums
Under current law, a state or local governmental unit, such as a city, can often issue governmental use bonds to finance all or a portion of a professional sports stadium. This tax-exempt financing is possible even though the city typically will lease the stadium to a professional sports team, so that there is excess private business use, as long as the team retains most or all stadium revenue and pays a rental amount that barely exceeds, if at all, the city’s cost to maintain the stadium. Thus, there are little or no private payments, and the city will repay the bonds through generally applicable taxes, thus avoiding the second part of the private business test that would require the city to use private activity bonds. The question of whether tax-exempt bonds should be used for professional sports stadiums has been studied exhaustively, and the House of Representatives held a hearing on the subject in 2007.
Rep. Steve Russell (R-OK) has again introduced a bill that would prevent cities from using governmental bonds to finance professional sports stadiums. As noted in the discussion of the public buildings legislation above, issuers can’t finance sports stadiums with qualified private activity bonds under current law, and, even if the new public buildings bill were to become law and a stadium otherwise met the requirements for qualified private activity bond financing, sports stadiums are specifically excluded, and they cannot benefit from tax-exempt bond financing.
We covered the previous iteration of the bill in depth last year. The new version has sharpened its focus from “professional entertainment facilities” to “professional sports stadiums.” Mechanically, the bill works by treating any bond issue that is used to finance a “professional sports stadium” as though it exceeds the private security or payment limit, even if the stadium is leased to the team for a nominal amount and the city repays the bonds through generally applicable taxes. For this purpose, a “professional sports stadium” means “any facility (and appurtenant real property) which, during at least 5 days during any calendar year, is used as a stadium or arena for professional sports exhibitions, games, or training.” Under last year’s bill, this deemed private security/payment treatment would have also extended to stadiums and arenas, or venues for entertainment where the audiences exceed 100 people and the net earnings from the facility redound to the benefit of any entity other than a political subdivision.
Each of these bills could easily be folded into broader tax reform discussions, or could be enacted on its own. We will provide further updates on these bills and other legislation as they become available.