HomeMy WebLinkAboutItem 06.v1 �
Date December 19, 2011 �� Item
TAX COMPLIANCE PROCEDURES RELATING TO TAX- EXEMPT
BONDS AND "BUILD AMERICA BONDS"
Proposed Action
Staff recommends adoption of the following motion: Move to approve the Tax Compliance
Procedures Relating to Tax - Exempt Bonds and "Build America Bonds"
Approval will result in formal procedures relating to compliance with IRS laws.
Overview
The IRS recently promulgated rules requiring jurisdictions which have issued Build America
Bonds to adopt formal procedures relating to the administration of the bonds. The attached
procedures satisfy that requirement.
The only Build America Bond issued by the City of Lakeville was the $4.945 million Taxable
General Obligation Bonds Series 2009. The City is in compliance with the proposed procedures.
Primary Issues to Consider
• Future bond issues. Congress did not extend the Build America Bond (BAB) authorization,
therefore there will be no further BAB's other than the 2009 issue.
S u pportW2 Information
a �
Dennis eller, Finan e- irector
Financial Impact: None budgeted: not applicable Source: Not applicable
Related Documents (CIP, ERP, etc.):
City of Lakeville, Minnesota
Tax Compliance Procedures
Relating to
Tax - Exempt Bonds and "Build America Bonds"
I. Purpose:
To ensure (1) that interest on tax- exempt bonds (or "TEBs ") of the City of Lakeville (the
"Issuer ") remains excludable from gross income under Section 103 of the Internal
Revenue Code of 1986, as amended (the "Code "); and (2) that bonds of the Issuer, the
interest on which would otherwise be excludable from gross income under Section 103 of
Code, intended to be issued as Build America Bonds (Direct Payment) under Section
54AA of the Code (`BABs ") will be qualified and will continue to he qualified, as such,
with the result that the Issuer shall be entitled to the 35% credit provided in Section 6431
of the Code (the "Act ").
These written procedures are intended to four, ally memorialize certain practices and
procedures of the Issuer previously adopted or followed in connection with the issuance
of the Issuer's TEBs or BABs (collectively, `Bonds "). These procedures are not intended
to replace or override the provisions of any resolution or tax or other closing certificate
prepared in connection with a particular series of Bonds, but are intended to summarize
the salient provisions of the Issuer's procedures with respect to Bond issuance and post -
issuance compliance. The Issuer reserves the right to use its discretion to make
exceptions to these procedures as circumstances warrant.
The Issuer's procedures for compliance are as follows:
II. Expenditure /Use of Proceeds:
A. Expenditure
of Bond proceeds will be
reviewed by
the Issuer's Finance
Department
for consistency with Bond
documents,
including any Bond
Resolution or
indenture and tax certificate.
B. The Issuer has separately established procedures for preparation and review of
requisitions of Bond proceeds, through the accounting system of the Issuer.
C. Requisitions must identify the Bond - financed property in conformity with the
Issuer's tax certificate executed at closing of the Bonds, including certifications as
to the character and average economic life of the financed property.
D. None of the proceeds of Bonds will be used to reimburse the Issuer for costs of a
capital project paid prior to the date of issuance of the Bonds unless the Issuer
shall have fully complied with the provisions of Section 1.150 -2 of the Treasury
Regulations, and for BABs, the Act, with respect to such reimbursed amounts,
which section is summarized in Exhibit A hereto.
-2-
E. "Available Project Proceeds" for a BAB issue shall be calculated as (i) the excess
of the proceeds from the sale of the issue, over the issuance costs financed by the
issue (which issuance costs may not exceed 2 percent of such proceeds), and (ii)
the proceeds from any investment of the excess described in (i).
F. 100% of the Available Project Proceeds for a BAB issue, less an amount in a
reasonably required reserve fund with respect to such issue, will be used for
capital expenditures. No portion of any proceeds will be used for working capital.
G. The Issuer shall acknowledge in its tax certificate that a failure to use proceeds of
the BABs for proposes specified in such certificate may result in the retroactive
loss of the federal tax credit that the Issuer otherwise would be entitled to receive.
