The LPDD team is proud to announce the release of a new federal model law on green private activity bonds. The law was drafted by a global law firm, which has requested to remain anonymous. It is available here.
From the introductory memorandum to the model law:
Generally, public entities may only issue tax-exempt bonds for governmental purposes. The Internal Revenue Code specifies certain limited categories of tax-exempt bonds that may be issued for private activities that Congress expressly determined over the years to have a significant public purpose (even with private involvement). With a couple of limited exceptions, these categories of tax-exempt private activity bonds do not currently apply to decarbonizing activities and projects. This draft legislation proposes an expansion in the scope of tax-exempt private activity bonds to include a wide variety of decarbonizing activities and projects.
Because interest rates for tax-exempt financing are lower than interest rates for non-tax-exempt financing, tax-exempt private activity bonds can be used to finance projects at lower cost. The typical structure for a tax-exempt private activity bond financing involves a public agency that acts as the issuer of the bonds, a trustee that manages and administers the loan, and an underwriter that markets the bonds to potential investors. The issuer’s role is to act as a conduit for the tax-exempt status of the bonds, and following issuance and delivery of the bond proceeds to the borrower, its role is minimal. Although the loan agreement is between the issuer and the borrower, the trustee, usually a commercial bank, takes over administration of the loan agreement and collateral and handles interactions with the bondholders. The borrower is typically the entity that owns the project. This legislation expanding eligibility for tax-exempt private activity bonds to decarbonizing projects and activities has been adapted from legislation that was originally proposed by Senator Dianne Feinstein in 2010 as S.3336 (111th Congress). The scope of eligible activities and projects has been expanded beyond renewable generation projects to include carbon capture and sequestration projects, energy storage projects, and advanced biofuels facilities. In addition, the scope of renewable energy projects covered has been expanded to include any source that does not emit greenhouse gases, which would include nuclear energy. These changes in scope are intended to align with and enable the deep decarbonization pathways described in Chapter 1 of Legal Pathways for Deep Decarbonization in the United States.
Tax-exempt private activity bonds are typically subject to a state volume cap and the alternative minimum tax (AMT). This draft legislation includes several options for addressing the state volume cap as well as language that would exempt issuances from application of the AMT.