Transit Public-Private Partnerships: Legal Issues (2014)

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48 the assessment district would be unlikely to garner the requisite number of votes to be implemented.620 Although a local authority may choose to levy a tax only on commercial property in a district, usually a majority of the voters in a district must approve the establishment of a special assessment district.621 Another approach is a Transportation Im- provement District (TID), which may be created to levy a special real estate tax on all existing and new land uses in a district for the purpose of fi- nancing transit improvements.622 The tax reve- nues generated by a TID also may be used to se- cure debt issued to finance infrastructure for transit.623 TIDs, which are authorized in Virginia, usually require the approval of a majority of the electorate in a proposed district.624 However, it is difficult to create an assessment or improvement district that involves multiple jurisdictions.625 D. Development Impact Fees Transit agencies and local jurisdictions may co- operate to obtain funding for transit by assessing development impact fees. Impact fees are being used locally in at least 28 states “to support capi- tal and operating needs.”626 For example, in 1981, San Francisco used a Transit Impact Develop- ment fee to offset the cost of additional service to the downtown area, a fee that was later expanded to apply to more commercial uses and to develop- ment city-wide.627 Another method is referred to as a Transit Ori- ented Concurrency (TOC) system. Local authori- ties may define what constitutes an adequate level of service as well as measure whether the service needs of a new de- velopment exceed existing capacity and any scheduled improvements in the capital improvements program for 620 Id. at 22. 621 Id. at 21, 23; Alternative Transit Funding Sources and Finance, supra note 278, at 9. 622 Transit Alternate Funding Options Study, supra note 609, at 13, 21 (citing, e.g., Fairfax and Loudoun Counties in Virginia and the WMATA extension of Met- rorail to Washington-Dulles International Airport). 623 Id. 624 Id. at 20. 625 Capturing the Value of Transit, supra note 10, at 22. 626 Transit Alternate Funding Options Study, supra note 609, at 19 (citing Broward County, Florida (Transit Concurrency Fee), and San Francisco (Transit Impact Development Fee)). 627 Capturing the Value of Transit, supra note 10, at 30. that period. If adequate capacity is not available, then the developer must provide the necessary facility or service improvements to proceed, or provide a monetary contribu- tion toward such improvements, or wait until government provides the necessary improvements.628 Some cities and counties in Florida have used a TOC “to help pay for transit improvements and operations.”629 After needed transit improvements are identified by a Transit Development Plan, “[t]he total cost of the improvements is charged as a fee on all new development. The costs are allo- cated to individual projects using a formula based on expected trip generation.”630 Impact fees are “only likely to be successful in an area with a strong real estate market and a significant amount of new development.”631 Devel- opment impact fees may be more acceptable to property owners than other value capture meth- ods.632 Developers also may be more amenable to impact fees as a value capture strategy if, as a result of development or redevelopment, the de- velopers will obtain favorable changes in zoning or other benefits.633 Most agencies having experience with PPPs that responded to the survey have not funded or financed a PPP with TIF, a special assessment district, or development impact fees. However, the City of La Crosse Municipal Transit Utility used TIF to finance $10 million of the cost of a PPP project. XI. PPPS AND LONG-TERM LEASING A. Long-Term Leasing of Facilities There are several forms of long-term leasing. First, a transit agency may lease an existing facil- ity and receive an up-front payment and thereaf- ter receive lease payments while transferring risks associated with the facility to a concession- aire. Several transit agencies responding to the 628 See, e.g., CENTER FOR URBAN TRANSPORTATION RESEARCH, UNIVERSITY OF SOUTH FLORIDA, TRANSPORTATION CONCURRENCY REQUIREMENTS AND BEST PRACTICES: GUIDELINES FOR DEVELOPING AND MAINTAINING AN EFFECTIVE TRANSPORTATION CONCURRENCY MANAGEMENT SYSTEM 1 (2006), available at http://www.cutr.usf.edu/pdf/TCBP%20Final%20 Report.pdf. 629 Capturing the Value of Transit, supra note 10, at 30. 630 Id. 631 Id. 632 Id. at 31. 633 Id. at 32.

