26 U.S.C. § 142 — Exempt facility bond

(a) General rule. A bond counts as an "exempt facility bond" if it's part of a bond issue where 95% or more of the net proceeds go toward one of 17 listed uses: (1) airports and spaceports, (2) docks and wharves, (3) mass commuting facilities, (4) facilities that supply water, (5) sewage facilities, (6) solid waste disposal facilities, (7) qualified residential rental projects, (8) local electric or gas utilities, (9) local district heating or cooling, (10) qualified hazardous waste facilities, (11) high-speed intercity rail, (12) environmental enhancements at hydroelectric plants, (13) qualified public educational facilities, (14) qualified green building and sustainable design projects, (15) qualified highway or surface freight transfer facilities, (16) qualified broadband projects, and (17) qualified carbon dioxide capture facilities. (b) Special rules that apply across categories. (1) Government ownership required. For airports, docks/wharves, mass commuting, and hydroelectric environmental enhancements (categories 1, 2, 3, and 12), all the property financed by the bond must be owned by a government unit. There's a safe harbor: leased property still counts as "government-owned" if the lessee permanently gives up any depreciation deduction or investment credit on it, the lease lasts no more than 80% of the property's expected economic life, and the lessee has no option to buy the property except at fair market value. Similar rules apply to management contracts. A special rule lets spaceport property built on land the government leases from the United States still count as government-owned, as long as the lease and any subleases meet these same conditions. (2) Office space limit. An office only counts toward one of these categories if it's located at the facility itself, and almost everything that happens in it is directly related to running the facility day-to-day. (c) Airports, spaceports, docks and wharves, mass commuting, and high-speed rail. (1) Storage and training facilities that are directly tied to one of these facility types count as that same type. (2) But certain private-use property doesn't count, if it's used for private business: lodging facilities; retail facilities (including food and drink) bigger than what's needed to serve passengers and staff; other retail facilities outside the terminal serving the public; office buildings for people who aren't government or facility-operator employees; and industrial parks or manufacturing facilities. (d) Qualified residential rental project. This is the longest and most detailed category. (1) In general. A housing project qualifies if, for the whole "qualified project period," it meets one of two income tests the issuer picks in advance: the 20-50 test (at least 20% of units go to people earning 50% or less of the area's median income) or the 40-60 test (at least 40% of units go to people earning 60% or less of median income). A building doesn't stop being "residential" just because part of it is used for something else. (2) Key definitions. The "qualified project period" runs from when 10% of units are first occupied until the latest of: 15 years after half the units are occupied, the date no tax-exempt bond for the project is still outstanding, or the date any Section 8 housing assistance for the project ends. Income and area median income are measured the same way as under the federal Section 8 housing program, adjusted for family size — special rules ignore certain below-market loan provisions and basic housing pay allowances for military members near installations that grew by 20% or more in personnel between 2005 and 2008 (or nearby counties). Student rules mirror those in the Low-Income Housing Tax Credit law. A single-room occupancy unit still counts as a residential unit. And if the area's median income figure would drop in a later year, the law "holds harmless" the project — the income limit can never go down from what it was the year before, with a special catch-up rule for projects affected by a 2007-2008 HUD calculation change. (3) Checking income over time. A resident's income is normally checked at least once a year, but doesn't need to be if no new resident in that project earned above the limit that year. Once a resident qualifies, they keep qualifying even if their income later rises — unless their income later measures above 140% of the limit AND a new tenant moving into a similarly sized unit that same year is over the limit (for Low-Income Housing Tax Credit projects, this comparison is done building-by-building rather than project-wide). (4) Deep rent skewing. Owners can elect a stricter, but more flexible, version of this rule: the 140% threshold becomes 170%, and the trigger becomes any low-income unit (not just similarly-sized ones) going to someone over 40% of area median income. To qualify for this election, the project must meet three tests throughout the qualified project period: at least 15% of low-income units go to people at or under 40% of area median income; rent on every low-income unit stays at or under 30% of the income limit that applies to it; and rent on every low-income unit stays at or under half the average rent charged for similar-sized market-rate units. "Gross rent" for this purpose includes Section 8 payments and utility allowances. (5) Which income limit applies. Generally it's whichever test (20-50 or 40-60) the project chose, except deep-rent-skewed low-income units use the 40%-of-area-median figure instead. (6) Special rule for a five-borough city over 5,000,000 people (i.e., New York City). There, the 40-60 test's 40% threshold drops to 25%. (7) Certification. Project operators must certify annually to the Secretary that they still meet these requirements. Failing to file