The Infrastructure Investment and Jobs Act (“IIJA”) has provisions to encourage investment in high-speed broadband projects, but as written, the legislation leaves open for interpretation several provisions. Guidance or clarification is required to allow providers and bond issuers to effectively access bond money for Qualified Broadband Projects. On February 24, 2023, the National Association of Bond Lawyers (“NABL”) submitted a request to the U.S. Department of the Treasury – Internal Revenue Service for clarification on several provisions.1 This article provides an overview of NABL’s requests to clarify the provisions codified in Section 142(n)2 of the Internal Revenue Code of 1986 (the “Code”) and the potential challenges issuers and providers may face when seeking to fund broadband projects for underserved communities with tax-exempt bond financing.
While certain provisions of the IIJA are clear—such as the minimum speed requirements—other provisions are unclear, undefined, vulnerable to multiple interpretations, or in need of safe harbor provisions. Issuers looking to take advantage of tax-exempt bond funding for broadband projects need to be aware of the following considerations:
When determining who is currently served and who will be served by a project, while not explicit, it appears the statute relies on the U.S. Census Bureau’s definition of “census block groups” and provides for issuers to rely on the Federal Communications Commission’s National Broadband Map (“FCC Map”). If you are relying on alternative data, it is important to note what data you are using and/or document any discrepancies that you know exist with the FCC Map so that you can show how you made your determinations.
There is currently a lack of clarity around what it means to provide service or have internet access. Until guidance is available, issuers need to determine whether they are counting or excluding current service provided by mobile and satellite-based service providers and whether service is provided if a connection is readily available or only after the connection is made. Additionally, service must be provided to a census block group area, but it is uncertain whether that means an entire area must be served or only a portion thereof. Given the challenges providing service to an entire large rural area would present, determining service based on a certain percentage of locations in the area being served is recommended, but the language is unclear. Additionally, how to count and categorize residential households, locations, and commercial locations is unclear as to whether residential households and locations are equivalent or distinguishable and how to account for community living facilities that house multiple families or residences within one structure or location. For “commercial locations,” guidance is needed to make explicit whether the term includes industrial and agricultural locations.
Section 142(n) has an explicit 90-day notice period that is required, but there are also latent timing considerations for issuers. For the 90-day period, it is best to delay the issuance of the bonds and any bond-related expenditures until the 90-day period has expired. When that 90-day period is triggered is currently not specified, and could be at the time notice is sent or at the time notice is received, and depends on what type of noticed is deemed to be required. It is unclear whether Tax Equity and Fiscal Responsibility Act (“TEFRA”) Notice satisfies the requirements or whether individualized service to all broadband providers is required.
Another timing consideration is the testing date for a project to qualify. Since the FCC Map are iterative and data changes over time and as bond-financed projects are completed, issuers must carefully evaluate when they are determining a project qualifies and document the iteration of the data relied upon. For now, it is recommended that bond projects in any one area are completed and placed into service at substantially the same time and that projects avoid multiple phases because the current language does not provide provisions that accommodate such structures.
Notice Requirements under Section 142(n)(2)
Whether notice applies on a project or bond issuance basis is unclear. NABL advocates for a bond issuance basis to be adopted and that this interpretation be made clear. Alternatively, if a project basis is adopted, then additional guidance is needed to determine if notice is required for taxable bond issues, and if so, if a prior taxable issuance that did not satisfy the notice requirements disqualifies a future tax-exempt financing for a portion of the same project. NABL requests all guidance be applied on a proscriptive basis, and to provide allowances for projects already in progress that would otherwise qualify under Section 142(n).
For now, we recommend that any notice provided includes a geographic component, though it is unclear whether it is required and if so, what that geographic component should be. The geographic component could be considered the census block group or county or counties of the project. It is recommended that the entire community be notified, not just the area where the project is located.
During the notice period, any comment received, whether in writing, verbally, or informally, should be considered a responsive comment, because no specific format is required. While no direction is provided for what an issuer must do with received comments, it is best practice to catalogue any comments received, including the date, author, and substance of the comment and to send an acknowledgment of receipt of the comment.
Other Bond Considerations
In addition to the written language, NABL identified other challenges to accessing tax-exempt bond funding for Qualified Broadband Projects related to TEFRA approval, volume cap, and conflicts with existing qualified bond provisions. The TEFRA approval process required under Section 1.147(f)1(f)(2) requires a “general description of the prospective location of the project.” Projects utilizing a system of fiber-optic cables will require a more extensive summary; NABL asks for guidance on how to best describe and summarize unconventional project location descriptions.
While not all Qualified Broadband Projects are subject to volume cap, a portion of them will be and there is limited volume cap available and increasing demand for volume cap for a wide range of qualified projects. NABL calls for reducing the demand on volume cap by eliminating the volume cap requirement for projects under 142(n) or reducing the demand on volume cap by removing the requirement for other types of bonds (suggesting qualified residential rental projects under Section 142(d)). Simplifying the TEFRA location description and reducing the demand on volume cap will pave the way for more projects to be implemented.
Exempt facility bonds generally have a 95% test, which allows for 5% “bad money” per Section 142(a). Section 142(n) sets clear standards for broadband speed, which implies a 100% compliance test requiring all broadband speeds to align with the minimum speeds. NABL would like guidance clarifying that a project would remain eligible if it meets a 95% test and confirming that temporary outages or network slowdowns and system failures will not disqualify a project. Additionally, NABL would like guidance that specifies the basis on which speed will be determined—“daily, monthly or annual average speeds.”If you would like to discuss any Qualified Broadband Projects or other tax-exempt bond facilities please contact any member of our Public Finance Team.
1 For NABL’s full analysis visit https://www.nabl.org/resources/request-broadband-bonds/.
2 Section 142(n) Qualified Broadband Project
- In general For purposes of subsection (a)(16), the term “qualified broadband project” means any project which—(A) is designed to provide broadband service solely to one or more census block groups in which more than 50 percent of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25 megabits per second downstream and at least three megabits service upstream, and (B) results in internet access to residential locations, commercial locations, or a combination of residential and commercial locations at speeds not less than 100 megabits per second for downloads and 20 megabits for second for uploads, but only if at least 90 percent of the locations provided such access under the project are locations where, before the project, a broadband service provider—(i) did not provide service, or (ii) did not provide service meeting the minimum speed requirements described in subparagraph (A).
- Notice to broadband providers A project shall not be treated as a qualified broadband project unless, before the issue date of any issue the proceeds of which are to be used to fund the project, the issuer—(A) notifies each broadband service provider providing broadband service in the area within which broadband services are to be provided under the project of the project and its intended scope, (B) includes in such notice a request for information from each such provider with respect to the provider’s ability to deploy, manage, and maintain a broadband network capable of providing gigabit capable Internet access to residential or commercial locations, and (C) allows each such provider at least 90 days to respond to such notice and request.