H. Requisitions will be summarized in a "final allocation" of Bond proceeds to uses
not later than 18 months after the in- service date of the financed property (and in
any event not later than 5 years and 60 days after the issuance of the Bonds or not
later than 60 days after earlier retirement of issue) in a manner consistent with the
Code and Treasury Regulations and applicable tax certificate.
I. Expenditure of proceeds of Bonds will be measured against the Issuer's tax
certificate expectation to spend or commit 5% of net sale proceeds within six
months, spend 85% of net sale proceeds within three years and to proceed with
due diligence to complete the capital project and fully spend the net sale and
investment proceeds within three years. In the event that exceptions provided by
the Code cannot be used, calculations of rebate liability will be performed or
caused to be performed as provided herein.
i. If there are any TEB proceeds remaining in the project or construction fund
established pursuant to the Bond Resolution after completion of any authorized
project, such proceeds shall be applied to payment of principal and interest due
the TEBs.
K. If there are any BAB proceeds remaining in the project or construction fund
established pursuant to the Bond Resolution after completion of any authorized
project, such proceeds shall be applied to defease the BABs.
L. The Issuer's tax certificate for BABs shall provide, and the Finance Department
shall ensure, that no more than 65% (or such other percentage as is arrived at by
subtracting from 100 the percentage of any federal credit allowable) of any
interest payment on BABs shall be funded with proceeds of such BABs.
M. Staff costs may be financed with Bond proceeds only to the extent that they are
properly capitalized render generally accepted accounting principles and federal
tax law.
N. If there are any Bond proceeds remaining other than in a reserve or debt service
fund established pursuant to the Bond Resolution or indenture after completion of
the project[s], such proceeds shall be applied in a manner consistent with the
-3-
applicable Bond Resolution or indenture and tax certificate or pursuant to advice
from bond counsel.
O. In the event that Bond proceeds are to be used to make a grant to an unrelated
party, a grant agreement will be reviewed prior to execution for compliance with
the Code. Such agreement will be approved by the Finance Director. The
repayment of any portion of a grant by the grantee shall be treated as unspent
Bond proceeds.
P. In the event that Bond proceeds are to be loaned to a conduit borrower, such
conduit borrower will be required to agree to all terms of the tax certificate and
provide evidence of post - issuance tax compliance procedures deemed adequate
and consistent with those set forth herein; and all such obligations for post -
issuance tax compliance shall be assumed by such conduit borrower. The Issuer's
Finance Director shall be the primary contact for all conduit hnrrnwerg and r 1210
compliance matters.
III. Use of Financed Property:
A. Use of financed property when completed and placed in service will be reviewed
by the Finance Department,
B. Upon issuance of Bonds, there shall be no expectation that the Bond - financed
property will be sold or otherwise disposed of by the Issuer during the term of the
Bonds.
C. Appropriate departinent rnariagers shall be advised in writing concerning
restrictions on the use of the Bond proceeds and the facilities financed thereby
and instructed to consult with the Finance Department and bond counsel
regarding any third -party contract concerning use of the facilities, including
without limitation leases, use, management or service contracts, and research
contracts.
D. Agreements with business users for lease, use, management, or any other service
with respect to, or non- govermnental use of Bond- financed property will be
reviewed prior to execution for compliance with the Code. Such agreements will
be approved by the Finance Department in consultation with bond counsel, who
will be responsible for determining whether the proposed agreement (i) results in
private business use of the facilities, and (ii) if applicable, meets the
compensation, term and other requirements under Revenue Procedures 97 -13
(summary included) and 2007 -47, all upon the advice of bond counsel, as
necessary.
E. No item of Bond - financed property will be sold or transferred by the Issuer while
the applicable Bonds remain outstanding without approval of the Issuer's Finance
Department upon advice of bond counsel or advance arrangement of a "remedial
action" under the applicable Treasury Regulations, as summarized in Exhibit C
hereto.
-4-
F. The Issuer acknowledges that any sale, transfer, change in use, or change in users
of the Bond - financed property may require remedial action, as previously
described, or resolution pursuant to the IRS Voluntary Closing Agreement
Program (or "VCAP ") to assist in resolving violations of the federal tax laws
applicable to the Bonds.
IV. Investments:
A. Investment of Bond proceeds in compliance with the arbitrage and rebate
requirements of the Code and applicable Treasury Regulations will be supervised
by the Issuer's Finance Department.