49 survey have entered into a long-term lease for the operation and maintenance of an infrastructure project.634 A second form of long-term leasing is a lease- purchase agreement in which a private partner finances and builds infrastructure that the pri- vate partner leases to the public authority.635 The public authority becomes the owner of the facility at the end of the term or purchases the facility before the end of the term for the amount of the remaining lease payments.636 A third form of long-term leasing is a sale- leaseback agreement. A public authority first sells a facility to a private entity. The private entity then leases the same facility to the public author- ity that continues to operate it.637 Sale-leaseback agreements have been used to limit a public au- thority’s liability.638 Long-term leasing may be beneficial to a public authority because it obtains an up-front payment in connection with an exist- ing facility while transferring the risks associated with the facility to a concessionaire.639 Although a concessionaire usually assumes the “financial, operational, and other risks” of a project or facil- ity, the concessionaire also has the “ability to im- plement private-sector efficiencies and technol- ogy.”640 A prime example of long-term leasing is a concession agreement for the lease of an existing facility for which an average term of the lease is from 10 to 20 years but may be for as long as 99 years.641 Usually for a lump sum amount, a pri- vate partner or concessionaire acquires the right to manage a facility and collect revenues that the facility will generate over the life of the con- 634 La Crosse Municipal Transit Utility Response; Milford Transit District Response (see App. C, item 4); N.J. Transit Response (regarding 32-year lease for the Weehawken Ferry Terminal project); PVTA Response; SEPTA Response (regarding 5-year lease for one project and an anticipated 20-year lease for the second project); and SARTA Response. At the time of the survey the Connecticut DOT had not determined whether a lease would be used in connection with the Stamford TOD project. 635 O’Steen & Jenkins, supra note 6, at 277. 636 Id. at 277–78. 637 Id. at 278. 638 Id. 639 FISHMAN, supra note 11, at 7. 640 Id. 641 O’Steen & Jenkins, supra note 6, at 277 (citing the $3.8-billion Indiana Toll Road PPP and the $1.8- billion Chicago Skyway PPP as examples); FISHMAN, supra note 11, at 7. tract.642 Although exceptionally long leases are needed “to recover capital outlays on an acceler- ated schedule,”643 a private partner will want to consider the tax consequences of a long-term lease, as discussed in Section IV.E. A transit agency will want a lease structured so that the lease does not result in a private, business use of public property that the transit agency financed with tax-exempt debt. A “[p]rivate business use can arise by ownership, actual or beneficial use of property [under] a lease, a management or incen- tive payment contract, or [under] certain other arrangements.”644 Deals must be structured prop- erly; otherwise “the existing tax-exempt status of debt previously issued for a system, or issued to finance any future capital needs of a system” may be lost.645 Revenue Procedure 97-13 authorizes the use of a “qualified management contract” (QMC) to maintain the bonds’ existing tax-exempt status.646 QMCs for operations and maintenance now may have terms of 20 years or more.647 In general, the contract must provide for reasonable com- pensation for services rendered with no “compensation based, in whole or in part, on a share of net profits from the operation of the facility.” In particular, longer-term contracts may provide that the public partner will not pay compensation for services to the private partner for any year of the contract if such payment, or any portion of the payment, would result in (1) less than eighty percent of the private partner’s compensation for services for such year of the contract being based on a periodic fixed fee, or (2) any portion of the private partner’s compensation be- ing based on net profit. Thus, up to twenty percent of the private partner’s compensation can be variable. Costs paid directly to third parties and costs that the private partner passes through to the public partner for reim- bursement are disregarded in the fixed-fee and variable- fee ratio. Compliance with these rules allows project debt 642 Id. 643 Tax and Financing Aspects of Highway Public- Private Partnerships, supra note 166, at 2. 644 Rev. Proc. 97–13, available at http://www.uncle fed.com/Tax-Bulls/1997/Rp97-13.pdf; O’Steen & Jenkins, supra note 6, at 294–95 (citing Rev. Proc. 97- 13, 1997 – C.B. 632 § 2.01(3)). 645 O’Steen & Jenkins, supra note 6, at 294 (citing Rev. Proc. 97-13, 1997-1 C.B. 632 § 2.01(1)). See Collins, supra note 415, at 2 (stating that “[t]ax-exempt financ- ing…places limits on private use of projects funded with tax-exempt funds”). 646 O’Steen & Jenkins, supra note 6, at 294 (citing Rev. Proc. 97-13, 1997-1 C.B. 632). 647 Id.

