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

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

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.

Disadvantage of Tax-Exempt Financing Strings! 3

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

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

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

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

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)

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

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

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.)

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

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

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

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

Annual Compliance Checklist 16

Annual Compliance Checklist 17

Annual Compliance Checklist 18

Annual Compliance Checklist 19

Annual Compliance Checklist 20

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)

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

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

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

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

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?

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.

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

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

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

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

Questions? Gilmore & Bell, P.C Grand Blvd. Suite #1100 Kansas City, MO Toni Stegeman James Dummitt