Michael Bradshaw Jr. is an attorney with Butler Snow LLP. A
member of the firm's public finance, tax incentives and credit
markets group, Bradshaw provides counsel to governmental entities,
financial institutions and private developers on various types of
public and public/private finance and economic development
transactions.Bradshaw described earlier guidance on safe
harbor regulations the IRS issued in a recent blog post on
Butler Snow's website.
The IRS recently issued guidance that expands private
developers' ability to enter into certain types of long-term
facility management agreements — including those involving
P3s — on projects that are financed with tax-exempt bonds,
without jeopardizing the bonds' tax-exempt status.
State and municipal agencies finance many infrastructure
projects by issuing tax-exempt bonds but these types of bonds
generally cannot be used to develop facilities that will be subject
to private use. Clearly, the ownership and leasing of property
constitutes private use but private management of bond-financed
property could also fall under this category. Specifically, the
federal tax regulations stipulate that a management contract that
provides for compensation to a private service provider or manager
based on a share of net profits from a facility's operations
constitutes private use.
To further clarify this issue, the IRS provided guidance, Rev. Proc. 97-13, which established the
original safe harbors for contract terms that would not result in
private use. For example, the original safe harbors permit
contracts of up to 15 years if at least 95 percent of the
compensation consists of a periodic fixed fee, and contracts of two
to five years if the highest percentage of compensation consists of
variable fees, based on the type of fee.
A couple of years ago, the IRS expanded these safe harbors in Notice 2014-67, which allows for a broader
range of variable compensation arrangements covering shorter-term
management contracts of up to five years. Such variable
compensation may include a percentage of gross revenues or expenses
of a facility, but not both revenues and expenses.
In August, the IRS issued Rev. Proc. 2016-44, which, the agency explains,
"builds upon the amplifications in Notice 2014-67 by taking a
more flexible and less formulaic approach toward variable
compensation for longer-term management contracts of up to 30
years." Under this new guidance, a management contract will
not result in private use if the following conditions are met:
The payments to the service provider are reasonable, the
contract does not provide the service provider with a share of net
profits from the managed property and the service provider does not
bear the burden of net losses from the managed property;
The term of the contract does not exceed 30 years or 80 percent
of the economic life of the managed property, whichever is
The governmental entity continues to exercise a significant
degree of control over the managed property's use;
The governmental entity continues to bear the risk of loss with
respect to the managed property;
The service provider agrees that it is not entitled to and will
not take any tax position that is inconsistent with being a service
provider (e.g., will not take depreciation or amortization or an
investment credit with respect to the managed property); and
The service provider does not have any role or relationship
with the governmental entity that would substantially limit the
governmental entity's ability to exercise its rights under the
These new rules are similar in some ways to the safe harbor for
leases and management contracts with respect to projects financed
with tax-exempt private activity bonds that must be governmentally
owned. Examples of such facilities include airports and mass
transit systems. Under that safe harbor, the lease or management
contract term may not exceed 80 percent of the economic life of the
project and the private service provider or manager must not claim
depreciation or an investment credit with respect to the
The new guidance does raise a few questions, such as how a
tax-exempt bond issuer should demonstrate that it maintains
sufficient control over the managed property. However, the longer
30-year term and more flexible compensation arrangements Rev. Proc.
2016-44 permits should help to facilitate more P3s, especially with
respect to larger, tax-exempt bond-financed infrastructure
Editor's note: NCPPP publishes new and previously
published articles written by public-private partnership experts
that are of interest to P3 Digest readers. Submissions of new and
previously published material are considered for publication on a
case-by-case basis and should be sent to email@example.com.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).