50 to be considered a governmental obligation, and therefore tax-exempt.648 It has been argued that long-term leasing of public property may fail to provide adequate pro- tection for the public interest.649 For example, a lease with a long duration significantly reduces a transit agency’s control and thus may have an impact on the overall transit system.650 B. Leasing of Rolling Stock and Other Equipment 1. Benefits of Using Leasing A lease/purchase agreement may be used for the acquisition of rolling stock.651 When leasing buses and other equipment, a transit agency may receive a benefit ranging from 4 or 5 percent to 10 percent or more of the value of the leased asset,652 avoid having to pay a higher price later, and bene- fit from economy of scale by buying more equip- ment at one time.653 Two funding options are the use of cross-border leasing or the use of COPs (the latter discussed in Section VIII.E).654 Off-shore or cross-border leasing is a mechanism by which the state purchases rolling stock, such as railcars, then simultaneously sells them to a non-U.S. investor who would be allowed to take investment tax credits or tax depreciation write-offs on the value of the equipment. The investor in turn leases them back to the state, and the tax benefits are shared with the state through re- duced leased costs. The foreign investor pays the state an up-front consideration usually ranging from five to ten percent of the cost or value of the vehicles. The balance of the proceeds is deposited in a trust account to prepay or decease the lease payments.655 648 Id. at 294–95 (citing Rev. Proc. 97-13, 1997-1 C.B 632 §§ 2.01(3), 2.01(6), 5.03(2); Treas. Reg. § 1.141- 3(b)(4)(i) (2001)). 649 FISHMAN, supra note 11, at 7. 650 MALLETT, supra note 25, at 25. 651 For guidance, see KEVIN M. SHEYS & ROBERT L. GUNTER, REQUIREMENTS THAT IMPACT THE ACQUISITION OF CAPITAL-INTENSIVE LONG-LEAD ITEMS, RIGHTS OF WAY, AND LAND FOR TRANSIT 4 (Legal Research Digest, Transportation Research Board, 1996) (discussing ma- jor obstacles that arise most often in long-lead acquisi- tions of buses, rail cars, and other rolling stock), avail- able at http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_ lrd_06.pdf. 652 Collins, supra note 415, at 37. 653 Id. at 5. 654 Midwest Regional Rail Initiative Project Note- book, supra note 201, at 9-14. 655 Id. Cross-border leasing is said to be “ideal” for railcars and may be used for buses.656 New Jersey Transit has used lease/purchase agreements in connection with one of its PPP projects.657 2. Effect of IRS Rulings and Congressional Legislation on SILOs and LILOs “Sale-in–lease-out” (SILO) and “lease-in-lease- out” (LILO) transactions involve at least two par- ties. The first party is the tax-exempt entity that is the ultimate user of the equipment. The second party is the U.S. taxpaying investor that leases the equipment to the tax-exempt entity. The in- vestor benefits because it is able to claim tax ex- emptions for the lease payments in the case of LILOs or the depreciation value in the case of SILOs.658 Although a tax-exempt entity receives no tax benefits from LILO or SILO transactions because it is not subject to federal income tax, it still benefits.659 A tax-exempt entity benefits by using the leased equipment and generating an income of 4 to 8 percent of the transaction’s value, the fee the tax-exempt entity receives for partici- pating in the transaction.660 According to Chase Bank, an investor, the tax-exempt entity also benefits by obtaining capital from the initial sale to the lessor in the case of a SILO.661 The investor may pass along its tax benefits to the tax-exempt entity in the form of lower rent payments. Accord- 656 Id. 657 N.J. Transit Response (e.g., ticket vending ma- chines for its Weehawken Ferry Terminal project for which the contractor is making the lease payments). 