PUBLIC FINANCE IN FOCUS

Issuers sometimes change the use of property financed with governmental bonds in a way that creates private business use ( e . g ., selling or leasing property to a private user ). In these instances , the issuer should consider whether the action would have the effect of causing the bonds to have private business use and private payments in excess of the permissible levels allowed under federal tax laws ( a “ deliberate action ”). If there is a deliberate action , the issuer can protect the tax-exempt status of its bonds if certain threshold requirements have been met and the issuer takes one of the remedial actions set forth in the Treasury Regulations .

The Threshold Requirements

Eligibility to take a remedial action requires that all the following threshold requirements be met :

• Reasonable expectations test . On the original issue date of the bonds , an issuer cannot have reasonably anticipated that it would later take the deliberate action .

• Maturity not unreasonably long . The term of the bonds must not be longer than is reasonably necessary for the purposes of the issue .

• Fair market value consideration . The deliberate action taken must be at arm ’ s length and for fair market value , taking into account any bona fide restrictions imposed on the property by the issuer .

• Treatment of disposition proceeds . The issuer must treat any proceeds relating to the deliberate action ( the “ disposition proceeds ”) as “ gross proceeds ,” meaning that they will be subject to yield restriction and rebate .

• Proceeds expended . The bond proceeds affected must originally have been expended on a governmental purpose , unless the remedial action will be redemption or defeasance of bonds .

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