Example
An issuer issues $ 5,000,000 of 20-year , tax-exempt governmental bonds with a 10-year call provision . The issuer uses proceeds in the amount of $ 1,000,000 to purchase land to be used for governmental purposes . After five years , $ 4,000,000 of principal amount of the bonds remains outstanding and the issuer determines that the land is not suitable for its intended purpose . Land values have appreciated , and the issuer enters into a noncontingent contract with a nonprofit 501 ( c )( 3 ) organization on September 1 , 2019 , to sell the land for $ 2,000,000 . The closing on the land occurs on October 1 , 2019 . All other bond proceeds have been used for governmental purposes and there is no additional private business use .
• As a result of the sale , the highest amount of private business use in any year is determined to be 20 % ( i . e ., 1,000,000 / 5,000,000 ). The issuer may remediate the bonds by :
• Defeasing $ 800,000 in principal amount of the bonds by establishing a defeasance escrow by November 30 , 2019 ( i . e ., 90 days after the date of the contract for sale ) and providing notice to the IRS of the defeasance ;
• Using the $ 2,000,000 of disposition proceeds for capital expenditures for a governmental purpose authorized under state law by September 1 , 2021 ( i . e ., two years after the date of the contract for sale ); or
• Treating the bonds as reissued as “ qualified 501 ( c )( 3 ) bonds ,” provided that the 501 ( c )( 3 ) purchaser will be using the land in furtherance of its exempt purpose and has agreed to comply with the rules applicable to qualified 501 ( c )( 3 ) bonds .
Anticipatory Remedial Actions
For many years , it was not clear whether an issuer could take a remedial action in advance of a deliberate action . In 2015 , new Treasury Regulations provided an issuer with the ability to redeem or defease nonqualified bonds in anticipation of a deliberate action if the following requirements are met :
Declaration of Intent . Prior to taking the remedial action , an issuer must describe the anticipated deliberate action , identify the affected property , and declare an official intent to redeem or defease all nonqualified bonds once a deliberate action is taken .
Redemption or Defeasance . Upon taking the deliberate action , the issuer must actually redeem or defease the nonqualified bonds , subject to the same restrictions that apply to a redemption or defeasance in connection with an “ after the fact ” remedial action , as described above .
Remediation of Long-Term Leases
Historically , the only option to remediate “ bad ” use created by an issuer entering into a long-term lease with a private business user was through redemption or defeasance of nonqualified bonds . In 2018 , the IRS released Revenue Procedure 2018-26 , which allows issuers to remediate private use resulting from eligible long-term leases by recycling an amount equal to the present value of the payments to be received under the lease ( i . e ., the “ disposition proceeds ”) into “ good ” use within two years of entering into the lease .
◊
This new remedial action provides issuers with more flexibility to remediate private use associated with a bad lease , but an issuer must actually have access to amounts equal to the disposition proceeds to avail itself of this option . This could present a challenge because the issuer presumably will receive payments from the lessee over the term of the lease .
bracewell . com