In a world of rising energy prices and concern about global warming, non-profit medical institutions and institutions of higher learning are looking for sustainable solutions to energy and resource needs. As with any new effort, a key challenge in pursuing a new institutional initiative is funding, and in the current economic environment, non-profit entities will need to reach beyond traditional funding sources. Many of Ballard Spahr's institutional clients are finding that, by pursuing integrated planning efforts and partnerships with innovative private companies to augment internal resources, they can complete "green projects" that enhance their mission while improving their bottom line. The American Recovery and Reinvestment Act of 2009 (ARRA) provides a wide range of incentives that will help make a compelling business case for renewable energy, energy efficiency, and other sustainability projects. 

ARRA provides new or greatly expanded forms of bond financing directly intended for, or that can be deployed to support, sustainability initiatives. Several loan and grant programs have been adopted or expanded as well. Tax incentives, such as investment tax credits and production tax credits, which are available to private developers, can help draw private capital to fund public-private partnerships. In addition, a number of provisions are aimed at assisting the recovery of bond markets and private finance markets by removing impediments to participation of certain classes of investors.

HOSPITAL AND UNIVERSITY DIRECT FUNDING

Nonprofit hospitals and universities undertaking renewable energy projects to meet their own needs, and energy efficiency and sustainability projects for their own facilities, depending on the type of institution, may take advantage of the following ARRA provisions:

Bonding Authority

Government-owned hospitals may be eligible for the following programs under ARRA:

  • Clean Renewable Energy Bonds and Energy Conservation Bonds (New CREBs/ECBs): New CREBs are tax-credit bonds, the proceeds of which are used by governmental bodies, public power providers, or cooperative electric companies for capital expenditures incurred on one or more qualified renewable energy facilities. ARRA authorizes an additional $1.6 billion of New CREBs to be allocated one-third (1/3) to state, local, and tribal governments, one-third (1/3) to public power providers, and one-third (1/3) for electric cooperatives. New CREBs are allocated by the Treasury Department, after an application process, starting with the smallest projects and then bigger ones, until available funds are depleted. The ECB program, created in 2008, was expanded by ARRA by another $2.4 billion, and its scope was altered to capture green community energy programs. Eligible issuers are state and local governments, a narrower group than New CREBs. Qualified conservation purposes include a wide range of capital expenditures, such as those incurred for reducing energy use in public buildings, implementing green community programs, rural development involving the production of electricity from renewable energy resources, and expenditures with respect to research facilities and grants. For implementing green community programs, bond funds may be used to distribute "grants and loans or other repayment mechanisms" (which could include repaying grants through charges on utility bills, for example) to parties including private individuals or businesses. The new boundaries of this program are not particularly clear. The allocations are allocated by the Treasury Department to states based on population. New CREBs and ECBs allow for near-zero-interest rate loans to fund these types of improvements.1
  • Recovery Zone Bonds: Many hospitals and universities have facilities located in impoverished areas. ARRA creates two new categories of tax-exempt and tax credit bonds that provide for "recovery zones," which include: (i) any area designated by an issuer as having significant poverty, unemployment, home foreclosures, or general distress; (ii) existing empowerment zones or renewal communities; and (iii) areas designated by an issuer as distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990.
  • Recovery zone economic development bonds (RZEDBs): RZEDBs are a special class of Build America Bonds, the new form of taxable governmental bonds with a refundable tax credit payable to the issuer. RZEDB proceeds, other than those in a reasonably required reserve fund, must be used for promoting development or other economic activity in a recovery zone through capital expenditures, expenditures for public infrastructure and construction of public facilities, and job training and educational programs. RZEDBs may not be private activity bonds. It appears to be intended that RZEDBs will be issued at par. The credit amount is forty-five percent (45%) of bond interest. RZEDBs are issuable during 2009 and 2010, subject to a national limit of $10 billion total for the two-year period. The limitation is allocated among states and within states on the basis of 2008 employment decline with a minimum allocation of   nine-tenths of a percent (0.9%)of the national limit.
  • Recovery zone facility bonds (RZFBs): RZFBs are a new form of tax-exempt private activity bonds. RZFBs are not subject to the regular PAB State volume ceiling under Section 146. It appears to be intended that RZFBs will be issued at par. RZFBs may be issued for "recovery zone property," defined as depreciable property meeting several requirements.  First, it must be constructed, reconstructed, renovated, or acquired by a taxpayer by purchase after the date of designation of a recovery zone (defined as for RZEDBs), and the original use of the property in the recovery zone must commence with the taxpayer. In addition, RZFBs are exempt from the PAB rule against acquisition of existing property. These rules apparently would permit a "turnkey" purchase of newly constructed real property, a purchase of new equipment for an existing facility, or a purchase of existing equipment outside the zone followed by transfer of the property into the zone for use there pursuant to the bond financing. Second, substantially all the use of the property must be in the recovery zone in a qualified business, defined to exclude: (i) rental of residential property (including a mixed use property where eighty percent (80%) or more of the gross rental income is from dwelling units); and (ii) any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off-premises. RZFBs are issuable during 2009 and 2010, subject to a national limitation of $15 billion total for the two-year period. This amount is allocated among states and within states on the basis of 2008 employment decline with a minimum allocation of nine-tenths of a percent (0.9 %) of the national limit.