658 Maxim Shvedov, CRS Report for Congress, Tax Implications of SILOs, GTEs, and Other Leasing Transactions with Tax-Exempt Entities, at text accom- panying footnotes 35 to 36 (2004), hereinafter referred to as “Shvedov,” available at http://congressionalresearch.com/RL32479/document.ph p?study=Tax+Implications+of+SILOs+QTEs+and+Othe r+Leasing+Transactions+with+Tex-Exempt+Entities. 659 Robert W. Wood & Steven E. Hollingworth, SILOs and LILOs Demystified, TAX NOTES, at 197 (Oct. 11, 2010), hereinafter referred to as “Wood & Hollingworth,” available at http://www.woodllp.com/ Publications/Articles/pdf/SILOs_and_LILOs_ Demystified.pdf. 660 Robert W. Wood, What Wells Fargo Brings to the SILO/LILO Debate, TAX NOTES, at 1390-1 (June 27, 2011), available at http://woodllp.com/Publications/ Articles/pdf/What_Wells_Fargo.pdf. 661 Andrew Landers, Transforming Equipment into Cash through Sale/Leaseback (2013), available at https://www.chase.com/commercial-bank/executive- connect/finance-heavy-equipment.

51 ing to the Equipment Leasing and Financing As- sociation (ELFA), the equipment leased in SILO or LILO transactions varies from commercial air- craft and vessels to railcars.662 In SILO transac- tions, the subleases usually range from 12- to 20- year terms.663 The term “LILO” generally refers to a transac- tion in which property is leased to a U.S. taxpay- ing investor pursuant to a head lease for a period that is less than the property’s useful life and then “leased back” to a foreign or domestic tax- exempt entity, the lessor in the head lease.664 As for the sublease, the term is for a period less than the term of the head lease; at the end of the sub- lease, the tax-exempt entity may exercise an op- tion to purchase the remainder of the investor’s interest in the head lease; and if the option is not exercised, the investor may “(1) compel the tax- exempt entity to renew the sublease; (2) take pos- session of the asset; or (3) enter into a replace- ment sublease with a third party.”665 The IRS has stated that LILO transactions have been used to finance leases of “subway cars and lines, locomo- tive, municipal buildings, passenger railway sys- tems, ferryboats, airplanes, power plants, and sewage treatment plants.”666 662 Deborah Brady & Paul Ingram, A Leveraged Leasing Primer, Financial Watch (May 2006), available at http://www.elfaonline.org/cvweb_elfa/Product_Down loads/E06MAYBRADY.PDF. ELFA members also fi- nance the leasing of medical technology and equipment and IT equipment and software. See Equipment Leas- ing and Finance Association, Requests for Clarifying Guidance under Section 7701(o) (Nov. 19, 2010), avail- able at http://www.elfaonline.org/Advocacy/Fed/PDFs/ Issues/CESLetter111910.pdf#search=“silo”. 663 Shvedov, supra note 658, at text accompanying footnotes 35 to 36. 664 Michelle M. Henkel, “Strike Two” for the IRS on LILOs: Revenue Ruling 2002-69, 16 J. TAX’N F. INST. 12, n.2 (2003). 665 John Hancock Life Ins. Co. (U.S.A.) v. Comm’r, 141 T.C. 1, 5, and 6, Docket Nos. 6404-09, 7083-10, 7084-10 (Aug. 5, 2013). 