B. At closing, the Issuer may consult with its financial advisor to determine an
estimate of the reasonably expected investment earnings on the sate proceeds of
the BABs, and such estimate shall be included in the Issuer's tax certificate.
C. Investment,of the gross proceeds of BABs prior to expenditure thereof will be
made only as pennitted by the Bond Resolution and tax certificate, and all
investments will be purchased only at fair market value, as determined under
applicable Treasury Regulations,
D. Guaranteed investment contracts ( "GICs "), federal securities and other
investments will be purchased only according to the fair market value provisions
of applicable Treasury Regulations, including bid requirements and fee
limitations.
E. Calculations of rebate liability will be performed by Springsted. Sach
calculations shall be made, as necessary, prior to each 5 year anniversary of the
date of issue of the Bonds.
F. Upon final expenditure of the gross proceeds of Bonds, and in any event promptly
following the fifth anniversary of the date of issuance of the Bonds or earlier
retirement of the Bonds, the Finance Director will consult a qualified professional
to prepare a spending exception report or an arbitrage rebate computation (as
applicable) for the issue of Bonds.
G. Rebate payments, as necessary, will be made with Fonn 8038 -T no later than 60
days after (i) each fifth anniversary of the date of issuance of the Bonds and
(ii) the final retirement of the Bond issue.
V. Record Management and Retention:
A. Management and retention of records related to Bond issues will be supervised by
the Finance Director.
B. Records for Bonds will be retained for the life of the Bonds, plus any refunding
Bonds, plus three years. Such records may be in the form of documents or
-5-
electronic copies of documents, appropriately indexed to specific Bond issues and
compliance functions.
C. Retainable records pertaining to Bond issuance shall include a transcript of
documents executed in connection with the issuance of the Bonds and any
amendments; copies of requests for refundable credits for BABs; and copies of
rebate calculations and records of payments, including Forms 8038 -T.
D. Retainable records pertaining to expenditures of Bond proceeds include
requisitions; trustee statements, if applicable, and final allocation of proceeds.
E. Retainable records pertaining to use of Bond - financed property include all third -
party contracts concerning use of the facilities, including (without limitation)
leases, use, management or service contracts, and research contracts.
F. Retainable records pertaining to investments include GIC documents under the
Treasury Regulations, records of purchase and sale of other investments, and
records of investment activity sufficient to permit calculation of arbitrage rebate
or demonstration that no rebate is due.
VL Overall Responsibility:
A. Overall administration and coordination of these procedures is the responsibility
of the Finance Director of the Issuer.
B. Review of compliance with these procedures shall be undertaken periodically, and
in any event, not less than annually.
C. The Issuer understands that failure to comply with the provisions of the Code and
Treasury Regulations reflected in these policies and procedures could result in the
retroactive loss of (i) the exclusion of interest on TEBs from federal gross and
Minnesota taxable net income, and (ii) the federal tax credit with respect to
BABs; and, thus, it would be advisable to consult with bond counsel in advance
regarding deviations from the facts and expectations as set forth in the closing
certifications relating to any issue of Bonds.
D. Any violations or potential violations of federal tax requirements shall promptly
be reported to the Finance Director, and such officer will engage qualified
consultants and bond counsel to further investigate potential violations or
recommend appropriate remedial actions.
VII. BAB Designations & Elections:
A. A BAB "Bond Resolution" (which term shall include an Indenture of Trust in
respect of Bonds, where applicable), or a certificate of an authorized officer of the
Issuer dated and executed not later than the date of issue of the BABs, shall
irrevocably designate the BABs as such and irrevocably elect to have Section
54AA(g) of the Code apply to the BABs.
-6-
B. At a minimum, where the federal tax credit is pledged to pay debt service on
BABs, the Issuer shall, by the Bond Resolution, covenant and agree with the
registered owners from time to time of the BABs that it will not take or permit to
be taken by any of its officers, employees or agents, any action which would
cause the BABs to lose their status as such under the Code and applicable
Treasury Regulations, and shall covenant to take any and all actions within the
Issuer's powers to ensure that the BABs will remain such under the Code and
Treasury Regulations.
