(1) The formulaic 97-13 rules providing a safe harbor for Management Contracts using a capitation fee, a periodic fixed fee, a per-unit fee, or combinations thereof, and certain types of incentive compensation, are all expressly authorized in 2017-13. If these rules are followed, the Service Provider is determined not to have a share in net profits. A capitation fee is a fixed fee for each person to whom the Service Provider provides a service, such as a fixed annual fee for each patient in an HMO. A periodic fixed fee is a set amount for services rendered in a specified time period, such as a charge of $1,000 per month to operate a sewage treatment plant. A per-unit fee is a set amount for each unit of service provided, such as a charge of $100 for each X-ray read by a Service Provider.
(2) Some Management Contracts allow for delayed payments of compensation to the Service Provider if the Managed Property has unexpected, insufficient cash flow to pay the fee. 2017-13 specifically approves a Management Contract that permits delayed fees in those circumstances so long as (a) the scheduled payments are at least annual, (b) there is a late interest or penalty charge added to the late payment, and (c) the late payment must be made within 5 years of the original due date.
(3) The term of a Management Contract is restricted to the lesser of 30 years or 80% of the remaining life of the Managed Property. By incorporating the rules in Section 147(b) of the Code, 2017-13 clarifies that (i) land should be included in that determination of remaining life if more than 25% of the proceeds of the bonds financed the land and (ii) if land is included in such determination, a useful life of 30 years should be assigned to the land.
(4) A Qualified User must have sufficient control of the Managed Property. In part, this control requirement mandates that the Qualified User have some control over the rates charged for use of the Managed Property, such as the room rates for a hotel. 2017-13 finds sufficient control of rates if the Qualified User expressly approves the rates or approves a general description of the methodology for setting the rates, such as setting hotel room rates using specified revenue goals based on comparable hotels.
Some observations: First, 2017-13 retains the surprising rule in 2016-44 that states that the employees of a Service Provider are related to the Service Provider. This means that Management Contracts that call for the Qualified User to reimburse the Service Provider’s costs must be carefully reviewed. Second, note that the Managed Property is the portion of the “project”, as defined in Regs § 1.141-6, that is bond-financed. Thus, in addition to analyzing what will constitute the project for purposes of allocating away from facilities that have private business use problems, issuers and borrowers will also need to consider the impact their definition of the “project” will have on their Management Contracts and should work with their bond counsel to consider all of the possible consequences in determining the scope of the bond financed project. Third, 2017-13 does not provide any guidance as to when a Management Contract is materially modified and therefore deemed to be a new Management Contract. Fourth, while the clarification about the life of land and when to incorporate it is helpful, 2017-13 retains the same rule that the term of a Management Contract cannot exceed 80% of the remaining life of the Managed Property. Unless the relevant bonds are already retired, this will often make it very difficult to implement a Management Contract near the end of the life of the Managed Property because the 80% constraint cannot be satisfied. Fifth, issuers and borrowers can choose to continue to use the 97-13 rules for Management Contracts executed before August 18, 2017. This date is just a few days earlier than the August 22, 2017 cut-off date previously found in 2016-44.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.
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