Tax-exempt debt has most frequently been issued by state and local governmental units for traditional governmental capital projects encompassing infrastructure improvements, technology updates, public safety needs, and facility construction including libraries, schools, and parks. However, Section 145 of the Internal Revenue Code of 1986, also enables specific “private” organizations, including private and parochial 501(c)(3) schools, to take advantage of the same tax-exempt benefits. These benefits include lower tax-exempt interest rates, longer fixed-rate financing terms, more flexible loan covenants, and in most instances, access to more competitive capital market participants.
IRS Code Section 145 authorizes 501(c)(3) entities to utilize a conduit issuer to enable them to access tax-exempt debt markets. Although the public conduit entity issues the debt “on-behalf-of” the 501(c)(3) borrower, the 501(c)(3) entity is responsible for repayment of the debt and continues to own the assets being financed.
Since 1986, the tax-exempt conduit financing structure has been commonly utilized by larger 501(c)(3) schools and universities, including Abilene Christian University, the University of Mary Hardin-Baylor, and Texans Can Academies. However, we have found that many smaller private and parochial schools were previously unaware this structure was available. Accordingly, many of the conduit financing transactions we’ve facilitated have included educating the entities issuing the debt how the tax-exempt borrow methodology works, not to mention the significant interest dollars that may be saved by utilizing it. Additionally, many times we assist in refunding previously issued taxable obligations that existed before the 501(c)(3) entity became aware of the tax-exempt conduit option, thereby saving the entity more money.
Working with public clients, we have been directly involved in the creation of nine different public conduits specifically designed to allow private and parochial schools access to the tax-exempt debt market. Over the years, our conduit relationships have been utilized by a wide variety of non-profits, including Orenda Education, Abilene Christian School, Eagle Advantage Schools, Austin Children’s Museum, and the Houston Ballet, to access tax-exempt borrowing markets.
Government Capital’s Representative Experience*
Rosehill Christian School - Tomball, TX
In October 2022, Government Capital structured a $6.9 million tax-exempt loan refunding facility for the Rosehill Christian School. Prior to Government Capital’s involvement, loans for the construction of a more than 36,000 square foot gymnasium and multi-purpose facility were financed on a taxable basis. The new tax-exempt loan provided by Government Capital provides a fixed interest rate and will save the school hundreds of thousands of dollars in future interest costs. Additionally, the loan facility has allowed the school to begin planning for their next projects earlier and positions the school to obtain future capital funding on a much more competitive tax-exempt basis.
Trinity Preparatory Academy - Keller, TX
Government Capital has partnered with Trinity Preparatory Academy on multiple financings since 2020. Most recently, Government Capital provided the Academy with a tax-exempt loan for the acquisition of 4.25 acres of land along with the construction of a 19,000 square-foot classroom and multipurpose facility. This represents the second phase of an ongoing campus expansion project to accommodate the school’s increasing student population. Upon completion of the expansion project, the Academy’s student body is projected to have almost doubled in size.
Live Oak Classical School - Waco, TX
In the summer of 2022, Government Capital provided Live Oak Classical School with a tax-exempt loan consolidation refunding solution. A new loan consolidated four existing taxable loans totaling approximately $5.5 million and provided funding for the construction of a new gymnasium, school building, and parking lot. Government Capital’s assistance allowed these projects to be expedited with significant interest cost savings for the school.
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*The representative experience and clients referenced herein include the experience and clients of our affiliate company, Government Capital Securities Corporation. Government Capital Corporation and Government Capital Securities Corporation are under common ownership and work seamlessly together to maximize the value we bring to our clients. In the above instances, GCC or GCSC served as the municipal advisor to the issuer or to the conduit.
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