C. In an Official Statement for BABs, the Issuer shall state that (i) interest on the
BABs is includible in gross income for federal income tax purposes (or they are
"taxable "), (ii) the BABs are "direct payment," and (iii) holders of the BABs are
not entitled to a tax credit as a result of ownership of the BABs.
VIII. BAB$ De LNinimic Preminm and Vield Calenlatinn;
A. Each Notice /Terms of Proposal distributed for BABs shall clearly state that: (i)
the prospective purchaser must specify the expected reoffering price of the BABs
for each maturity, (ii) each such reoffering price cannot exceed the par amount of
the maturity by more than 0.25% multiplied by the number of complete years to
the earlier of the maturity date or the first optional redemption date for the
maturity of the BABs, and (iii) in the initial offering, no BABs may be sold for a
price in excess of such limit unless the Internal Revenue Service provides
authoritative guidance to the contrary.
B. Each Notice /Terms of Proposal distributed for BABs shall list the maximum
permitted reoffering price for each maturity of BABs.
C. Prior to acceptance of a proposal for the purchase of ,BABs, the Issuer's financial
advisor shall be responsible for computations to verify that the expected
reoffering price, as certified by the purchaser, does not exceed the par amount of
the maturity by more than 0.25% multiplied by the number of complete years to
the earlier of the maturity date or the first optional redemption date for the
maturity of the BABs.
D. The Certificate of Purchaser shall include certifications that: (i) the Bonds of each
maturity were initially reoffered to the public at the prices shown therein or in the
final Official Statement, and (ii) as of the date of sale of the Bonds, the purchaser
reasonably expected that at least 10% of each maturity of the Bonds would be
sold to members of the public (other than bond houses and brokers, or similar
persons or organizations acting in the capacity of underwriters or wholesalers) at
said public offering prices.
E. The Certificate of Purchaser shall provide a certification that, as of the date of
issue of the Bonds, the purchaser has actually sold at least 10% of each maturity
of the Bonds to members of the public at the public offering prices expected as of
the date of sale, provided, however, that if the purchaser will not provide this
-7-
certification, the Issuer's representative or bond counsel shall inquire as to the
circumstances preventing sales at such prices or why otherwise such certification
will not be made.
F. The Issuer's tax certificate for BABs shall certify that the "issue price" of the
BABs is the initial reoffering price of the BABs to the public and, as shown in the
Certificate of Purchaser, the issue price of the BABs does not include more than a
de minimis amount of premium within the meaning of Section 54AA(d)(2)(C) of
the Code.
G. In the case of a negotiated sale, the Issuer's financial advisor shall review records
available through EMMA (or through other readily accessible and available
sources) of the secondary market trading activity for Bonds between the sale date
and the date of issue of the Bonds to determine if there is reason to question the
reasonableness of the expectations of the purchaser ac of the cinte of sale of the
Bonds.
H. The Issuer's financial advisor shall be advised that the yield on BABs is to be
computed in accordance with Section 148 of the Code and reduced as required by
Section 6431(c) of the Code to reflect the federal credit allowed to the Issuer.
The Issuer's financial advisor shall certify to the Issuer that the offer accepted by
the Issuer for the purchase of Bonds is a reasonable offer under customary
standards applicable in the municipal bond market for similar Bonds.
IX. Requests for Credit for BABs:
A. Requests for the refundable credit for BABs, including the calculation of the
credit payable and timely filing of requests for payment pursuant to Form 8038 -
CP and in accordance with the closing letter of bond counsel, shall be the
responsibility of the Finance Director, who shall verify eligibility for the credit
and sign such form.
B. For fixed rate BABs, interest payments calculated by the purchaser shall be
verified by the Finance Director or the Issuer's financial advisor.
C. For variable rate BABs, interest payments shall be as calculated pursuant to the
Bond Resolution and shall be verified by the Finance Director or the Issuer's
financial advisor.
D. Payment of the credit shall be directed to the Issuer or to such other party as
provided in the Bond Resolution.
Adopted this 19th day of December, 2011.
0
EXHIBIT A
REIMBURSEMENT BOND SUMMARY
Following is a general summary of the requirements relating to bonds that are issued to
reimburse expenditures that were paid prior to the date of issuance of bonds
( "Reimbursement Bonds ").
