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IRS Issues Final Regulations Regarding Allocation of Bond Proceeds to Mixed-Use Projects; SLGS Window Reopens

On October 26, 2015, the IRS released final regulations (the “Final Regulations”) regarding allocation and accounting rules for purposes of the private activity bond restrictions applicable to tax-exempt bonds issued by state and local governments and, for certain purposes, other non-profit borrowers. Applicable generally to bonds sold on or after January 25, 2016 (with certain exceptions for electing in for earlier bonds), the Final Regulations provide that governmental and private use be applied on a pro rata basis throughout a “project,” offering a flexible approach that allows for the areas subject to private business use to change (i.e., “float”) over time so long as the overall percentage of use does not exceed the applicable limit. This is in contrast to the regulations proposed in 2006 that would have required issuers, under certain situations, to allocate private business use to a discrete portion of a facility. The Final Regulations also set forth helpful (and issuer-friendly) guidance regarding the allocation of tax-exempt bond proceeds in connection with public-private partnerships, which make it easier to finance the governmental (or 501(c)(3)) portion of a joint venture with tax-exempt bonds. Finally, the Final Regulations provide guidance regarding an issuer’s ability to take “anticipatory remedial actions” in advance of a deliberate action that would create private business use in excess of the permitted amounts. As with any new set of Treasury regulations, there are interpretive hurdles. While leaving some issues unaddressed, the Final Regulations nonetheless provide much helpful guidance for issuers of tax-exempt bonds the proceeds of which might be used to finance property with a private business use component.

Also, note that on November 3, 2015, the Treasury Department began accepting orders for United States Treasury Obligations – State and Local Securities (i.e., SLGS). As is well known, the SLGS window had been closed since March as one of the “extraordinary measures” the Treasury Department took to preserve the federal government’s borrowing capacity in light of the debt limit.

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About this Author

Steven H. Gerdes, Tax Attorney, Bracewell Law Firm

Steve focuses his practice on the tax aspects of state and local government obligations. During his career, he has covered the full range of tax-exempt obligations appearing in the marketplace, including governmental new money, commercial paper and working capital financings, and current and advance refundings. These transactions also include exempt facility bond financings such as seaport and airport financings, student loan financings, solid waste and sewage financings, single- and multi- family housing financings, as well as professional sports facility and...

R. Todd Greenwalt, Tax Attorney, Bracewell Law Firm

Todd's practice focuses on governmental entities and tax-exempt organizations, advising clients with regard to tax-exempt financings and other business transactions, and resolving tax-exempt status issues.

His clients include all types of state and local governmental entities, hospitals, other health care organizations, colleges and universities, charter schools, museums, arts organizations, community and economic development organizations, private foundations, advocacy groups, and other charities. Todd serves as bond counsel and advises health...

Brian P. Teaff, Business Transaction Attorney, Bracewell Law Firm

Brian Teaff has a multifaceted tax practice, advising clients in connection with tax-exempt financings and other business transactions in the public finance area, as well as counseling public charities and private foundations on a wide range of tax planning and compliance matters. In addition, Brian advises a variety of types of clients with respect to the "opportunity zone" provisions enacted under the Tax Cuts and Jobs Act of 2017. 

In his public finance practice, Brian serves as tax counsel on governmental and conduit financings where he...