ARRA is effective for RZEDBs and RZFBs issued after the date of enactment

Market Enhancements

  • Temporary relief from alternative minimum tax (AMT) treatment for tax-exempt private activity bonds (PABs) issued in 2009 and 2010: Interest on PABs (other than 501(c)(3) bonds) generally is subject to the AMT. Last year, Congress excluded one category of PABs (tax-exempt housing bonds) from the AMT. ARRA excludes the remaining categories of PABs from AMT in the case of new money bonds issued in 2009 and 2010, and bonds issued to currently refund bonds issued in 2004 through 2008.
  • Temporary relief for banks holding tax-exempt obligations: Under present law, banks are not permitted to claim a deduction for interest allocable to holdings of tax-exempt bonds. A limited exception is made for bonds issued by certain small governmental issuers. ARRA modifies these rules in two important respects:
  • Temporary extension of the existing corporate two percent (2%) de minimis rule to banks: ARRA provides that tax-exempt obligations issued during 2009 and 2010 and held by a bank, in an amount not to exceed two percent (2%) of the adjusted basis of a bank's assets, are not taken into account for purposes of determining the portion of the bank's interest expense subject to the interest deduction disallowance rules. The two percent (2%) de minimis rule previously applied only to corporations other than financial institutions.
  • Increase of qualified small issuer limit for bank qualifications purposes from $10 million to $30 million of tax-exempt bonds issued in 2009 and 2010, calculated on a per borrower basis: Under current law, the general rule denying a bank's interest expense deductions allocable to tax-exempt obligations does not apply to governmental and 501(c)(3) bonds issued by or on behalf of a "qualified small issuer" and designated by the issuer as "qualified tax-exempt obligations" (QTEOs). The qualified small issuer must expect that the total amount of such bonds to be issued during the calendar year will not exceed $10 million. ARRA increases the limit from $10 million to $30 million for bonds issued during 2009 and 2010. ARRA also provides that the $30 million applies at the borrower level rather than the issuer level. Thus, bonds issued by a 501(c)(3) entity are not counted in a qualified small issuer's limit. Bonds issued in 2009 and 2010 that qualify for the increased $30 million limit will retain their status as QTEOs for the life of the bonds. 

Grant and Loan Provisions

  • Energy efficiency grants and loans: Universities and government-owned hospitals may be eligible for some of the following ARRA programs:
  • ARRA appropriates $3.2 billion to fund the Energy Efficiency and Conservation Block Grants program.2 Grant funds assist states, local governments, and institutional entities in implementing strategies to reduce fossil fuel emissions and total energy use, such as grants to non-profit organizations to perform energy efficiency retrofits. Non-profit institutions are likely to have the edge in obtaining such funds.
  • Renewable energy grants and loans: Universities and government-owned hospitals may be eligible for some of the following ARRA programs:
  • The Department of Energy's Energy Efficiency and Renewable Energy Research Development, Demonstration and Deployment program gets $2.5 billion in funding from ARRA, including $800 million for biomass, $400 million for geothermal energy, and $1.3 billion for other technologies such as water power and solar energy. 
  • "Smart Grid" demonstration project grants: ARRA provides financial support for smart grid demonstration projects, including matching up to fifty percent (50%) of the cost of qualifying advanced grid technology investments made by qualifying entities to carry out a demonstration project. Such grants can be used to install smart metering technology that can allow energy consumers to track electricity usage and prices in real time, as well as participate in demand response programs that reduce energy costs not just through conservation, but also through special rates or payments received for participating in such programs.  DOE is required to initiate the matching grant program within sixty (60) days of the enactment of ARRA.

