Bridging Public Pension Funds and Infrastructure Investing

Nossaman attorneys Yuliya Oryol, Peter Mixon and Allan Ickowitz provided feedback and comments on drafts of “Bridging Public Pension Funds and Infrastructure Investing,” a white paper co-authored by Clive Lipshitz and Ingo Walter (NYU Stern School of Business).

The paper is a thoughtful evaluation of the sustainability of the largest public pension systems in the United States and the role of infrastructure investing in their portfolios. Lipshitz and Walter argue that infrastructure should become more central to pension portfolios despite the existing challenges for infrastructure development in the United States. In order for public pension plans to benefit from the gains of infrastructure investing, they discuss the importance of improved efficiencies and increased supply of deals – likely through public-private partnerships and other greenfield or repurposed brownfield investing opportunities.

Click here to download and read the paper

P3 Investors: Are You In The Zone?

Last December we told you about favorable IRS guidance letting P3 contractors and investors keep full tax deductions for interest on debt.[1] The IRS kept a P3-friendly approach in last week’s proposed regulations on “qualified opportunity zones” – which, like the interest limitations in our December post, come from the 2017 Tax Cuts and Jobs Act (“TCJA”).[2]  The qualified opportunity zone legislation promotes a broad range of real estate and business development in distressed areas, and these proposed regulations are particularly helpful to private parties contracting for and investing in P3s in these areas – for example, to build a city hall, school, courthouse, or convention center.

A qualified opportunity zone (“QOZ”) is an economically-depressed census tract, ripe for revitalization, recommended by state governors and designated by the Treasury Department.[3] Revitalization occurs through a “qualified opportunity fund” (“QOF”) whose assets must consist at least 90% (the “90% test”) of real estate and other tangible property used in a trade or business and located in a QOZ that the QOF owns (1) directly such as an apartment, office, commercial, or industrial building (“direct-owned assets”) and/or (2) indirectly as a shareholder, partner, or LLC member in an “active” trade or business such as a hotel, restaurant, factory, or technology start-up (‘indirect-owned assets”).

The TCJA encourages investment in a QOF (and, by extension, revitalization of the underlying QOZ) by letting a taxpayer roll gain from the sale of most investments into a QOF within 180 days after sale. The taxpayer must recognize the deferred gain from the original sale effective at the close of 2026, but up to 15% of the original gain escapes tax depending on how long the taxpayer held the QOF interest. Plus, if the taxpayer holds the QOF interest for more than 10 years, any appreciation in that interest above the gain rolled over from the original investment completely escapes tax. These tax benefits make it easier for a developer to attract private investors if a P3 project is inside a QOZ and a developer forms a QOF to build and operate it: Investors may forego higher returns in exchange for the tax benefits, and P3 developers’ (and by extension governments’) costs fall accordingly.

Congress left it to the IRS to build the infrastructure for how a developer operates a QOF and a taxpayer obtains benefits from investing in one. The IRS issued proposed regulations in mid-October 2018,[4] and a second round last week.[5] This second round benefits P3s as follows:

  • Taking our city hall, school, courthouse, or convention center as an example, the tax-exempt government agency in the P3 typically owns the real estate and improvements – e., what would otherwise be a QOF’s direct-owned assets. The real value of the QOF would be in the P3 private business counter-party that performs labor, owns or leases equipment, and purchases supplies – and for these indirect-owned assets to count toward the 90% test that business must be “active” within the QOZ even though throughout the project labor might be performed and equipment and supplies move in and out of the QOZ. The proposed regulations follow a common-sense approach by providing that substantial services may be performed and equipment located outside the QOZ from time to time (and establishing safe harbors in this regard); providing that supplies and inventory may be held temporarily outside the QOZ so long as they are destined for incorporation in the project inside the QOZ; and providing lenient treatment for equipment that the developer leases as opposed to owns (though the rules are more stringent for property leased from related parties).
  • P3 projects must undergo months of bidding, permit, and preparatory work before the first shovel hits the ground; but a QOF in the meantime must gather and hold multiple tranches of investments as taxpayers try to roll over their gains into the QOF within the 180-day deadline. Working capital and other reserves are not direct- or indirect-owned assets and therefore could cause the QOF to violate the 90% test. The first round of proposed regulations had a “working capital” safe harbor to prevent this result, but commentators said this relief was inadequate. The more recent proposed regulations significantly expand these safe harbors; expand other circumstances under which a QOF need not consider a recent capital raise in applying the 90% test; and – perhaps most important – provide that a QOF will not be penalized for permitting and other governmental delays.

