The Stimulus Act of 2009 New Opportunities for Municipal Bonds and New Tax Credit Bonds. Hunton & Williams LLP February 25, 2009

Transcription

1 The Stimulus Act of 2009 New Opportunities for Municipal Bonds and New Tax Credit Bonds Hunton & Williams LLP February 25, 2009

2 Bond Related Provisions in Stimulus Act Bond related provisions in the American Recovery and Reinvestment Tax Act of 2009 (the Stimulus Act ) Marketability provisions Tax Credit Bonds Qualified School Construction Bonds Build America Bonds and Refundable Credit Option Provisions affecting private activity bonds 2

3 Marketability Provisions Changes in Alternative Minimum Income Tax ("AMT") Changes in Bank Qualified Eligible obligations ("BQEs") 3

4 AMT Changes Current law Interest on governmental bonds, 501(c)(3) bonds and tax-exempt housing and mortgage bonds is exempt from AMT Interest on all other private activity bonds is not exempt from AMT Interest on all tax-exempt obligations, whether directly subject to AMT or not, is taken into account as current earnings for purposes of corporate AMT 4

5 AMT Changes (continued) AMT under the Stimulus Act Interest on ALL new money tax-exempt obligations (governmental and private activity bonds) issued in 2009 and 2010 is exempt from AMT Interest on ALL new money tax-exempt obligations (governmental and private activity bonds) issued in 2009 and 2010 is NOT taken into account in calculating current earnings for the corporate AMT 5

6 AMT Changes (continued) AMT treatment of refunding bonds under the Stimulus Act General Rule - Refunding bonds issued in 2009 and 2010 are treated as issued on the date of issue of the refunded bonds Exception - Interest on governmental and private activity refunding bonds issued to refund bonds issued in (regardless of whether the refunded bonds were themselves refunding bonds) will still be exempt from AMT and not in current earnings Exception - Governmental refunding bonds continue to be exempt from AMT regardless of when the refunded bonds were issued 6

7 BQE Bonds Current law on deductibility of interest Taxpayers cannot deduct interest costs or other costs of carry for the purchase of acquiring and holding tax-exempt bonds Corporate taxpayers other than financial institutions can acquire tax-exempt bonds in an aggregate amount not exceeding 2% of all assets without losing deductibility of interest 7

8 BQE Bonds (continued) Special rule for financial institutions (IRC 265(b)) Financial institutions cannot deduct that portion of interest expense allocable to tax-exempt interest, except for BQEs Financial institutions can deduct 80% of the carrying cost associated with BQEs 8

9 BQE Bonds (continued) Current law BQEs are governmental or 501(c)(3) bonds issued by or on behalf of local governments that do not issue more than $10 million of such bonds in that calendar year BQE bonds cannot be sold in a pooled or composite issue with an aggregate face amount in excess of the $10 million limit 9

10 BQE Changes and 2010 New BQE rules ( ) Each 501(c)(3) entity is now treated as an issuer with its own limit The limit is increased from $10 million to $30 million for each of 2009 and 2010 Issues may be combined for example, a single issue of $50 million might be done benefiting two borrowers for $25 million each 10

11 BQE Changes and 2010 (continued) 2% de minimis exception Financial institutions can also purchase non-bqe bonds issued in 2009 and 2010 up to 2% of assets Only 80% of the cost of carry is deductible Includes private activity bonds Refunding bonds treated as issued on date of issue of refunded bonds or, in a series of refundings, on the date of issue of the original bonds 11

12 Key Points and Predictions on AMT and BQE Provisions Each 501(c)(3) entity having its own limit is VERY IMPORTANT and likely to promote significant volume Application of $30 million amount at borrower level can be a limitation (instead of a benefit) in some situations Old issues (including most taxable issues and loans) can be refunded and become BQE bonds if within the issuer s $30 million limit 12