666 IRS, Appeals Settlement Guideline All Industries Losses Claimed and Income to be Reported from Lease In/Lease Out Transactions, available at http://www.irs. gov/pub/irs-utl/lilo_asg_redacted.pdf. For example, in BB&T Corp. v. United States, 523 F.3d 461, 465 (4th Cir. N.C. 2008), BB&T Corp., a financial services com- pany, entered into a LILO transaction with Sodra Cell AB, a Swedish wood pulp manufacturer pursuant to which BB&T leased pulp manufacturing equipment to Sodra. The court in BB&T Corp. denied BB&T’s tax benefits from its transaction as it failed to show any business or regulatory realities. The court held that the Similar to a LILO, a SILO is a transaction in which the term of the head lease extends beyond the useful life of the property or the head lease amounts to a sale of the property to the investor. At the end of the sublease, if the tax-exempt en- tity does not purchase the asset, the investor “may (1) compel the lessee to arrange for a service contract for the asset for a predetermined term or (2) take possession of the asset.”667 In LILO and SILO transactions, a tax-exempt entity is able to use the payment made by the in- vestor under the head lease to pay its lease pay- ments. Therefore, the tax-exempt entity is able to use the leased property without incurring any ad- ditional fees. The tax-exempt entity often uses the remainder of the head lease payment to buy back the property at the end of lease.668 In Wells Fargo v. United States there are sev- eral examples of SILO transactions.669 In 2002, Wells Fargo claimed taxed benefits from its in- volvement in 26 SILO transactions. Seventeen of the transactions were between Wells Fargo and substance of the transaction was a financing arrange- ment and not a genuine lease and sublease because of the circular payments and BB&T's lack of control over the equipment. BB&T never acquired a genuine lease- hold interest and did not incur a genuine indebtedness. In another LILO transaction, Consol. Edison Co. of N.Y. v. United States, 703 F.3d 1367, 1369–70 (Fed. Cir. 2013), ConEd leased a gas-fired, combined cycle cogene- ration plant to N.V. Electriciteitsbedrijf Zuid-Holland. The Federal Circuit Court denied ConEd’s claims for tax benefits in the LILO transaction with the Dutch utility company. Because the Dutch company was rea- sonably likely to exercise the purchase option, ConEd did not have the genuine leasehold interest that is re- quired for an entity legally to obtain rent deductions under the tax code. The court also held that ConEd was not entitled to interest deductions because it did not incur a genuine indebtedness. 667 John Hancock Life Ins. Co. (U.S.A.), 141 T.C. at 6. The tax court held that the LILO transactions were financial arrangements and not genuine leases because the transactions resembled loans; thus, John Hancock was not entitled to rent deductions. As for the SILO transactions in the case, the court held that John Han- cock was not entitled to depreciation deductions be- cause the transactions were financing arrangements. Finally, the court held that John Hancock was not enti- tled to deduct for interest payments because it only ac- quired a future interest in the assets, not a current in- terest. 668 Shvedov, supra note 658, at text accompanying footnotes 32 to 33. 669 Wells Fargo v. United States, 91 Fed. Cl. 35, 36– 37 (Fed. Cl. 2010).