A developer and potential investor can rely on these proposed regulations if they apply the rules consistently and across-the-board. The IRS does not anticipate issuing more proposed regulations, but the last two rounds should give developers enough comfort to form QOFs and attract investors for qualified opportunity zone P3s.

[1] See “P3 Industry Gets an Early Holiday Present in IRS Guidance on Interest Deduction” (Dec. 11, 2018).

[2] The text of the TCJA, and accompanying Congressional reports, can be viewed here. The specific qualified opportunity zone statutes (Internal Revenue Code sections 1400Z-1 and -2) can be viewed here.

[3] To identify qualified opportunity zones, go to the Treasury Community Development Financial Institutions Fund web site and follow the instructions — you can view qualified opportunity zones as a list of census tracts, or as a map overlay.

[4] These proposed regulations (and detailed preamble explanation) can be viewed here. Along with the proposed regulations, the IRS issued an interpretive revenue ruling and a draft Form 8996 QOF certification with instructions.

[5] The proposed regulations (and detailed preamble explanation) can be viewed here. Along with the proposed regulations the IRS issued a 7-page request for information to monitor economic activity in QOZs.

P3 Policy and Delivery Summit in Washington D.C. May 14-15

One of the key events for the P3/infrastructure industry this year will be the P3 Policy and Delivery Summit, which is being held in Washington D.C. on May 14th and 15th. The Summit is taking place during, and in partnership with, Infrastructure Week, and is poised  to attract industry leaders from the private sector and senior officials from federal, state, and local government. The event will be held at the Cosmos Club, a D.C. landmark listed on the National Register of Historic Places.

The Summit’s focus is to analyze the respective roles of federal, state and local government in helping deliver world-class infrastructure across all sectors in the U.S. via P3s. The conference is particularly timely, given the imminent Infrastructure Bill, which it is hoped will move forward with bipartisan support. The program for the Summit has been developed in collaboration with DJ Gribbin, former Infrastructure Advisor to President Trump, and current Nonresident Senior Fellow, the Brookings Institution; Senior Operating Partner, Stonepeak Infrastructure Partners; and founder, Madrus, LLC.

In addition to Mr. Gribbin, keynote speakers include: Andrew Wheeler, Acting Administrator, Environmental Protection Agency, Derek Kan, Under Secretary, U.S. Department of Transportation, Ryan Fisher, Principal Deputy Assistant Secretary of the Army for Civil Works and Tim Petty, Assistant Secretary for Water and Science, U.S. Department of Interior.  The organizers are also anticipating having a member of the House Committee on Transportation & Infrastructure as a keynote speaker.

Geoff Yarema, partner and  co-founder of Nossaman’s Infrastructure Practice Group, will be part of the event’s closing panel “P3’s–Past, Present, and Future” along with Robert Poole, Director of Transportation Policy for the Reason Foundation and Mike Parker, Americas Infrastructure Leader, EY Transaction Advisory Services.

Additional topics that will be covered at the Conference include:

  • How should the financing burden be shared between federal, state and local governments?
  • Reform of the Gas Tax – is it viable, and, if so, how?
  • Harnessing P3 for airports

For more information on the event, you can visit the Summit website here.