Reimbursement Bond proceeds cannot be used to reimburse expenditures paid more than
60 days prior to the adoption of the declaration of official intent /reimbursement
resolution, which must contain:
• a general functional description of the property to which the reimbursement
relates or an identification of the fund or account from which the expenditure is to
be paid and a general functional description of the purposes of such fund or
accounts and
• the maximum principal amount of debt to be issued.
Reimbursement Bonds must be issued not later than 18 months after the later of (i) the
date on which the original expenditure is paid, or (ii) the date on which the property is
placed in service, but in any case not more than three years after the date on which the
original expenditure is paid. If possible, actual reimbursement should be made within 30
days of the date of issuance of the Reimbursement Bonds.
Note that there are exceptions for "de minimis" amounts (not in excess of the lesser of
$100,000 or 5% of proceeds of the issue) and for "preliminary expenditures" (such as
arcu tectural, engineering, surveying, soil testing and similar costs and costs of issuance),
oc " 6 as such preliminary expenditures do not exceed 20% of the aggregate issue price.
EXHIBIT B
SUMMARY OF REVENUE PROCEDURE 97 -13
Background
A mianagement, service or Incentive payrnent contract with a private service
provider with respect to tax exempt bond - financed property may result in private business
use of that property, based on all facts and circumstances. done of the compensation
may be based on a share of net profits.
Revenue Procedure 97 -13 establishes conditions under which a management
contract generally does not result in private business use. Issuers and bond counsel
typically attempt to satisfy, or substantially satisfy, one of these "safe harbors" because of
uncertainty as to the treatment of noneonforining contracts. Below is a brief summary of
the provisions of Rev. Proc. 93 -17, as modified by Rev. Proc. 2001 -39.
Rev. Proc. 93 -17 establishes conditions based on (1) the compensation
arrangements and the tern of the agreement, and (2) whether the service provider has any
role or relationship with the "qualified user " that substantially limits the qualified user's
ability to exercise its rights under the contract.
General Rules
In all events, the contract must provide for reasonable compensation for services
rendered, with no compensation based, in whole or in part, on a share of net profits from
the operation of the facility. Reimbursement of the service provider for actual and direct
expenses paid by the service provider to unrelated parties is not by itself treated as
co=Vensation.
The compensation, with the percentage determined by the term of the contract,
subject to additional conditions, as described under "Compensation Safe Harbors" below,
generally may be computed by:
(A) a periodic fixed fee which is a stated dollar amount for a specified period of
time;
(B) a percentage fee which is a percentage of gross revenues (or adjusted gross
revenues) of the facility or a percentage of expenses of the facility, but not both;
(C) a capitation fee which is a fixed periodic amount for each person for whom
the service provider or the qualified user assumes the responsibility to provide all needed
t A "qualified user" of the financed property is a slake or local governmental unit (or instrumentality
thereof or a 501(c)(3) organization if the financed property is not used in an unrelated trade or business
under section 513(a) of the Internal Revenue Code.
z r1 periodic fixed fee may include an automatic increase based on a specific, objective, external standard
that is not linked to the output or efficiency of the facility in question.
I
services for a specified period so long as the quantity and type of services actually
provided to covered persons varies substantially 3 ;
(D) a per -unit fee which is a fee based on a unit of service specified in the
contract or otherwise specifically determined by an independent third party or the
qualified ed user ; or
(E) a productivity reward equal to a stated dollar amount based on increases or
decreases in gross revenues (or adjusted gross revenues), or reductions in total expenses
(but not both increases in gross revenues (or adjusted gross revenues) and reductions in
total expenses) in any annual period during the term of the contract.
The service provider must not have any role or relationship with the qualified user
that, in effect, substantially limits the qualified user's ability to exercise its rights,
including cancellation rights, under the contract based on all facts and circumstances.
The relationship does not limit the qualified user's ability to exercise its rights if the
following conditions are satisfied: (1) not more than 20 percent of the voting power of the
governing body of the qualified user in the aggregate is vested in the service provider and
its directors, officers, shareholders, and employees, (2) overlapping board members do
not include the chief executive officers of the service provider or its governing body or
the qualified user or its governing body, and (3) the qualified user and the service
provider are not related parties.
