A recent change to federal law permits local school districts and charter schools to enter into public-private partnerships to take advantage of tax-exempt bonds for developing new school facilities as well as renovating, refurbishing, and equipping existing ones.
The change was made to stimulate private sector involvement in school construction and renovation. Unmet needs in this area total $127 billion nationwide, according to an estimate from the National Center for Education Statistics (NCES), which also reports 75 percent of the nation’s schools need funds to bring their buildings into “good overall condition.”
A provision in Section 422 of the “Economic Growth and Tax Relief Reconciliation Act of 2001” expanded the definition of “an exempt facility bond” to include bonds issued for qualified public educational facilities. Exempt facilities typically are large public works, such as solid waste disposal plants and water pumping stations, which often receive a mix of private investment and public assistance. The new bonds for public educational facilities share this partnership feature with existing exempt facility bonds.
Under the 2001 Act, a qualified public educational facility is defined as any school facility which is: (a) Part of a public elementary school or a public secondary school, and (b) Owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a state or local educational agency (LEA).
A satisfactory public-private partnership agreement is one where the private entity agrees to do one or more of the following: construct, rehabilitate, refurbish, or equip a school facility. At the end of the agreement, the private entity must transfer the school facility to the LEA for no additional consideration.
A school facility is any school building or functionally related facility and land, including any facilities used primarily for school events, such as stadiums. That broad definition allows the bond proceeds to be used for nearly any school-related capital investment. However, to maintain tax-exempt status, the bonds must comply with Internal Revenue Service regulations governing the use and purposes of tax-exempt bonds.
These tax-exempt facility bonds are not counted against a state’s private activity volume cap but instead have their own individual caps. In the case of qualified public educational facility bonds, that limit is equal to $10 multiplied by state population. Based on the 2000 population count, this gives a potential nationwide total for these bonds of $2.8 billion.
The result of the law change is that state and local governments can issue private activity tax-exempt bonds for school construction. Charter schools will be able to take advantage of these bonds where there is state participation in the development of educational facilities or where the LEA is favorably disposed towards charter schools. However, finding a private partner and forming a public-private partnership is a challenging undertaking.
The definition of a “public-private development partnership” incorporates several features, including:
- the close collaboration of a public entity and a private entity;
- structuring, negotiating, and implementing the project;
- finance, design, and construction; and
- operation of the completed facility.
Many public-private developments are complex undertakings that involve accommodations of multiple competing interests in order to produce a successful partnership deal structure. It is not necessarily a matter of finding middle ground but, typically, of finding a creative way to solve a unique mix of problems.
Every public-private partnership is different and every deal structure must be customized to meet the objectives of the individual public and private partners. It is the ability to specifically tailor partnerships that makes this public-private finance and development approach so attractive. The level of responsibility of each partner can be designed to accommodate their individual capacities to perform and their desired levels of involvement.
To make this approach work, charter school operators must understand the financial responsibilities and risks involved in the development process. They also must invest time and energy in seeking out reliable partners for facility development. The payoff is the ability to tap into private activity bonds, which gives them greater options for creating suitable permanent facilities.
Mark Howard has specialized in the development of commercial properties since 1980. He owns and operates M.H. Realty Associates, Inc. in Tamarac, Florida. Readers with questions on facilities and finances are encouraged to contact him directly at [email protected]. The most frequent questions about common problems will be included in future columns.