Bipartisan Support for Bill Authorizing Tax Exempt Financing of Public Buildings

A pair of Senators from both sides of the aisle, Senator Todd Young (R-Ind.) and Senator Catherine Cortez Masto (D-Nev.), introduced the Public Buildings Renewal Act of 2019 last week, which would authorize the use of tax exempt financing along with private equity to rebuild schools and public buildings through public-private partnerships.  “We owe it to our students and teachers, our firefighters and nurses, and all taxpayers to find a way to upgrade our schools and public buildings.  This is a public health and safety issue that impacts not just Hoosiers, but all Americans.  Our bill will enable local governments to access private financing to support public building projects for the first time, so that much needed building upgrades can occur.  I look forward to working with my colleagues to advance this critical legislation,” said Senator Young.

At the end of 2016/beginning of 2017, the IRS issued a revenue procedure which liberalized the ability on the part of public agencies to enter into long-term management contracts with private companies and still benefit from tax exempt financing.  However, the P3 industry has yet to come up with a way of using the new IRS rule to couple tax exempt financing with the infusion of private equity in the capital structure.  This latest bill (which was originally introduced in the last session of Congress) would expressly authorize up to $5 billion of tax exempt private activity bonds for government buildings in part financed with private equity.

“Whether it be police stations, court houses, hospitals, or schools, our nation’s infrastructure is one of the most important assets we have.  Having the private sector involved in our infrastructure projects allows us to tap into innovation and technology that the public sector may not otherwise have access to,” said Senator Tim Scott (R-SC), another co-author of the P3 bill.  “When we allow public buildings to be eligible for Private Activity Bonds, we reduce the cost of capital for public-private partnerships hoping to invest in our neighborhoods and communities.”

By adding public buildings as a new class of projects eligible for financing with Private Activity Bonds, state and local governments can more easily attract private investment to pay for public building projects, such as schools, universities, courthouses, and hospitals, and preserve the risk transfer so critical to the success of a P3 project.  Private investment in public building provides state and local governments with access to private capital, accelerated project development, transfer of risk, and the ability to spread out payments over the length of the contractual term.  The ownership of the building, however, would always remain with the government entity.

Feds To Launch New Source for Information About Major Transportation Projects

Have you ever wished there was a comprehensive, easily accessible project cost database for major US transportation projects?  It would be populated following an in depth review of information available from State DOT’s and would capture not just the capital cost of the project, but it’s operation and maintenance cost and delivery and financing approach.  The information could be valuable in many ways, including assessing the project performance outcomes for P3’s and non P3’s.

As I found out a couple of weeks ago at the Transportation Research Board annual meeting, there will soon be an internet based, open-source database for this information courtesy of the FHWA’s Office of Innovative Program Delivery housed in the USDOT Build America Bureau.  With assistance from researchers at the University of Maryland, FHWA is conducting a rigorous data collection effort for over 130 US transportation projects covering development, procurement, design, construction and operation and maintenance costs.  Projects will be categorized by type, such as tunnel, bridge, managed lanes and location by region and delivery and financing approach (DB, DBF, DBFOM, CM/GC).

As you can imagine, this is a labor intensive effort on the part of the researchers, not just to gather and catalogue the information, but to develop a searchable, user friendly database.  I’m told that it is in the final stages of development so we will post a link when it’s live so you can add it to your “favorites” list.

P3 Industry Gets an Early Holiday Present in IRS Guidance on Interest Deduction

Contractors and investors in P3s can continue taking a full tax deduction for interest on debt under recent IRS guidance (Revenue Procedure 2018-59, issued November 26). Many P3s are highly leveraged, and the interest deduction is a valuable tax benefit for developers. Were this deduction restricted, P3 developers’ (and by extension governments’) costs would rise; potential investors would demand higher rates of return; and infrastructure projects would be more costly.  Without this guidance, the 2017  tax law would otherwise severely restrict the interest deduction for businesses.[1] The IRS’ position is welcome (and a relief) and caps an intense letter-writing campaign by industry groups – including the Design-Build Institute of America, Associated General Contractors of America, Performance Based Building Coalition, and Association for the Improvement of American Infrastructure – to the IRS and Treasury.[1]

