Sharing the Right of Way:

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Justin Barker
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1 Sharing the Right of Way: Embracing Alternative Revenue Sources Without Jeopardizing Tax-Exempt Financing Dorit F. Kressel, Esq. Generating New Revenues from Existing Assets Advertising Concessions Branding Rights / Naming Rights Sponsorship Programs Specific Service (Logo) Signs Service Plazas; Operating Agreements Cell Tower Leases Park & Ride Operations; Tow Trucks Service Plazas; Bridge Towers; Toll Plazas Rest Stops; Scenic Overlooks; Flower Beds 1

Generating New Revenues from Existing Assets Advertising Concessions Branding Rights / Naming Rights Sponsorship

2 In Each Case Are You Sharing The Public Asset With The Private Sector? Implications for Facilities Financed with Tax- Exempt Bonds Compliance With Federal Tax Law Compliance With Bond Covenants Compliance with Federal Tax Law If Private Activity Exceeds Permitted Levels, the Project Is Not Eligible For Tax-Exempt Financing Post-Issuance Compliance: Adding Private Involvement to an Existing Project May Put Your Tax-Exempt Bonds in Jeopardy Don t Let Your Tax-Exempt Bonds Become Taxable Private Activity Bonds 2

Compliance with Federal Tax Law If Private Activity Exceeds Permitted Levels, the Project Is Not Eligible For Tax-Exempt

3 Compliance with Bond Covenants Bond Resolution or Indenture; Tax Regulatory Agreement The Issuer shall not take any action, or fail to take any action, if any such action or failure to take action would adversely affect the exclusion from gross income of the interest on any series of Bonds under Section 103 of the Code, if such series is issued as a Tax-Exempt Obligation What is a Private Activity Bond? ABond is a Private Activity Bond if the Bond Issue Meets BOTH The Private Business Use Test AND The Private Security Or Payment Test Make Sure Your Bonds Fail One or Both Post-Issuance Compliance for the Life of the Issue 3

the Code, if such series is issued as a Tax-Exempt Obligation What is a Private Activity Bond?

4 Private Business Use Test An issue meets the Private Business Use Test if more than 10% of the proceeds of the issue are used for any private business use. (Lower threshold -- 5% test -- if private business use is unrelated to public use) Private Security Or Payment Test An issue meets the Private Security or Payment Test if the payment of debt service on more than 10% of the proceeds of the issue is (A) secured by any interest in property used for a private business use, or by payments in respect of such property, or (B) derived from payments (whether or not to the issuer) in respect of property used for a private business use. 4

Payment Test if the payment of debt service on more than 10% of the proceeds of the issue is (A) secured by any interest in property used for a private

5 What is Private Business Use? use (directly or indirectly) of the bond-financed facilities or of the bond proceeds in a trade or business What is Private Business Use? Private ownership of a bond-financed facility Lease to a private lessee Nonqualified management contracts Special legal entitlement (naming rights) Special economic benefit 5

in a trade or business Private ownership of a bond-financed facility Lease to a

6 Aggregation of Private Business Use All private business uses are aggregated to determine if the 10% test is met for the issue as a whole Compliance is determined on an issue by issue basis, not on a project by project basis Beware: some types of private business use will taint the entire issue Measuring Private Business Use Space, Time, Fair Market Value, Revenues Use reasonable, consistently applied method to allocate private business use to bond proceeds or facilities Average percentage of private business use over the life of the bonds cannot exceed 10% Measure by reference to physical space (leases) Measure by relative FMV (naming rights) Use of entire facility (nonqualified management contract) 6

Value, Revenues Use reasonable, consistently applied method to allocate private business use to bond proceeds or facilities Average percentage of private business use over the

7 Naming Rights; Advertising Rights PLR (Naming Rights Ruling) measure of use must properly reflect the amount of benefit conferred upon the naming party; FMV of naming rights contract PLR (Advertising Rights Ruling) intangible use; incidental use; no control over facility Exceptions to private business use Incidental use Qualified management contracts Qualified sponsorship programs 7

201049003 (Advertising Rights Ruling) intangible use; incidental use; no control over facility

8 Incidental Use Use is not possessory (except for vending machines, pay telephones, kiosks, and similar uses) Not functionally related to any other use by the same person In aggregate, less than 2.5% of proceeds/facilities Incidental uses are disregarded i.e., not PBU Advertising displays -- FGLA signage? Nonqualified Management Contracts Service provider has an ownership or leasehold interest in the financed facility, or Compensation for services rendered is based in whole or in part on a share of net profits from operations of the facility Results in PBU of entire facility 8

Nonqualified Management Contracts Service provider has an ownership or leasehold interest in the financed facility, or Compensation for services

9 Qualified Management Contracts Rev. Proc , as modified Compensation must be reasonable No share of net profits Safe harbors dictate specific compensation structures and duration of contracts Electronic toll collection system operators; concession management agreements Qualified Sponsorship Payments Payments received from private business user are treated as qualified sponsorship payments, not PBU Acknowledgement of support (signage) may not include advertising Private business user cannot control location, content, size or appearance of signage Business user s name or logo qualifies Highway sponsorship signs; FGLA signs? 9

Electronic toll collection system operators; concession management agreements Qualified Sponsorship Payments Payments received from private business user are

10 Opportunities Advertising i revenue; advertising i concessions Motorist service signs; sponsorship programs Cell towers; fiber optic lines Parking concessions; service plaza concessions Qualified management contracts Incidental Use Qualified Sponsorship Programs PBU < 10% Proceed With Caution Changes In Use Profit Sharing Relinquishing Control Possible consequences of a failure to monitor PBU: loss of tax exempt status liability to IRS liability to bondholders disclosable event damage to reputation reduced access to tax exempt bond market 10

10% Proceed With Caution Changes In Use Profit Sharing Relinquishing Control Possible consequences of a failure to monitor PBU: loss of

11 Take Aways Implement Post-Issuance Procedures To Monitor Private Business Use Maintain Records, Documents, Contracts Consult with Counsel Evaluate New Opportunities With Knowledge And Information Facilitate Future Transactions and Opportunities Thank you. Questions? Contact Information: Dorit F. Kressel, Esq. Wolff & Samson PC One Boland Drive West Orange, New Jersey (973) Telephone 11

Transactions and Opportunities Thank you. Questions? Contact Information: Dorit F. Kressel, Esq.

PRIVATE BUSINESS USE FOR QUALIFIED 501(C)(3) BONDS

PRIVATE BUSINESS USE FOR QUALIFIED 501(C)(3) BONDS Courtney A. Strutt Todd Davis Brown Law Firm PRIVATE BUSINESS USE GENERAL RULE Borrowers may lose their tax exemption if they have more than 5% of Private