9.2.2 Capitalized Interest Fund

Many projects financed by public agencies produce revenue that is the primary source of repayment for the obligations. Lease revenue obligations, for example, may be issued to underwrite the cost of construction, but until the facility is operational and occupied the agency will not begin to make lease payments. When revenues will not be immediately available to meet debt service obligations, an alternative source must be established to pay the interest portion owed to bondholders (capitalized interest fund). For non revenue producing facilities, public agencies may delay debt service payments during the construction phase but continue to make interest payments on any debt issued. To do so they may borrow, as part of the original financing, an amount that, together with interest earnings thereon, will be sufficient to pay interest during the construction phase. See Section 2.4.3, Funds and Accounts; Flow of Funds. Because this process essentially turns the interest owed during the construction period into a project cost, it is said to be “capitalized.”