doesn't cancel the bond's tax-exempt status, but the operator can be penalized under section 6652(j). (e) Water facilities. A facility only counts as "furnishing water" under category (4) if the water is available to the general public (including utility, industrial, farm, or business customers), and either a government unit runs the facility or a government body, federal agency, or public utility commission has approved or set its water rates. (f) Local electric or gas utilities (category 8). (1) "Local" furnishing means service only within a city plus one adjoining county, or two adjoining counties. (2) Electricity that's forced outside that local area by a federal order (a FERC order under specific sections of the Federal Power Act) doesn't disqualify the facility, as long as the tax-exempt-financed share of the facility's cost is no bigger than the share normally allocated to local service. Facilities financed before such an order are protected too, if the issuer sets up an escrow to cover remaining bond payments and redeems the bonds at the earliest possible date. (3) No new bonds can be issued under category (8) unless the facility will serve the same area (or an overlapping county or city) that the utility served as of January 1, 1997, or the facility passes to a successor serving that same area. (4) Utilities with older bonds facing loss of tax-exempt status because their service area expanded can instead make a one-time election: give up issuing any new category-8 bonds ever again, keep any service-area expansion unfinanced by these bonds and not counted as private business use, and redeem all their outstanding bonds within 6 months of the election (or the earliest redemption date, whichever is later). This election covers all of that utility's — and its related companies' — local energy facilities together. (g) District heating or cooling (category 9). This means property that's an integral part of a local pipeline or network delivering hot water, chilled water, or steam to two or more users, for heating, cooling, or industrial steam. A "local" system can serve a city plus one adjoining county. (h) Hazardous waste facilities (category 10). This means a facility that disposes of hazardous waste by incineration or burial, but only if it's permitted under Subtitle C of the Solid Waste Disposal Act (as it stood when the Tax Reform Act of 1986 was enacted), and the tax-exempt-financed portion doesn't exceed the share of the facility used by people other than the facility's own owner, operator, or their related parties. (i) High-speed intercity rail (category 11). (1) This covers fixed-rail passenger facilities (not the trains themselves) connecting metro areas, using trains that can reasonably reach over 150 mph between stops — as long as the general public can ride. (2) Any non-government owner must irrevocably give up depreciation deductions and tax credits on the bond-financed property. (3) Any bond proceeds not spent within 3 years must be used, within 6 months after that period ends, to redeem bonds. (j) Hydroelectric environmental enhancements (category 12). (1) This means property tied to a federally licensed, government-owned hydroelectric plant that either protects fish and wildlife (like fish bypasses or hatcheries) or provides recreation required by the plant's federal license. (2) At least 80% of the bond issue's net proceeds must go toward the fish/wildlife protection use specifically. (k) Public educational facilities (category 13). (1) This covers school buildings that are part of a public elementary or secondary school but owned by a for-profit corporation under a public-private partnership agreement. (2) That agreement must have the corporation agree to build, fix up, or equip the school and then hand it over to the school agency for free at the end of the agreement — and the agreement can't outlast the bond issue. (3) "School facility" includes the building, related and subordinate facilities and land (like a stadium mainly used for school events), and depreciable equipment used there. (4) "Elementary" and "secondary school" use the definitions from the Elementary and Secondary Education Act of 1965. (5) States face an annual cap on these bonds: the greater of $10 times the state's population or $5,000,000. States can allocate this however they choose, and can carry forward unused amounts for up to 3 years, but only for more category-13 bonds. (l) Green building and sustainable design projects (category 14). (1) This covers projects the Secretary designates, after consulting the EPA, as meeting listed energy and design standards. (2) The Secretary had 60 days after the application period closed to designate projects — at least one within 10 miles of an empowerment zone, at least one in a "rural state," no more than one per state, and none that include a professional sports stadium or arena. Overall, the designated projects together had to cut annual electric use by over 150 megawatts, cut daily sulfur dioxide emissions by at least 10 tons versus coal power, expand the U.S. solar market by 75% compared to 2001-2002 growth, and use at least 25 megawatts of fuel cell generation. (3) Only projects nominated by a state or local government within 180 days of this subsection's enactment, backed by written assurance they'd meet the eligibility rules, could be designated. (4) The application had to show the project met several eligibility rules: at least 75% of commercial building square footage registered for and expected to earn LEED certification (with specific credit rules for wood and composite wood products); inclusion of a "brownfield" site as federal law defines it; at least $5,000,000 in state or local government support (including tax breaks or in-kind help); a size of at least 1,000,000 square