COMPENSATION SAFE HARBORS
A management contract generally will not result in private business use if the
compensation arrangement meets the criteria in one of the following categories:
50% Periodic Fixed Fee Contracts
• At least 50 percent of the compensation for services for each annual period during
the term of the contract is based on a periodic fixed fee;
• the term of the contract, including all renewal options in favor of the service
provider, does not exceed 5 years; and
s A capitation fee may include an automatic increase based on a specified, objective, external standard that is
not linked to the output or efficiency of the facilit A capitation fee may also include a variable
component of up to 20 percent of the total capitation fee designed to protect the service provider against
risks such as catastrophic loss.
4 A periodic fee may include an automatic increase based on a specified, objective, external standard that is
not linked to the output or efficiency of the facility.
s A provision under which a contract is automatically renewed absent cancellation by either party is not a
renewal option (even if it is expected to be renewed).
_2
• the contract is terminable by the qualified user of the facility on reasonable notice,
without penalty or cause, at the end of the third year of the contract terns.
80% Periodic Fixed Fee Contracts
• At least 80 percent of the compensation for services for each annual period during
the term of the contract is based on a periodic fixed fee; and
• the term of the contract, including all renewal options in favor of the service
provider, does not exceed the lesser of 80 percent of the reasonably expected
useful life of the financed property and 10 years.
For purposes of this safe harbor (but not the 50% periodic fixed fee safe harbor), a
one -time incentive award during the term of the contract under which compensation
automatically increases by a single, stated dollar amount when a gross revenue or
expense target (but not both) is reached may be considered part of a fixed fee
arrangement.
95% Periodic Fixed Fee Contracts
• At least 95 percent of the compensation for services for each annual period during
the term of the contract is based on a periodic fixed fee; and
• the tern of the contract, including all renewal options in favor of the service
provider, does not exceed the lesser of 80 percent of the reasonably expected
useful life of the financed property and 15 years.
For purposes of this safe harbor (but not the 5v% periodic fixed fee safe harbor), a
one -time incentive award during the term of the contract under which compensation
automatically increases by a single, stated dollar amount when a gross revenue or
expense target (but not both) is reached may be considered part of a fixed fee
arrangement.
Capitation Fee Contracts (with or without fixed fees)
• All of the compensation for services is based on a capitation fee or a combination
of a capitation fee and a periodic fixed fee;
• the term of the contract, including all renewal options in favor of the service
provider, does not exceed 5 years; and
• the contract is terminable by the qualified user of the facility on reasonable notice,
without penalty or cause, at the end of the third year of the contract term.
Per -unit Fee Contracts (with or without fixed fees)
• All of the compensation for services is based on a per -unit fee or a combination of
a per -unit fee and a periodic fixed fee;
3
the term of the contract, including all renewal options in favor of the service
provider, does not exceed 3 years; and
• the contract is terminable by the qualified user of the facility on reasonable notice,
without penalty or cause, at the end of the second year of the contract term.
Percentage of Revenue or Fxxpenses
All the compensation for services is based on a percentage of fees charged or a
combination of a per -unit fee and a percentage of revenue or expense fee;
the term of the contract, including all renewal options in favor of the service
provider, does not exceed 2 years; and
• the contract is terminable by the qualified user of the facility on reasonable notice,
without penalty or cause, at the end of the first year of the contract term.
During the start-up period, however, compensation may be based on a percentage
of either gross revenues, adjusted gross revenues, or expenses of a facility. The contract
must be terminable by the qualified user on reasonable notice, without penalty or cause,
at the end of the first year of the contract tern. This safe harbor applies only to contracts
under which the service provider primarily provides services to third parities and
management contracts involving a facility during an initial start-up period for which there
have been insufficient operations to establish a reasonable estimate of the amount of the
annual gross revenues and expenses (for example, a contract for general management
services for the first year of operations).
Revision of Compensation Arrangements
Please note that if the compensation arrangements of a management contract are
materially revised, the compensation arrangements are "retested" as of the date of the
material revision, and the management contract is treated as one that was newly entered
into as of the date of the material revision.
