Port of Pittsburgh Commission Bonds
The Port of Pittsburgh Commission (PPC) enabling act, 55 Pa Statute §698.21, provides that the PPC may issue private-activity lease-backed bonds as a conduit to fmance private economic development projects in the 12-county port district of Southwestern Pennsylvania, including Allegheny, Annstrong, Beaver, Blair, Butler, Clarion, Fayette, Greene, Indiana, Lawrence, Washington and Westmoreland Counties. Projects must be approved by the Port of Pittsburgh Commission and authorized by the Govemor.
The bonds are limited obligations of the Commission, payable from revenues received from the company, but they do not represent an indebtedness of the Commonwealth of Pennsylvania. As a PPC-owned project, building materials may be exempt from state sales tax.
The bonds may be off the company’s balance sheet. Eligibility for off-balance treatment is regulated by the Financial Accounting Standards Board (FASB) Rule 13. Typically, the company agrees to make lease payments to amortize the bonds. The company must demonstrate investment grade management and repayment capabilities or arrange for a private placement with certain assurances. The company is then eligible for a fixed or variable lease rate at a low effective cost of funds. The flexibility of how the bonds are structured is a major advantage of PPC conduit bonds. Each project is structured individually, but may resemble one of the following alternatives.
Bond Structure Alternatives
Operating Lease Structure
• The project’s assets and liabilities may appear on the PPC balance sheet for book and tax purposes as opposed to the books of the company. The company may expense its lease payments made to the PPC to amortize the bonds. The company may have a fair market value purchase option or lease extension option at the end of the initial lease term.
Synthetic Lease Structure
• A lease that changes the obligations from a capital to an operating lease. At the end of an initial lease term, it may specify that the company purchase the facility for the unamortized principal, extend the term for ten years in order to fully amortize the bonds or provide for a fixed purchase price. The project may remain on the PPC’s balance sheet for book purposes only and the company may be able to deduct the facility’s depreciation from its federal taxes.
Capital Lease Structure
• The company makes lease payments sufficient to retire the debt service on the bonds. The bonds may be based on the strength of a full payout lease with a rated company. It may not require additional credit enhancement.
Eligible projects may include industrial or commercial facilities; corporate or regional headquarters; transportation, distribution, warehousing or parking facilities; and government, technical, research or development facilities. Most tax-exempt issues are subject to state volume cap allocations, taxable issues are subject only to the credit of the borrower or the project.
Port of Pittsburgh Commission FASB 13 structured bonds (depending on structure selected)
• Provide the corporation with the assets it needs, but keep the debt off the corporate balance sheet.
• Improve fmancial ratios of earnings to assets, and debt to equity.
• Protect bank covenants and preserves borrowing capacities.
• Allow the corporation to deduct lease payments, but still take the depreciation for tax purposes.
• Avoid sales tax on construction materials.
• Finance at fixed rates, generally significantly lower than the corporation’s rate.
• Funnel state and local incentives through Port Commission, reducing effective cost of borrowing funds.
• Allow construction under private construction laws, instead of more restrictive public construction laws.
• Allow the company to retain control of the construction and operation of the facility.
Note: This brochure is for information purposes only. The company must retain its own legal, financial and tax advisors and base their the decision on their own advisors. Port related projects include industrial and commercial developments in the port district, but such projects do not need to be river related. For further information, contact Mary Ann Bucci at the Port of Pittsburgh Commission at 412-201 -7331 (firstname.lastname@example.org).