1. 2014 MSBA/MASA Annual Conference Restrictions on Use of Bond-Financed Property Toni Stegeman & James Dummitt Gilmore & Bell, P.C. and Linda Quinley Columbia Public Schools

2. 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? 1

3. 2 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.

4. Disadvantage of Tax-Exempt Financing Strings! 3

5. 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. 4

6. 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 5

7. 6 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

8. 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 7

9. 8 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)

10. 9 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

11. 10 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

12. 11 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.)

13. 12 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

14. 13 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

15. 14 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

16. 15 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

17. Annual Compliance Checklist 16

18. Annual Compliance Checklist 17

19. Annual Compliance Checklist 18

20. Annual Compliance Checklist 19

21. Annual Compliance Checklist 20

22. 21 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)

23. 22 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

24. 23 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

25. 24 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

26. 25 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

27. 26 Examples What counts when determining tax compliance?  District’s good-faith, reasonable expectations?  Actual use of bond proceeds?  District’s allocation of bond proceeds?

28. 27 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.

29. 28 Examples Buildings/Classrooms  Contract with maintenance/cleaning company  Cell tower easement to phone company  Food service contract with catering company for cafeteria

30. 29 Examples Athletic Facilities  Lease of aquatic center to YMCA  Lease of stadium to neighboring district for football games  Naming rights to private donor  Advertising

31. 30 Examples What does the district do with the existing or previous school?  Bond-financed? Bonds outstanding?  Remedial action?  VCAP?

32. 31 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

33. Questions? Gilmore & Bell, P.C. 2405 Grand Blvd. Suite #1100 Kansas City, MO 64108 816-221-1000 www.gilmorebell.com Toni Stegeman (tstegeman@gilmorebell.com) James Dummitt (jdummitt@gilmorebell.com)