PUBLIC-PRIVATE PARTNERSHIPS

Many ARRA incentives are designed for taxpaying entities. By entering into various contractual "partnership" arrangements that allow private energy companies to retain tax ownership of projects, nonprofit hospitals and universities can engage the operating and technical expertise of private entities who will use their own funds in support of the project. It is important to structure the arrangements to assure appropriate performance guarantees and consistency with the special reliability needs of medical facilities and the values of university communities. Depending on project structure, care may also be required to deal with unrelated business income issues. ARRA helps taxpaying entities by loosening restrictions on qualifying for the following tax incentives and grant programs:

Tax Incentives

  • "Bonus depreciation"  extension: In 2008, Congress allowed businesses to recover the cost of capital expenditures faster than the ordinary depreciation schedule by permitting those businesses to immediately write-off fifty percent (50%) of the cost of depreciable property. ARRA extends this temporary benefit for capital expenditures incurred in 2009. This provision will allow businesses to immediately write-off fifty percent (50%) of the cost of depreciable property. Thus, assuming the availability of funds, commercial property owners who anticipate the need for capital expenditures for their projects within the next few years may wish to incur those expenditures this year in order to benefit from the accelerated depreciation. This provision is not limited to energy-related capital expenditures, yet it provides an additional financial incentive for commercial property owners to consider purchasing and installing on-site renewable energy facilities such as solar panels or fuel cells, or retrofitting buildings to improve their energy efficiency.
  • Three-year extension of Section 45 production tax credits (PTC): ARRA extends the Section 45 PTC through Dec. 31, 2012 for wind projects, and through Dec. 31, 2013 for closed -and open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine renewables projects. This change should allow developers to plan for sustained growth.
  • Availability of Investment Tax Credits (ITCs) for wind and other PTC-type technologies: The tax law changes in ARRA enhanced a broadening of the applicability of the Section 48 Investment Tax Credit that was initiated in October 2008. ARRA allows investors in projects that historically could generate only Section 45 production tax credits instead to elect to claim now otherwise available Section 48 ITCs. This change means that any qualifying electing project will get a faster payback from its tax credits, since the Section 45 PTCs are otherwise claimed over a 10-year period based on the amount of electricity actually produced. Renewable electricity production facilities that qualify for the election include wind facilities placed in service in 2009-2012, and closed-loop biomass, open loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine facilities that are placed in service in 2009-2013.
  • New Markets Tax Credit (NMTC) expansion: Electric utility investments in low-income communities may qualify for NMTCs. Under current law, an investor may claim an NMTC for qualified equity investments made to acquire stock in a corporation or a capital interest in a partnership that is a "qualified community development entity" (CDE). A CDE includes any domestic partnership whose primary mission is serving or providing investment capital for low-income communities or low-income persons. The allocation for New Markets Tax Credits was increased from $3.5 billion to $5.0 billion for 2009 and retroactively for 2008 (to benefit unfunded and under-funded requests in 2008). This credit is unusual in that it can be structured into renewable energy projects that also utilize the Section 48 credits.
  • Removal of Section 48 investment tax credit cap for small wind systems: The bill removes the $4,000 cap on the amount of the Section 48 investment tax credits claimed for small wind projects.