The deduction restriction (new section 163(j)) emerged from last year’s Tax Cuts and Jobs Act (“TCJA”) and generally caps a business’ interest deductions at 30% of “adjusted taxable income” (which is similar to, but not the same as, EBITDA or EBIT).[2] “Real property trades or businesses” can elect out of these new deduction limits, but at the price of less-generous depreciation for their buildings and other improvements. The actual section 163(j) language is a good deal more complicated, and the Treasury proposed regulations accompanying the IRS guidance consist of 400-plus pages trying to explain everything.[3]

Revenue Procedure 2018-59 provides a safe harbor – which most P3s should meet – under which a P3 will be a “real property trade or business.”[4] As a result, companies and investors in a P3 can elect out of the restricted interest deduction rules – and, because the tax-exempt government agency in a P3 usually owns the improvements which otherwise give rise to depreciation deductions, giving up the more generous depreciation treatment usually is not an issue. Because Revenue Procedure 2018-59 is an administrative promulgation and not a regulation, it is effective immediately and not subject to the comment period and other delays with the accompanying Treasury proposed section 163(j) regulations.

Revenue Procedure 2018-59 follows a trend of mostly favorable treatment for infrastructure by the IRS and Congress, including continuing to allow an exemption for interest on private activity bonds used to funds P3s[5] and proposed regulations issued in June  clarifying that investment of bond proceeds in infrastructure projects will not trigger rebates to the government under the Code’s exempt bond arbitrage provisions.[6]

[1]  The letter can be viewed at

[2] The text of Code section 163(j) is available at The text of the TCJA and accompanying Congressional reports, can be viewed at

[3] The proposed regulations (REG-106089-18) are available at

[4] Revenue Procedure 2018-59 is available at

[5] Earlier drafts of the TCJA would have ended this tax exemption (see our prior post (November 10, 2017) at but the final bill kept it.

[6] The proposed regulations (REG-106977-18) are available at

Financial Close Achieved for Consolidated Rent-A-Car Facility at LAX

Courtesy of LAWA

Los Angeles World Airports (LAWA) and LA Gateway Partners, LLC  (LAGP), together with equity providers and lenders, achieved Financial Close on the approximately $2 billion consolidated rent-a-car facility (ConRAC) at Los Angeles International Airport (LAX) on December 6, 2018.

LAGP is owned indirectly by funds managed by Fengate Asset Management (“Fengate LAGP US I, LLC”, 83.3%) and PCL Investments USA, LLC (“PCL LAGP Partnership LP”, 16.7%). After achieving Commercial Close on November 6, 2018, Fengate and PCL proceeded to secure private financing for the project  comprised of (a) approximately $458 million in notes due in 2046 issued by LAGP, and (b) a construction loan of approximately $73 million with National Bank of Canada as lender. Fengate and PCL are making equity contributions to the project.

Moody’s assigned an A3 rating to the notes based in part on the strength of the availability-based revenue stream from LAWA under the terms of the design-build-finance-operate-maintain (DBFOM) agreement and the fact that PCL Construction Services Inc. (design-builder ), Johnson Controls, Inc. (operator) and MVI Field Services, LLC (Quick Turn Around area (QTA) sub) are experienced contractors. The notes were issued by way of private placement to three life insurance companies (MetLife Investment Management’s managed accounts, Legal and General Assurance Society Limited and The Canada Life Assurance Company and its affiliates).

LAWA will contribute approximately $690 million to the capital costs of the project through construction period payments and a final completion payment. Once the ConRAC is operational, LAWA will make availability payments to LAGP, which payments are subject to deductions for unavailability and other failures to meet the performance standards set forth in the DBFOM Agreement.

The ConRAC facility will relocate over 20 existing rental car locations scattered around the airport area into one convenient location adjacent to the 405 freeway. The ConRAC  facility will include  6,600 ready/return spaces, 10,000 idle vehicle storage spaces, 1,100 rental car employee spaces and a QTA area that allows for car washing, fueling and light maintenance. The facility will be approximately 5.3 million square feet in size and will be connected to the LAX Automated People Mover (APM), which reached financial close in June.