52 domestic transit authorities, including the Cali- fornia DOT and WMATA. Wells Fargo leased rail- cars, locomotives, and buses to the transit au- thorities using the SILO transactions, and it leased telecommunications equipment to Bel- gacom Mobile.670 The court in Wells Fargo held that Wells Fargo was not the owner of the equipment at issue in the SILO transactions because Wells Fargo never obtained any of the benefits or burdens of owner- ship of the equipment and therefore was not enti- tled to deductions for depreciation. Wells Fargo was not entitled to deductions for interest paid because it did not incur any genuine indebtedness due to the circular nature of the payments. The court also held that the transactions had no eco- nomic substance because there was no economic benefit aside from the tax deductions. In 1999, in Revenue Ruling 99-14, the IRS ruled that investors in LILO transactions were no longer permitted to obtain tax deductions for lease income and interest payments because LILOs lacked economic substance due to a lack of pretax economic benefit.671 As a result of the 1999 ruling, SILO transactions became preferred.672 Revenue Ruling 2002-69 modified and superseded the 1999 ruling on LILO transactions. In the 2002 ruling, the IRS determined that an investor may not de- duct rent and interest paid in connection with a LILO transaction because not only did the trans- action lack economic substance, but its substance did not support its form.673 The substance of the transaction indicated a financing transaction, al- though the transaction took the form of a leasing transaction.674 The IRS described the payment and banking arrangements as “reciprocal and cir- cular obligations that offset one another,” because the lending banks, investor, and tax-exempt en- tity face low risks of nonpayment during the first sublease term.675 The IRS was guided by federal court decisions. The IRS ruled that the substance rather than the form of the transaction deter- mines how the transaction would be treated for tax purposes.676 As the Supreme Court has held, 670 Id. at 37. 671 Wood & Hollingworth, supra note 659, at 200. 672 Id. 673 Rev. Rul. 2002-69, 2002-2 C.B. 760. 674 Id. 675 Id. 676 Id. See Gregory v. Helvering, 293 U.S. 465, 55 S. Ct. 266, 79 L. Ed. 596 (1935) and Frank Lyon Co. v. United States, 435 U.S. 561, 573, 98 S. Ct. 1291, 55 L. Ed. 2d 550 (1978). In Gregory, the petitioner created a when two separate transactions result in offset- ting obligations, the court may modify the trans- actions and join them in a single transaction.677 In applying those principles to LILO transactions, the IRS stated that the interests conveyed under the head lease and sublease are the same; they are offsetting obligations. Section 162(a)(3) of the Internal Revenue Code permits a deduction for rentals and other pay- ments required to be made as a condition to the continued use or possession for purposes of the trade or business of property; however, the inves- tor is not entitled to a deduction for rent because it does not have a leasehold interest in the prop- erty.678 The investor’s retained interest is substan- tially the same as the interest it conveyed to a tax-exempt entity; therefore, only a future inter- est is conveyed to the tax-exempt entity.679 The investor may not deduct for interest on the loans acquired to make the initial payment in the head lease, because it never obtains possession of the funds lent by the bank. The funds are lent to the investor merely for the purpose of making the head lease payment. Because the same funds, al- though characterized as rent payments, are used by a tax-exempt entity to repay the loan, the IRS company to transfer shares of another company to her- self through a newly created company that was imme- diately dissolved after the transfer. The court held that the reorganization of the shares was invalid because the petitioner did it only to increase her tax deductions and the reorganization had no business purpose. In Frank Lyon Co., the Court held that the lease-in-lease- out transaction between Frank Lyon Company and Worthern Bank and Trust Company was a valid leasing transaction with economic substance. The Court held that Lyon’s capital was invested in the building and Frank Lyon Co. was entitled to deduct for depreciation. Additionally, the transaction was not created merely to benefit from the tax laws but also was created to enable Worthen to obtain a new building, a acquisition that it could not make with an alternative mortgage because of regulatory restrictions. 677 See Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978); Rev. Rul. 2002-69, 2002-2 C.B. 760. 678 Id. 26 U.S.C. § 162(a)(3) provides that (a) [i]n general [t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including…(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. 679 See Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978); Rev. Rul. 2002-69, 2002-2 C.B. 760.