Market Enhancements

  • Temporary relief from alternative minimum tax (AMT) treatment for tax-exempt private activity bonds (PABs) issued in 2009 and 2010: Interest on PABs (other than 501(c)(3) bonds) generally is subject to the AMT. Last year, Congress excluded one category of PABs (tax-exempt housing bonds) from the AMT. ARRA excludes the remaining categories of PABs from AMT in the case of new money bonds issued in 2009 and 2010, and bonds issued to currently refund bonds issued in 2004 through 2008. 
  • Temporary relief for banks holding tax-exempt obligations: Under present law banks are not permitted to claim a deduction for interest allocable to holdings of tax-exempt bonds. A limited exception is made for bonds issued by certain small governmental issuers. ARRA modifies these rules in two important respects:
  • Temporary extension of the existing corporate two percent (2%) de minimis rule to banks. ARRA provides that tax-exempt obligations issued during 2009 and 2010 and held by a bank, in an amount not to exceed two percent (2%) of the adjusted basis of a bank's assets, are not taken into account for purposes of determining the portion of the bank’s interest expense subject to the interest deduction disallowance rules. The two percent (2%) de minimis rule previously applied only to corporations other than financial institutions.
  • Increase of qualified small issuer limit for bank qualifications purposes from $10 million to $30 million of tax-exempt bonds issued in 2009 and 2010, calculated on a per borrower basis. Under current law, the general rule denying a bank's interest expense deductions allocable to tax-exempt obligations does not apply to governmental and 501(c)(3) bonds issued by or on behalf of a "qualified small issuer" and designated by the issuer as "qualified tax-exempt obligations" (QTEOs). The qualified small issuer must expect that the total amount of such bonds to be issued during the calendar year will not exceed $10 million. ARRA increases the limit from $10 million to $30 million for bonds issued during 2009 and 2010. ARRA also provides that the $30 million applies at the borrower level rather than the issuer level. Thus, bonds issued by a 501(c)(3) entity are not counted in a qualified small issuer's limit. Bonds issued in 2009 and 2010 that qualify for the increased $30 million limit will retain their status as QTEOs for the life of the bonds.
  • Treasury Department grants for specified energy property in lieu of tax credits: Under current law, an income tax credit (the renewable electricity production tax credit (PTC) under Section 45) is allowed for the production of electricity from qualified energy resources at qualified facilities. An investment tax credit (ITC) also is permitted for certain energy property placed in service (energy credit under Section 48). These tax credits offset income tax on a dollar-for-dollar basis. 
  • ARRA authorizes the Treasury Secretary to provide a grant to each person who places in service during 2009 or 2010 energy property that is either (1) an electricity production facility otherwise eligible for the PTC or (2) qualifying property eligible for the energy ITC.
  • For Section 45 PTC properties, the grant amount is equal to thirty percent (30%) of the property basis of wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine renewable facilities. For Section 48 ITC properties, the grant amount is equal to thirty percent (30%) of the cost basis of fuel cell, solar and small wind property, and ten percent (10%) of the basis of geothermal, micro-turbine, combined heat and   power, and geothermal heat pump property. 
  • ARRA also permits taxpayers to claim the credit with respect to otherwise eligible property that is not placed in service in 2009 and 2010 so long as construction begins in either of those years and is completed prior to 2013 (in the case of wind facility property), 2014 (in the case of other renewable power facility property eligible for credit under Section 45) or 2017 (in the case of any specified energy property) described in Section 48.
  • No grant may be awarded to any federal, state, or local government (or any political subdivision, agency, or instrumentality thereof), any section 501(c)(3) entity, any clean renewable energy bond lender, cooperative electric company, or a governmental body under section 54(j) of the tax rules. Applications for the grant must be received before October 1, 2011.
  • Removal of limitation on ITC for projects financed with tax-exempt bonds or other subsidized energy financing: Under current law, the ITC under Section 48 must be reduced if the property qualifying for the credit is also financed with tax-exempt private activity bonds or through any other federal, state, or local subsidized financing program. ARRA permanently removes this limitation.
  • Five year carryback of net operating losses (NOLs) for small businesses: NOLs typically may be carried back two years before the year that the loss arises and carried forward to each of the succeeding 20 taxable years after the year that the loss arises. For 2008, ARRA would extend the maximum NOL carryback from two years to five years for small business with gross receipts of $15 million or less. This provision permits small business with losses to invest tax savings generated by increased NOL carrybacks in worthwhile expenditures of any nature, including on-site renewable energy facilities such as solar panels or fuel cells, or retrofitting buildings to improve their energy efficiency. 

Grant and Loan Provisions

  • Department of Energy "rapid deployment" renewable energy and transmission loan guarantees: ARRA   includes $6 billion in "rapid deployment" loan guarantees for both renewable energy power generation and electric transmission projects. Recipients must be entities borrowing to develop/construct projects using current commercial technology for: (i) renewable energy systems, including incremental hydropower facilities, systems that generate electricity or thermal energy, and facilities that manufacture related components; (ii) electric power transmission systems, including upgrading and re-conductoring projects; and (iii) leading edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the Secretary of DOE determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels. Construction on such systems must commence not later than September. 30, 2011. The $6 billion in appropriated funds is expected to support more than $60 billion in loans for these projects. Loan guarantees for leading edge biofuel projects are limited to $500 million.3

Lawyers in Ballard Spahr's Energy and Project Finance Group, Public Finance Group, and Climate Change Practice stand ready to provide additional information about ARRA, obtaining grants and loan guarantees, and implementing sustainability initiatives. For assistance, please contact: Robert B. McKinstry, Jr. (mckinstry@ballardspahr.com; 215.864.8208); R. Thomas Hoffmann (hoffmannrt@ballardspahr.com; 202.661.2215); Blake K. Wade (wadeb@ballardspahr.com; 801.531.3031); or Charles S. Henck (henck@ballardspahr.com; 202.661.2209).

RELATED PUBLICATIONS

For further information on ARRA provisions relating to investment in alternative energy technologies, click here.

For further information on ARRA provisions relating to state and local governmental entities, click here.

For further information on ARRA provisions relating to bonding authority, click here.


ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects financed by New CREBSs and ECBs.

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects funded directly by, or assisted in whole or in part by and through, the Federal Government under ARRA. 

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects supported by these loan guarantees. 


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