Expectations – Just when you lease expect them:
The following expectations are relevant to the issuance of tax-exempt bonds. These expectations are commonly recited in the tax compliance document executed and delivered by the issuer.
- Under Section 149(g) (“Hedge Bonds”), in order to prevent a bond from being characterized as a “hedge bond,” the issuer must reasonably expect that 85% of the issue’s spendable proceeds will be used within three years from the date of issuance to carry out the governmental purpose. Note that “reasonable expectations” for Section 149 purposes not only encompasses reasonable expectations as defined in Treas. Reg. 1.148-1 but also, as modified by Section 149(f)(2)(B), that expectations as to changes in interest rates or in the provisions of the tax code (or regulations and rulings) may not be taken into account in determining whether expectations are reasonable. Policy: to ensure reasonable sizing and timely issuance to prevent a potentially substantial drain on the Treasury.
- There is an exception for refunding bonds: See this article concerning hedge bond rules.
- Under Section 1.148-2(e)(2) (“3-Year Temporary Yield Period”) concerning the 3-year temporary period for capital projects and qualified mortgage loans, the issuer must reasonably expect to satisfy the (a) expenditure test, (b) time test and (c) due diligence test. The expenditure test requires that at least 85% of the net sale proceeds of the issue are allocated to expenditures on the capital projects by the end of the 3-year temporary period (this is almost like the 149(g) hedge bond definition test) (policy: to ensure prompt commencement of work). The time test is met if the issuer incurs within 6 months of the issue date a substantial binding obligation to a third party to expend at least 5 percent of the net sale proceeds of the issue on the capital projects (policy: to assure that expenditure of bond proceeds is done within a reasonable time). An obligation is not binding if it is subject to contingencies within the issuer’s or related party’s control. The due diligence test is met if completion of the capital projects and the allocation of the net sale proceeds of the issue to expenditures proceed with due diligence (policy: to prevent delay of work). See also this article concerning yield restriction.
- Under Section 1.141-12(a) (“Remedial Actions”), the conditions should be met in order to preserve remedial actions should they be needed: (a) Reasonable expectation on the issue date that the issue will meet neither the private business tests nor the private loan financing test for the entire term of the bonds; (b) Maturity not unreasonably long (120% test); (c) Proceeds of the issue must have been expended on a governmental purpose before the date of the deliberate action. There is a separate WordPress article describing remedial actions.
- Election under Section 1.141-15(d) of the Regulations permits application of the 1997 regulations (refunding regulations) to bonds outstanding on May 16, 1997 or refunding bonds issued on or after May 16, 1997.
- Election to waive the right to treat a purpose investment as a program investment.
- Election to waive the right to invest in higher yielding investments during any temporary period.
- Election of the issuer of a pooled financing issue to apply rebate spending exceptions separately to each conduit loan.
- Election for purposes of the two-year spending exception from rebate to apply certain provisions based on actual facts rather than reasonable expectations.
- Election for purposes of the two-year spending exception from rebate to exclude from available construction proceeds the earnings on a reasonably required reserve fund.
- Election for purposes of the two-year spending exception to treat a portion of an issue as a separate construction issue from rebate.
- Election to pay 1.5% penalty in lieu of arbitrage rebate.
- Election to treat portions of a bond issue as separate issues.