The ConRAC and the APM projects, slated for completion in 2023, will transform the airport and dramatically improve the experience for travelers at LAX.  These projects, with a collective contract value in excess of $7 billion, represent the first two public-private partnerships to be entered into by the City of Los Angeles.

Commercial Close Achieved for Groundbreaking ConRAC Project at LAX

Los Angeles World Airports (LAWA) and LA Gateway Partners (LAGP) have reached commercial close on the design-build-finance-operate-maintain (DBFOM) agreement for the consolidated rent-a-car facility (ConRAC) at Los Angeles International Airport (LAX).  In reaching this milestone, LAWA’s ConRAC project becomes the first public-private partnership for a ConRAC facility in the United States.  LAGP will now proceed to close the financing for the project, which is expected to occur in December.  The financing structure will be a private placement.

Leading up to commercial close, LAWA’s Board of Airport Commissioners and the Los Angeles City Council both unanimously approved the roughly $2 billion DBFOM availability payment agreement for the project.  The Board’s approval came on October 18, 2018, and the City Council took its action on October 31, 2018.

Courtesy of LAWA

The 5.3 million square foot ConRAC facility will include 6,600 ready/return parking stalls, 10,000 idle storage and 1,100 rental car employee parking spaces, easily making it the largest ConRAC facility in the nation.  The new facility will be the anchor of LAX’s Landside Airport Modernization Program, which includes a new Automated People Mover (APM), various stations, and a connection to LA Metro’s Crenshaw Light Rail Line.  The APM is under construction pursuant to a separate DBFOM agreement.  For more information on the APM project, please see the following blog post, Financial Close for Automated People Mover (APM) Project at LAX.

The ConRAC DBFOM agreement requires LAGP to design, build and partially finance the ConRAC facility, and then operate and maintain the facility until the end of the agreement’s 28-year term.  LAWA will make milestone and other periodic payments to LAGP during construction.  Once the ConRAC facility is available for use by rental car customers, LAWA will make availability payments to LAGP, which may be adjusted downward if the facility does not meet specified availability and performance requirements.

For more details, click here to read the full press release from LAWA.

Port of Wilmington Uses P3 Concession to Develop Port Facilities

The State of Delaware and a subsidiary of Gulftainer Company Limited (“Gulftainer”) have finalized a concession agreement for the operation and further development of the 100-year-old Port of Wilmington (“Port”).

While the concession agreement signed on September 18, 2018 is not publicly available, it is expected, based on deal terms described in Port documents submitted in support of approval of the P3 transaction,[1] that the agreement grants Gulftainer exclusive rights to manage the Port for a 50-year term. In return, Gulftainer agrees to invest up to $584M in the Port in the first 10 years to improve the Port’s cargo terminal facilities, $411M of which will be used to develop a new 1.2 million TEU (twenty-foot equivalent units) container terminal. Gulftainer will pay concession fees to the State based on cargo volume along with periodic adjustments for inflation. These fees could reach $13M by the tenth year of the concession.[2] At the end of the concession, Gulftainer must hand the Port facilities back with the capacity to handle specified minimum service and tonnage volume requirements.

In May 2017, Diamond State Port Corporation (“DSPC”), the state entity that owns and operates the Port, issued an RFQ seeking private partners to develop, finance and/or operate port-related infrastructure.[3] After evaluating submissions, DSPC signed a non-binding letter of intent with Gulftainer in December 2017.

As Gulftainer is a port management and logistics firm based in the United Arab Emirates (“UAE”), the concession agreement was reviewed by the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS evaluates the national security implications of foreign investments in United States companies and operations and may prohibit foreign investment that poses a threat to United States national security. In June 2018, CFIUS determined that the agreement was not a “covered transaction” under Section 721 of the Defense Production Act of 1950,[4] and as such the parties were cleared to execute the agreement.