4
EXHIBIT C
REMEDIAL PROVISIONS APPLICABLE TO BONDS
The Issuer acknowledges that any deliberate action by the Issuer after Rond issuance that results
in a satisfaction of the private business tests or the private loan test will result in private activity
bond status unless one or more qualifying remedial actions are taken by the Issuer. Specifically,
Treasury Regulations provide that actions are not treated as deliberate actions if (A) five
conditional requirements are met, and (B) one of three remedial actions is taken, with respect to
the disposition proceeds and nonqualified bonds`:
CONDITIONAL REQUIREMENTS
t. Reasonable Expectations — The issuer reasonably expected on the issue date that it would
not meet the private business tests or the private loan test for the whole term of the bonds;
and
2. Reasonable Bond Maturity — The term of the issue must not be unreasonably long; this
requirement is met if the weighted average maturity of the bond issue is not greater than
120% of the expected economic life of the property financed; and
3. Fair Market Value Consideration — The terms of any agreement (relating to satisfaction
of a private activity bond test) must be bona fide and at arm's - length, and the new user
must pay a fair market value consideration for the use of the bond - financed property; and
4. Disposition Proceeds Are Gross Proceeds — The Issuer must treat any disposition
proceeds as gross proceeds subject to arbitrage /rebate restrictions; and
5. Proceeds Spent for Authorized Purpose — Except as described with respect to redemption
and defeasance options below, prior to deliberate actions, the affected proceeds must
have been spent for the authorized purposes under the applicable bond documents.
REMEDIAL ACTIONS — Under Treasury Regulations, Sections 1.141- 12(d), (e) and (f):
1. Redemption of Non- Qualified Bonds — Under the general rule, all nonqualified bonds of
the issue must be redeemed. Tax - exempt bond proceeds (i.e., refunding bond proceeds)
cannot be used unless the tax- exempt bonds are qualified bonds, taking into account the
purchaser's use of the facility. The bonds must be redeemed within 90 days of the date of
the deliberate action or a defeasance escrow for the bonds must be established within
such 90 -day period. Special rules apply to transfers exclusively for cash and to
defeasance escrows.
The portion of the outstanding bonds in an amount that, if the remaining bonds were issued on the date on
which the deliberate action occurs, the remaining bonds would not satisfy the private business use test or the
private loan financing test, as applicable. The amount of private business use is the highest percentage of
business use in any one -year period, commencing with the deliberate action
-1
2. Alternative Use of Disposition Proceeds — To meet this requirement, all disposition
proceeds must be in cash, the issuer must reasonably expect to expend the proceeds
within 2 years, the new use must not meet the private business tests or the private loan
test (and the issuer cannot take any action subsequent to the date of the deliberate action
to cause the tests to be met), and any unused proceeds must satisfy the redemption
requirement in the preceding paragraph.
3. Alternative Use of Facility — This remedial action is satisfied if the bond - financed
property itself (as distinguished from the proceeds of the issue) is used in an alternative
manner (e.g., for a different purpose or by a different person); the nonqualified bonds are
treated as reissued on the date of the deliberate action and independently meet all of the
requirements for tax exemption under Sections 141 through 150 of the Code, except the
arbitrage and rebate rules of Section 148, for the remaining term of the nonqualifred
uoiiva
l___d_ t he rc_ , rile de dcilori does not involve a ir3iislci _ � r i the property to a purchaser t hat
finances the acquisition with the proceeds of another issue of tax - exempt bonds; and any
disposition proceeds, other than those arising from an agreement to provide services,
resulting from the deliberate action are used to pay debt service on the bonds on the next
available payment date or escrowed within 90 days of receipt and yield restricted to pay
debt service on the next available payment date.
The above is only a brief summary of remedial actions, and additional special rules may
be applicable. As provided in the Issuer's Compliance Procedures for Tax - Exempt Bonds, the
Finance Director shall seek advice of bond counsel as necessary to provide guidance as to
"remedial action" that may be required under the applicable Treasury Regulations.
The Commissioner of the IRS may, by publication, provide for additional remedial
actions. In addition, the IRS provides a program in which issuers/borrowers which cannot meet
a listed remedial action can enter into a closing agreement with the IRS to avoid private activity
bond status. The closing agreement program includes several conditions, including providing for
the redemption of the bonds and paying the IRS an amount based on an assumption that the non -
qualified bonds are taxable from the date of the subsequent act until they are redeemed.
-2