Public Private Partnerships are now a common tool to develop key infrastructure for the benefit of the public and are increasingly utilized to both obtain financing for such projects but also to capture private sector initiative and efficiency in developing projects ranging, from building structures to energy to broadband. Although “P3” is a very generalized term that can take many shapes depending on the needs of a given project, one emerging tool is the use of “63-20” entities to develop and support a project.
The term “63-20” derives from the recognition by the Internal Revenue Service of certain entities that are acting “on behalf of” a governmental body as entities that may issue tax-exempt obligations. The IRS established this ability through the issuance of a private letter ruling in 1963 (the 20th such revenue procedure of that year). IRS Revenue Procedure 63-20 allows certain private entities acting on behalf of a government entity to issue tax-exempt obligations to fund a project that is “essentially public in nature,” meaning the project generally is available to its citizens. One parallel may be drawn to state created municipal authorities.
The creation and operation of the 63-20 entity must satisfy a number of conditions, namely, the governmental entity: (i) must approve recognition of the 63-20 entity, its purpose and the obligations being issued; (ii) retain a “beneficial interest” in the project financing, which can be achieved through possessing the right to obtain title to the property upon redemption/maturity of the obligations issued, appointing the substantial majority of the 63-20 board members or maintaining the exclusive beneficial use of the project facilities.
Additional requirements a 63-20 entity must satisfy include not being organized for profit (i.e., must be a state non-profit entity) and the profits from the project do not inure to a private party. This latter provision does not mean private vendors, service providers and the like cannot be involved, only that the entity must comply with basic tax-exempt financing rules (e.g., private use, management contract rules, etc.).
Although there are many adequate structures available for P3’s, a 63-20 entity should be considered for any public-private project due to its favorable tax treatment while also providing the benefits of private sector knowledge and management with ultimate control still residing within the governmental entity sponsoring the project.
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