53 has ruled that such a transaction lacks economic substance.680 The IRS maintains a list of abusive transac- tions and included LILOs and SILOs on the list in 2002 and 2005, respectively.681 On August 6, 2008, the Commissioner of the IRS released a statement that the IRS would offer settlements to companies using LILOs and SILOs in improper tax re- turns.682 Since Revenue Ruling 2002-69, several investors have appealed IRS decisions that denied them tax benefits derived from SILO or LILO transactions. It appears that investors did not prevail on their appeals.683 As a further attack on the use of SILOs and LILOs, in the American Jobs Creation Act of 2004, Congress amended the tax code by adding § 470, which limits tax deductions for property used by tax-exempt entities.684 How- ever, § 470 does not apply to certain leases that meet four requirements set forth in § 470(d).685 680 Id. 681 U.S. Internal Revenue Service, Recognized Abu- sive and Listed Transactions (updated Sept. 3, 2013), available at http://www.irs.gov/Businesses/Corporations /Listed-Transactions---LB&I-Tier-I-Issues#17. 682 U.S. Internal Revenue Service, IRS Commis- sioner’s Remarks Regarding LILO/SILO Settlement Initiative (Aug. 6, 2008), available at http://www.irs.gov/Businesses/IRS- Commissioner%E2%80%99s-Remarks-Regarding-LILO- SILO-Settlement-Initiative---August-6,-2008. 683 John Hancock Life Ins. Co. (U.S.A.), 141 T.C. at 34 (citing Altria Grp., Inc. v. United States, 658 F.2d 276 (2d Cir. 2011); BB & T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008); Wells Fargo & Co. v. United States, 641 F.3d 1319 (Fed. Cir. 2011); and Consol. Edi- son Co. of N.Y., Inc. & Subs. v. United States, 703 F.3d 1367 (Fed. Cir. 2013)). 684 American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, § 848. See Sidley Austin Brown & Wood LLP, The American Jobs Creation Act of 2004– Leases to Tax-Exempt Entities (Nov. 2004), available at http://www.sidley.com/files/News/1be3fdea-ca39-41a1- 892e-7005a86d2270/Presentation/News Attachment/58abc401-d248-46af-b4f5- 76e3320c4b74/Tax-AJC-TaxExempt.pdf. 685 26 U.S.C. § 470(d). First, for the duration of the lease, a tax-exempt entity is not permitted to have more than the allowable amount of funds, which is defined as “an amount equal to 20 percent of the lessor’s adjusted basis in the property at the time the lease is entered into.” Id. § 470 (d)(1)(c)(i). Second, the investor must make an investment of at least 20 percent of the prop- erty at the time of the lease and maintain the invest- ment throughout the lease, and the fair market value of the property at the end of the lease must be at least 20 percent of its initial value. Id. § 470(d)(2). Third, the As a result of Revenue Ruling 2002-69 and the amendment of the tax code in 2004, it is said that public transportation agencies have suffered be- cause investors are denied tax benefits associated with the interest and rent payments derived from the transactions. However, as explained by the American Public Transportation Association (APTA), the financial crisis that began in ap- proximately 2007 provided an opportunity for in- vestors to recover their profits. Many of the agreements required the holder of the securities to maintain a AAA credit rating, but many credit ratings fell, and tax-exempt entities were required to replace the holder of the securities within 60 days. During those 60 days, the investor could declare the tax-exempt entity in default and ob- tain “stipulated loss values.”686 At present, according to an article in Railway Age, recent leases of rolling stock by banks to rail- road companies are rarely for terms longer than 12 years; in fact, most are for terms of 7 to 10 years.687 Many of the leases include an option to buy the equipment at the end of the lease. C. Contractual Issues and Leasing Private entities participating in a venture should have an agreement that describes their legal relationship and sets forth their rights and obligations.688 Depending on what is being leased, the terms of a lease may deal with the condition of the property being leased; the required condition of the property at the end of the lease;689 restric- tions on the use of the property while it is leased; performance standards to be met during the term of the agreement; operation and maintenance re- quirements; liquidated damages in the event of a breach or default; incentive payments that are tax-exempt entity must not bear more than a minimal risk of loss. Id. § 470(d)(3). Finally, in leases for prop- erty with more than 7 years of class life that include options to purchase at the end of the lease, the pur- chase price must be at fair market value. Id. § 470(d)(4). 686 See American Public Transportation Association, Transit Agencies Face Catch-22 in Fiscal Meltdown, Passenger Transport (Nov. 3, 2008), available at http://passengertransport.apta.com/aptapt/issues/2008- 11-03/1.html. 687 Anthony Kruglingski, 2012 Guide to Equipment Leasing, RAILWAY AGE (June 19, 2012), available at http://www.railwayage.com/index.php/finance- leasing/2012-guide-to-equipment-leasing.html. 688 DELMON, supra note 189, at 151. 689 Public Transportation: Federal Project Approval Process Remains a Barrier, supra note 170, at 34.