feet or 20 acres; a description of how the tax savings would be used (for green features, certification compliance, or brownfield cleanup); no funding for a restaurant or bar as the main business; and projected employment of at least 1,500 permanent jobs (150 in rural states) and 1,000 construction jobs (100 in rural states), backed by an independent economic analysis. Each application also had to describe the project's expected cuts to electricity use and sulfur dioxide emissions, and its solar and fuel cell capacity. (5) Within 30 days of finishing the project, it had to certify to the Secretary that the tax savings were used as promised. (6) A "rural state" is one with under 4,500,000 people (2000 census), under 150 people per square mile, and population growth under half the national rate between 1990 and 2000. (7) Each project's bonds are capped at whatever amount the Secretary set when designating it, and the nationwide total for this whole category can't exceed $2,000,000,000. (8) This category ended — no bonds under it can be issued after September 30, 2012. (9) But bonds that refund (refinance) an earlier category-14 bond issued before that date are still allowed, if the new bonds don't mature later on average than the old ones, don't exceed the old bonds' outstanding amount, and are used to redeem the old bonds within 90 days. (m) Highway or surface freight transfer facilities (category 15). (1) This covers federally assisted highway projects under title 23; international bridge or tunnel projects run by an authorized international entity that get title 23 federal assistance; and freight transfer facilities (truck-to-rail or rail-to-truck, including related temporary storage) that get federal assistance under title 23 or 49. (2) The Department of Transportation can allocate up to $30,000,000,000 nationwide among these facilities, in whatever way it decides, and bonds for a single facility can't exceed what DOT allocated to it. (3) At least 95% of a bond issue's net proceeds must be spent on the qualifying facility within 5 years of issuance (with unspent money used to redeem bonds within 90 days after that, and the Secretary may extend the 5-year window for reasons outside the issuer's control). (4) Refunding bonds are exempt from the allocation cap if they don't mature later on average, don't exceed the refunded bonds' amount, and redeem the old bonds within 90 days. (n) Broadband projects (category 16). (1) This covers projects that bring broadband only to census block groups where over half of homes lack fixed service of at least 25 Mbps down/3 Mbps up, and that deliver at least 100 Mbps down/20 Mbps up to at least 90% of newly served locations that previously had no service, or service below that 25/3 threshold. (2) Before issuing bonds, the issuer must notify every broadband provider already in the project area, describe the project's scope, ask whether the provider could build a gigabit-capable network there instead, and give the provider at least 90 days to respond. (o) Carbon dioxide capture facilities (category 17). (1) This covers eligible equipment at an industrial CO2-emitting facility, plus any direct air capture facility as defined under section 45Q(e)(3). (2) "Eligible component" means equipment that captures, treats, compresses, transports, or stores the facility's carbon dioxide on-site, or equipment tied to converting coal, petroleum residue, biomass, or similar material into a hydrogen/CO2 synthesis gas — as long as the equipment meets the capture-percentage rule below. "Biomass" means plant or wood-mill waste and forestry byproducts, but not recyclable paper. "Coal" covers anthracite, bituminous, subbituminous coal, lignite, and peat. An "industrial carbon dioxide facility" is one that emits CO2 from fuel combustion, gasification, bioindustrial processes, fermentation, or manufacturing (chemicals, fertilizer, glass, steel, petroleum residue, forest products, agriculture including feedlots and dairies, or transportation fuels) — but not a "geological gas facility" (one that produces, transports, or processes raw natural gas) or most air separation units. (3) Equipment generally must be designed to capture and permanently store at least 65% of the facility's CO2 emissions. If it's designed for less than 65%, only that same percentage of the equipment's cost can be tax-exempt financed. The capture-and-storage percentage is the tons of CO2 captured and geologically stored (including via enhanced oil/gas recovery followed by storage) divided by the tons that would otherwise be released; if the equipment only targets specific emission sources within the facility, the percentage is calculated based on just those sources. (4) The Secretary must issue regulations to carry out this subsection, including how to figure the costs attributable to eligible components. (p) Spaceport (category 1). (1) A "spaceport" is a facility at or near a launch or reentry site used to build, assemble, or repair spacecraft or space cargo; run flight control operations; provide launch or reentry services; or transfer crew, passengers, or cargo to and from spacecraft. (2) "Space cargo" includes satellites, experiments, and other payloads. "Spacecraft" means a launch or reentry vehicle. Other terms — launch site, crew, spaceflight participant, launch services, launch vehicle, payload, reentry services/site/vehicle — carry the meanings given in a specific federal aviation law (title 51, section 50902), as that law read when this subsection was enacted. (3) A spaceport doesn't have to be open to the general public to qualify. (4) Unlike other category-1/2/3/11 facilities, spaceport property is allowed to include manufacturing facilities and industrial parks — the private-use exclusion in subsection (c)(2)(E) doesn't apply to it.