In a very busy end of the year, the IRS provided two new bond regulations: The final public approval (TEFRA) regulations and proposed reissuance regulations. With the publication of these two regulation projects, the IRS has completed all but one of the items on the 2017-2018 IRS/Treasury Business Plan. The TEFRA regulations affect issuers and borrowers who are required under the tax rules to obtain approval and hold a public hearing before issuing their bonds.
Final Regulations on Satisfying the Public Approval Requirement
Generally, under the tax rules, an issuer must obtain public approval of certain tax-exempt bonds after providing reasonable public notice and a hearing.
The final regulations apply in circumstances where the public approval of a bond issuance occurs on or after April 1, 2019. As such, if the public approval of a bond issuance occurs before April 1, 2019, an issuer should apply the existing regulations.
Highlights of the final regulations:
- The public notice is reasonable if published no fewer than seven calendar days before the hearing, changing the prior requirement of a 14-day notice.
- In addition to providing a notice of the hearing in a newspaper of general circulation, an issuer can instead post a notice of the hearing on the approving governmental unit's public website. An issuer that issues on behalf of a governmental unit may post public notice on the public website of either the issuer's or the approving governmental unit's website.
- Public notice may be given in a way that is permitted under a general state law for notices for public hearings for the approving governmental unit, provided that the public notice is reasonably accessible and otherwise meets the provisions of the final regulations.
- The notice and approval must include a general functional description of the type and use of each project to be financed with an issue. A project description is sufficient if it identifies the project by reference to a particular category of exempt facility bond to be issued.
- The notice and approval must include the maximum stated principal amount of bonds to be issued to finance the project or projects. If an issue finances multiple projects such as facilities at different locations the notice and approval must specify separately the maximum state principal amount of bonds to be issued to finance each separate project to be financed as part of the issue. This is a new requirement and necessitates that issuers and borrowers consider carefully the specific projects and the amounts anticipated to be spent on each of the projects and discuss each project with tax counsel before publishing the notice.
- The maximum stated principal amount of bonds to be issued to finance a project may be determined on any reasonable basis and may take into account contingencies without regard to whether the occurrence of any such contingency is reasonably expected at the time of the notice.
- The notice and approval must include a general description of the prospective location of each project by street address, reference to boundary streets, or other geographic boundaries or other description of the specific geographic location that is reasonably designed to inform readers of the location. For a project involving multiple capital projects or facilities located on the same site, a consolidated description of the location of those projects or facilities provides a sufficient description of the project.
- Unlike the existing regulations, the final regulations provide special rules for mortgage revenue bonds, qualified student loan bonds, and pooled qualified 501(c)(3) bonds.
- The final regulations define the term "project" to mean one or more capital projects or facilities including land, buildings, equipment, and other property to be financed with an issue that are located on the same site or adjacent or proximate sites used for similar purposes. However, the final regulations also state that capital projects or facilities that are not located on the same site or adjacent or proximate sites may be treated as one project if those capital projects or facilities are used in an integrated operation.
- The final regulations permit an issuer to cure a "substantial deviation" between the stated use or amount of proceeds of an issue included in the public approval information and the actual user or amount of the proceeds of the issue if the issuer obtains a supplemental public approval for those bonds before using the proceeds. For the first time, TEFRA regulations provide for a definition of insubstantial deviations.
- "Insubstantial deviation" in public approval information is defined in the regulations as follows:
- A deviation between the maximum stated principal amount of a proposed issuance of bonds to finance a project and the actual stated principal amount of bonds issued and used to finance that project is an insubstantial deviation if the actual stated principal amount is no more than 10 percent greater than that maximum stated principal amount or is any amount less than that maximum stated principal amount.
- A deviation between the initial legal owner or principal user of the project named in the notice and public approval and the actual initial legal owner or principal user of the project is an insubstantial deviation if such parties are related parties on the issue date of the issue.
Proposed Reissuance Regulations
On December 31, 2018, the IRS released proposed regulations addressing circumstances under which tax-exempt state or local bonds are treated as retired for purposes of the tax-exempt bond rules. The proposed regulations are intended to unify prior IRS guidance issued as notices dating back 30 years (including IRS Notice 88-130 and Notice 2008-41). The proposed regulations retain the concept of a separate definition of qualified tender bonds that existed in previous IRS guidance but do little else in terms of adding new additional guidance. The proposed regulations are effective on or after the date that is 90 days after the date of publication of the final regulations. This provides practitioners an opportunity to comment. The IRS has stated that comments and requests for a public hearing on the proposed regulations must be received by the IRS by March 1, 2019.
General Rules Regarding Retirement of Tax-Exempt Bonds
- The proposed regulations provide that a tax-exempt bond is treated as retired if: (1) the issuer and bond holder agree to make a "significant modification" to the terms of outstanding tax-exempt bonds under the tax rules; (2) the issuer (or its agent) acquires the bond such that the bondholder's investment in the bond is liquated or extinguished; or (3) the bond is otherwise redeemed, including at maturity. These rules were similar to the language in Notice 2008-41.
- The proposed regulations only apply to tax-exempt bonds and do not cover other tax-advantaged bonds. The proposed regulations also do not cover all bank modes.
- The proposed regulations permit remarketing at par only, dropping the special rule in Notice 2008-41 that would have permitted premium or discount on a remarketing to maturity.
- The regulations do not include some of the special rules or any examples included in Notice 88-130 and Notice 2008-41.
- The regulations define the term "qualified tender bond" and "qualified tender right." Both terms were previously defined only in the IRS notices.
Exceptions to Retirement of a Tax-Exempt Bond
There are three exceptions under the proposed regulations from the general rules regarding retirement of tax-exempt bonds. These exceptions are similar to the ones in prior IRS guidance. Two exceptions apply to "qualified tender bonds."
- Under the first exception in the proposed regulations, the existence and exercise of a "qualified tender right" is disregarded for purposes of determining whether a significant modification under the tax rules has occurred.
- The second exception applies to the acquisition of a qualified tender bond pursuant to the exercise of a qualified tender right, provided that the issuer (nor its agent) holds the bond for longer than 90 days. The 90-day period is also in Notice 2008-41.
- A third exception applies to all tax-exempt bonds. Under this exception, the acquisition of a tax-exempt bond by a guarantor or liquidity facility provider acting as the issuer's agent does not result in retirement of the bond if the acquisition is pursuant to the terms of the guarantee or liquidity facility and the guarantor or liquidity facility provider is not a related party to the issuer.
Attorneys in Ballard Spahr's Public Finance Group have participated in practically every type of tax-exempt bond financing. These financings include bond issues for governments, hospitals and health care institutions, universities, colleges, student housing, single- and multifamily housing, airports and other exempt facilities, and public-private partnerships.