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"The Bond Deal is Over, Now What?"

Elizabeth S. Blutstein, Jennifer V. Powers
Wisconsin Health and Educational Facilities Authority

As any borrower who has participated in a tax-exempt bond financing knows, it takes a team of people working together to ensure that all of the legal requirements are met in order to issue the bonds and close the deal. Although many of the financing team members then move on to the next financing, a borrower’s responsibilities with respect to its tax-exempt bonds does not end at the time of the bond closing. In fact, a borrower’s obligation to monitor and comply with the legal requirements pertaining to its tax-exempt bonds and the ownership and use of the bond financed assets is only just beginning on the closing date.

The post-issuance compliance obligations of a borrower are generally set forth in the bond documents and are more specifically addressed in the Tax Exemption Agreement entered into with respect to each bond issue. When bonds are issued by WHEFA, each borrower is required to designate a “bond compliance officer” who will be responsible for monitoring and ensuring that the borrower complies with the ongoing covenants contained in the bond documents and the various federal tax law requirements applicable to the bonds. It is important that the person overseeing such compliance be familiar with the bond financing, the bond financed assets and the requirements of the Tax Exemption Agreement.

Although there is no express legal requirement that a borrower adopt written procedures regarding post-issuance compliance with federal tax law requirements, recent changes and actions by the Internal Revenue Service (IRS) indicate that the IRS strongly recommends the adoption by borrowers of separate written policies and procedures pertaining to post-issuance compliance with the tax laws. For example, Schedule K of IRS Form 990 specifically asks whether a borrower has adopted written procedures for compliance with certain rules applicable to tax-exempt bonds. Additionally, the IRS has indicated that borrowers who have such policies in place will generally receive more favorable treatment in the event there is a tax problem with respect to an issue of tax-exempt bonds, including when a borrower is seeking a voluntary closing agreement (VCAP) with the IRS. It is, therefore, becoming increasingly important for a borrower to adopt written post-issuance compliance policies and procedures.

Post-issuance compliance policies should identify who is responsible for each of the various ongoing compliance obligations and at a minimum should address the following:

  1. Final allocation of bond proceeds – tracking the expenditures of bond proceeds (including requisitions to the bond trustee and the detailed project completion certificate) and maintaining records to support the ownership and use of the proceeds;
  2. Investments and arbitrage – identifying what investments are permissible for the bond proceeds and the timing and requirements for rebate calculations;
  3. Monitoring ownership and private business use – tracking ownership and use of the financed assets, including management, research and service contracts, leases or sales of financed assets, and having procedures in place to timely identify and remediate any non-compliance; and
  4. Record keeping – identifying what records should be kept to substantiate compliance with the federal tax law requirements (including those identified in 1., 2. and 3. above).

There are several useful resources describing post-issuance and compliance obligations and even providing samples of written policies and procedures.

In light of the increased emphasis by the IRS on the need to have written policies and procedures for compliance with tax requirements, it is advisable for a borrower to adopt such post-issuance compliance policies that meet the organization’s particular needs and circumstances.

Quarles & Brady LLP is happy to assist a borrower with the preparation of policies and procedures that can be implemented with respect to its outstanding bond issues.

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