The Issue Spot - Reimbursement Rules

The Issue Spot


Reimbursement Rules

It is not uncommon for an issuer to begin paying project costs from sources other than bond proceeds with the intent that it ultimately reimburse itself for those costs with proceeds of a future bond issue . If properly reimbursed , the issuer is permitted to treat the proceeds of the bonds as spent – and thus not subject to yield restriction and rebate . Recognizing that an issuer could attempt to avoid the arbitrage restrictions by allocating bond proceeds to expenditures made far in the past , the Treasury Regulations provide rules that establish threshold requirements for using bond proceeds to reimburse expenditures paid prior to the issue date .
The three general reimbursement rules are :
1 . Nature of Expenditure Requirement Generally , capital expenditures and costs of issuance are eligible for reimbursement . Other limited categories of expenditures , including certain extraordinary working capital expenditures and grants , are also eligible .
2 . Official Intent Requirement An official intent – often referred to as the “ reimbursement resolution ” – must be adopted prior to or within 60 days after the expenditure . The reimbursement resolution must :
• be in a reasonable form , indicating the expectation of reimbursement ,
• contain a general functional description of the project ,
• indicate the maximum principal amount of the debt to be issued , and
• not be made as a matter of course or in an amount substantially in excess if what is reasonably necessary ( i . e . no “ blanket ” resolutions ).
3 . Reimbursement Period Requirement A reimbursement allocation generally must be made no later than 18 months after the later of :
• the date on which the original expenditure was paid or
• the date the property is placed in service
BUT in no event later than three years after the date the original expenditure was paid .
It is useful to note that the requirements set forth in 2 and 3 above do not apply to reimbursements for preliminary “ soft cost ” expenditures ( so long as they do not exceed 20 % of the bond proceeds ) or de minimis amounts that , in the aggregate , do not exceed the lesser of $ 100,000 or 5 % of the proceeds of an issue .
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