The Wilmington/Gulftainer deal is comparable to the $1.3B lease and concession agreement entered into in 2010 by Maryland Port Administration (“MPA”) and Ports America Chesapeake, LLC (“Ports America”) for the development and operation of the Seagirt Marine Terminal (“Seagirt”).[5] As with the Wilmington/Gulftainer concession, the Seagirt concession has a 50-year term and Ports America agreed to make significant capital investments, including developing a new terminal.[6] Ports America’s financing included a combination of tax-exempt bonds and equity. The Seagirt P3 deal reportedly enabled the State of Maryland to avoid the need to incur additional debt, provided a capital reinvestment payment to the Maryland Transportation Authority and allowed the port to handle larger vessels two years earlier than scheduled.

Ports are exploring alternative ways to deliver and finance large infrastructure projects, and the Wilmington and Seagirt P3 deals are examples of how private sector financing is being integrated into these transactions. Both deals demonstrate how, for the right projects, alternative approaches may allow ports to better capture the value of their existing infrastructure and accelerate delivery of port infrastructure improvements.


[1] DSPC Board of Directors Resolution 18-15 Regarding Recommendation of a Proposed P3 with GT USA Wilmington, LLC, available at and

[2] “Governor Carney, Diamond State Port Corporation, Gulftainer Sign Agreement to Expand Port of Wilmington,” State of Delaware Press Release (September 18, 2018) available at

[3] “Request for Qualifications: Formation of a Public/Private Partnership (P3) with the Diamond State Port Corporation”, DSPC Public Notice, available at

[4] Letter from Department of the Treasury Deputy Assistant Secretary of Investment Security Regarding CFIUS Case 18-105 GT International Limited FZC (United Arab Emirates)/Certain Assets of Diamond State Port Corporation (June 25, 2018) available at; “Government Panel Signs Off on Port of Wilmington-Gulftainer Agreement”, Delaware Business Now (June 30, 2018) available at

[5] Ports America Chesapeake, News Alert, available at

[6] Maryland Transportation Authority, “Public-Private Partnerships in Maryland,” available at

LA Metro Announces P3 Job Opportunity

Los Angeles County Metropolitan Transportation Authority has posted notice of an opening for a position as “Manager, Innovation” in its Office of Extraordinary Innovation.

The job responsibilities will include:

  • Managing and facilitating evaluation of unsolicited proposals submitted to the OEI
  • Managing OEI’s P3 advisors
  • Managing pre-procurement activities for P3 projects such as project screenings, qualitative and quantitative assessment and value for money analyses
  • Managing procurement schedules and project budgets
  • Coordinating among key LA Metro departments, staff and outside stakeholders
  • Participating in outreach for the P3 program and projects.

Applications are due by 5:00 pm September 21.

When Phil Washington became LA Metro’s Executive Director, one of his first initiatives was to create the OEI and reach out to industry to encourage innovative unsolicited proposals to advance LA Metro’s mission.  Metro’s goal is nothing less than to be the most innovative transportation agency in the U.S.  With the largest transit capital program in the nation, LA Metro seeks better solutions for delivering its major projects and improving mobility.  The OEI is focused on technological and financial innovations that deliver quality infrastructure and services at lower cost than traditional ways of doing business.  It is particularly interested in proposals for public-private partnerships to speed and improve capital project delivery.

To date the OEI has received 113 unsolicited proposals and vetted most of them through the first of its two-phase evaluation process, with 18 proposals currently in the second phase.  Thirteen proposals have been implemented or are in implementation or proof of concept.  One of the best examples is Metro’s Microtransit P3 pilot project, currently in the first implementation stage.  Through OEI’s program, Metro is in pre-procurement development for the West Santa Ana Branch light rail line and the Sepulveda Transit Corridor project, two of the biggest future projects in LA Metro’s capital program.

There will be no shortage of work, opportunity and stimulating professional experience for LA Metro’s new Innovation Manager.