Tax-Exempt Conduit Financing

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.