2014 MSBA/MASA Annual Conference Restrictions on Use of Bond-Financed Property Toni Stegeman & James Dummitt Gilmore & Bell, P.C. and Linda Quinley Columbia.

2014 MSBA/MASA Annual Conference

Restrictions on Use of Bond-Financed Property

Toni Stegeman & James DummittGilmore & Bell, P.C.

andLinda Quinley

Columbia Public Schools

Why are we here?

WHY are there restrictions on use of property financed with tax-exempt bonds?

WHY do we care?

WHAT are the restrictions?

HOW do we comply with the restrictions?

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WHY are there restrictions?

Tax-exempt bonds and leases = lower interest rates, because bondholders/lenders don’t pay income tax on the interest received.

IRS views the difference between the tax-exempt and taxable interest rates as a loss to the U.S. Treasury; therefore, a grant to the school district.

Disadvantage of Tax-Exempt Financing

Strings!

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Types of Debt

Tax-advantaged debt

Tax-exempt bonds (TEBs)

Build America Bonds (BABs)

Qualified School Construction Bonds (QSCBs)

Qualified Zone Academy Bonds (QZABs)

Rules apply to all tax-advantaged debt – bonds, notes, financing leases, COPs, etc.

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WHY Do We Care?

Tax-exempt rate approximately 1.5% lower than taxable rate

Why? Investor does not pay federal income tax on the interest.

Benefit – allows District to finance more project with same revenues, because less money needed for interest

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3 Main Areas of Tax Compliance

Accounting for Expenditures

Accounting for Investment of Bond Proceeds

Accounting for Use of Bond-Financed Assets

How do you do this?

Tax-Exempt Financing Compliance Policy and Regulation or Procedure

Adequate Recordkeeping

WHAT Are The Restrictions?

In order to qualify for tax exemption, bond-financed property must be used in a “qualified use”

“Private business use” means use of property by a person or entity that is not a State or local governmental entity in furtherance of a business Qualified Users – state and local governments Non-Qualified Users – private businesses

(including non-profits); federal government and agencies

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When Do the Restrictions Apply?

Reasonable Expectations and Actual Facts How do you expect to use the property? How has the property actually been used? Rules generally apply during the entire

term of the bonds (including refunding bonds)

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HOW To Comply

Final Allocation Identifying and accounting for bond-

financed property Allocation of financing sources

Periodic Monitoring compliance checklists and questionnaires consultation with tax/bond counsel

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Types of Private Business Use

What is “private business use” – some special legal right to use facilities

Ownership

Lease

Service or Management Contracts

Miscellaneous Arrangements

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Types of Private Business Use

Ownership – sale of financed assets (buildings, furniture, equipment, etc.)

Lease – operating lease of financed assets Athletic teams, YMCA, after-school groups,

churches, colleges, etc. General public use exception Short-term exceptions Incidental use exception (vending, janitorial,

advertising displays, etc.)

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Types of Private Business Use

Service or Management Contracts

Concessions, school stores, bus fleet, cafeteria, etc.

Exceptions for incidental services (janitorial, office equipment repair, etc.)

Safe harbors (IRS Revenue Procedure 97-13)

Miscellaneous arrangements – vending machines; advertising displays; exclusivity contracts; cell towers; pouring rights

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Best Practices

Develop and implement policy on facility usage

Standardize contracts and rates

Final Allocation & Annual Compliance Checklist

Contact Bond Counsel if questions or variations

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Final Allocation

What is a final allocation? Accounting of sources and uses of project

funds and expenditures Identifies the bond-financed property

What is the purpose of a final allocation? Details the expenditure of bond funds Starting point for monitoring use of

property and compliance Substantiates efforts to comply

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Annual Compliance Checklist

What is an annual compliance checklist? Simple checklist with targeted questions

relating to how the bond-financed project(s) is used

Designed to catch and remediate non-compliance

What is the purpose of an annual compliance checklist? Identifies potential non-compliance Substantiates efforts to comply Reminder to perform compliance efforts

Annual Compliance Checklist

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Annual Compliance Checklist

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Annual Compliance Checklist

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Annual Compliance Checklist

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Annual Compliance Checklist

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Non-Compliance or Change-in-Use

What if non-compliance is discovered or the use of property changes?

Options/Outcomes Remedial action (voluntary) VCAP (voluntary) IRS audit (involuntary)

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Remedial Action

Certain conditions and prerequisites to taking remedial action

Timing Element

No payment to IRS (but may involve paying down bonds)

Effect – cures private business use problems

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Voluntary Closing Agreement Program

IRS Voluntary Closing Agreement Program (VCAP)

Settlement payment negotiated with IRS

Generally available if remedial action not an option and bonds not under audit

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IRS Audit

What happens if IRS audits bonds and concludes there is a problem?

Hammer – declare bonds taxable (in practice, a settlement payment by the District for treasury’s lost revenue)

Transactional costs

Pay off bonds or taxable refinancing

Damaged reputation in public markets

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Examples

Project: Bonds issued to finance acquisition, construction, equipping and furnishing of a new high school

Primary buildings – classrooms, administrative, cafeteria, etc.

Athletic Facilities Computers and other equipment and

furnishings

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Examples

What counts when determining tax compliance? District’s good-faith, reasonable

expectations? Actual use of bond proceeds? District’s allocation of bond proceeds?

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Examples

Buildings/Classrooms Lease to ACT prep company for

classes

Lease to non-profit community group for weekly meeting

Personal property - computers, equipment, furniture, etc.

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Examples

Buildings/Classrooms Contract with

maintenance/cleaning company

Cell tower easement to phone company

Food service contract with catering company for cafeteria

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Examples

Athletic Facilities Lease of aquatic center to YMCA

Lease of stadium to neighboring district for football games

Naming rights to private donor

Advertising

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Examples

What does the district do with the existing or previous school?

Bond-financed? Bonds outstanding?

Remedial action?

VCAP?

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Today’s Takeaways

Bond compliance is important and doesn’t end when all of the money is spent!

Don’t be afraid to ask questions early and often – answers often turn on the specific circumstances

Keep good documentation to support efforts

Questions?

Gilmore & Bell, P.C.2405 Grand Blvd. Suite #1100

Kansas City, MO 64108816-221-1000

www.gilmorebell.com

Toni Stegeman ([email protected])James Dummitt ([email protected])