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Distributed Infrastructure Toolkit

DI Toolkit

Module 3

Overcoming Barriers to Paying for Distributed Infrastructure

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Tax Exempt Municipal Bond Issues

Many investors favor municipal bonds because their interest earnings are exempt from federal taxes, so avoiding any risk to their tax-free status is a priority for many utilities. IRS rules for tax exempt bonds seek to limit funding from those bonds going to business activities. It is highly unlikely that incentives or other benefits to private businesses would reach this threshold; so while there is a potential for conflict, it is also relatively easy to avoid. 

Private Business Use

No more than 10% of the total proceeds of a municipal bond can be used in a private business.  

  • If bond proceeds are used to provide consumer rebates, there may be some potential for businesses to benefit.
  • To solve this challenge, utilities can include funding for distributed infrastructure in a larger bond to keep investments targeted for commercial properties below the 10% mark.
  • They can also limit the use of bond proceeds to exclusively residential properties and use SRF or other fundings sources for commercial properties.

Private Business Use Test

Any asset paid for with tax-exempt bond proceeds cannot be used by a private business.

  • Private business use of a financed asset is any use other than that by a governmental entity or the general public.
  • The Private Business Use Test can present challenges for utilities when issuing tax-exempt bonds for distributed infrastructure that encompasses or extends into private property used in a trade or business.
  • If, however, the financed assets are available for use by nongovernmental entities on the same basis as the general public, then the bond issue will likely fit within the restrictions of the Private Business Use Test. This means the bonds could be issued as tax-exempt.

Private Payment or Security Test

This requirement focuses on situations when the debt is repaid by a private business that uses the financed asset, as well as potentially other payments directly or indirectly related to such private business use. A bond issued to finance distributed infrastructure would likely fit within the restrictions of the Private Payment or Security Test if:

  • There is a grant of bond proceeds to a private business owner without an expectation of repayment; and
  • Cumulative payments made with respect to the private business use do not exceed 10% of the debt service on the bonds.

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