Chapter 22 - § 22.4 • OTHER REQUIREMENTS AND LIMITATIONS

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§ 22.4 • OTHER REQUIREMENTS AND LIMITATIONS

§ 22.4.1—Costs of Issuance Limitation

Because tax-exempt bond issuances can involve more time and complexity relative to issuing comparable taxable obligations, increased borrowing costs can be associated with the issuance of tax-exempt bonds. Leaffer, "Tax-Exempt Financing for Code § 501(c)(3) Organizations," 29 Colo. Law. 87, 90 (July 2000). These "issuance costs" can range from 2 to 3 percent of the amount borrowed, or more, depending on the complexity of the borrowing, the number of participants involved, the size of the borrowing, the legal and other opinions rendered in connection with the borrowing, and whether the costs may be shared with other borrowers (for example, by participating in a pooled loan program). Id.

I.R.C. § 147(g) provides that only up to 2 percent of the proceeds of an issue of qualified § 501(c)(3) bonds may be used to pay costs of issuance of the bonds. Costs of issuance (or "issuance costs") are "costs to the extent incurred in connection with, and allocable to, the issuance of an issue . . . [and include] underwriter's spread; counsel fees; financial advisory fees; rating agency fees; trustee fees; paying agent fees; bond registrar, certification and authentication fees; accounting fees; printing costs for bonds and offering documents; public approval process costs; engineering and feasibility study costs; guarantee fees, other than for qualified guarantees (as defined in [Treas. Reg.] § 1.148-4(f)); and similar costs"). Treas. Reg. § 1.150-1T(b). Issuance costs in excess of 2 percent of the sale proceeds of the bond issue may be paid from other available funds (e.g., borrower equity or proceeds of a loan or other taxable obligation).

§ 22.4.2—Public Approval Requirement

I.R.C. § 147(f) requires that issues of qualified § 501(c)(3) bonds (as well as other issues of qualified private activity bonds) be approved by a specified governmental unit prior to issuance. The approval must follow a public hearing regarding the bond issuance and notice of the public hearing. I.R.C. § 147(f)(2)(B)(i). These requirements are referred to colloquially as the "TEFRA notice and approval requirements" because the requirements were originally added to the Code in the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248 (1982). There are three principal components to the approval requirements: notice, a hearing, and the approval itself. See generally I.R.C. § 147(f)(2). Each of these requirements is addressed below.

Notice

The Treasury Regulations require that an issue be approved following a public hearing "for which there was reasonable public notice." Treas. Reg. § 5f.103-2(d)(1). In order to be reasonable, the notice must "state the time and place for the hearing." Treas. Reg. § 5f.103-2(g)(3). The notice, as well as the approval itself, must contain:

• "A general, functional description of the type and use of the facility to be financed," Treas. Reg. § 5f.103-2(f)(2)(i);
• "The maximum aggregate face amount of obligations to be issued with respect to the facility," Treas. Reg. § 5f.103-2(f)(2)(ii);
• "The initial owner, operator or manager of the facility," Treas. Reg. § 5f.103-2(f)(2)(iii); and
• "The prospective location of the facility," Treas. Reg. § 5f.103-2(f)(2)(iv).

This notice must be published at least 14 days prior to the hearing in a newspaper of general circulation. Treas. Reg. § 5f.103-2(g)(3).

Hearing

The applicable Treasury Regulations require that an approval of an issue follow a public hearing "providing a reasonable opportunity for interested individuals to express their views . . . on the proposed [bond] issue . . . and the location and nature of a proposed facility to be financed." Treas. Reg. § 5f.103-2(g)(2).

Approval of the Issue

I.R.C. § 147(f)(2)(A) requires that an issue of qualified private activity bonds (including an issue of qualified § 501(c)(3) bonds) be approved by either the governmental unit "which issued such bond," or the governmental unit "on behalf of which such bond was issued," and also be approved by "each governmental unit having jurisdiction over the area in which any facility [to be financed by the issue] is located." I.R.C. § 147(f)(2)(A).

The Treasury Regulations provide additional detail for each of the requirements above, as well as rules governing deviations in public approval information. See generally Treas. Reg. § 5f.103-2. The IRS proposed new regulations on September 27, 2017, governing the public approval requirements of I.R.C. § 147(f), Public Approval Guidance for Tax-Exempt Bonds, 73 Fed. Reg. 52,220 (Sept. 9, 2008), which may be applied to public approvals that occur after September 27, 2017. Department of the Treasury, "2015-2016 Priority Guidance Plan," 32 (April 29, 2016), available at www.irs.gov/pub/irs-utl/2015-2016_pgp_3rd_quarter_update.pdf.

§ 22.4.3—Bond Maturity Limitation

Two separate provisions of the I.R.C. provide that the average maturity of an issue of qualified §...

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