13 Key Points and Predictions on AMT and BQE provisions (continued) For governmental bonds, expect multiple series to account for: whether bonds are eligible for financial institution 2% de minimis exception whether interest on the bond is included in adjusted earnings for corporate AMT purposes 13

14 Key Points and Predictions on AMT and BQE provisions (continued) For private activity bonds Expect refundings to get the non-amt and noncurrent earnings marketing benefits (if refunded bonds were issued after 12/31/03) Competition at banks to use the 2% de minimis exception 14

15 Tax Credit Bonds Overview Scope and recent legislative history Fundamentals of Tax Credit Bonds ( TCBs ) Changes to TCBs New categories of TCBs and the refundable credit option Qualified School Construction Bonds ( QSCBs ) Build America Bonds ( BABs ) Recovery Zone Economic Development Bonds ( RZEDs ) 15

16 Scope and Recent Legislative History TCB provisions under the Stimulus Act Created QSCBs (IRC 54F), BABs (IRC 54AA), and RZEDs (IRC 1400U-2) Modified other TCBs: New CREBs (IRC 54C), QECBs (IRC 54D), and QZABs (IRC 54E) Refundable credit option framework IRC

17 Fundamentals of Tax Credit Bonds ( TCBs ) IRC 54A TCBs v. Tax-exempt bonds General similarities to tax-exempt bonds The issuer, with exceptions, must be a state or local governmental body or authority Expenditures of proceeds are subject to arbitrage-rebate limitations Must file an informational report upon closing Allocation, private business use and costs of issuance limitations Significant differences: Holder or investor receives a tax credit in lieu of tax-exempt interest and tax credit is includable in gross income 17

18 Fundamentals of TCBs (continued) IRC 54A tax credit amount and rate The credit is included in gross income and treated as interest The credit is an annual credit measured quarterly based on a formula that accounts for the credit rate and the outstanding amount of the obligation The rate is established on the sale date (i.e., a date that there is a binding written contract for the sale of the bond) 18

19 Fundamentals of TCBs (continued) IRC 54A tax credit amount and rate (continued) The rate changes daily and is posted at: Per Notice , the credit rate is based on Treasury s estimate of the yields on outstanding bonds from market sectors selected by Treasury with a rating of between A and BBB for bonds of a similar maturity Notice was published prior to the Stimulus Act s passage 19

20 Fundamentals of TCBs (continued) Maturity of IRC 54A TCBs Treasury publishes maximum permitted maturity monthly and is posted at the web address above The maturity is based on a present value calculation in which the discount rate is 110% of the long-term adjusted applicable federal rate compounded semiannually February s rate and maximum maturity: 5.20% and 13 years; March s rate is 4.53% and is expected to result in an increase of the maximum maturity to 14 or 15 years 20

21 Fundamentals of TCBs (continued) Rules regarding proceeds for IRC 54A TCBs Available project proceeds ( APP ) = sale proceeds less financed costs of issuance (not to exceed 2%) plus earnings thereon (also applies to refundable credit bonds) Issuance date expectations test for expenditures 100% of APP by third anniversary 10% of APP by six months Actual test for expenditures Expenditure period: three years Period may be extended by Treasury Test: 100% of APP spent by end of period Failure to satisfy: redemption of nonqualified bonds within 90 days 21

22 Fundamentals of TCBs (continued) Rules regarding proceeds for IRC 54A TCBs (continued) Reimbursement Timing of allocation award may affect eligibility of reimbursable costs Reimbursement is no later than 18 months after original expenditure Arbitrage and Rebate IRC 148 restrictions apply Exception for investment of APP during expenditure period if spent on qualified purposes Exception for reserve fund 22

23 Fundamentals of TCBs (continued) Reserve fund exception for IRC 54A TCBs Expectation of use to repay bonds Funded no more than in equal annual installments No more than needed to repay Fund is yield restricted to semi-annual long-term adjusted applicable federal rate (i.e., discount rate for maximum permitted term) Stripping of credits Applies to all TCBs, including BABs Credit may be separated from bond Tax-exempt bond stripping rules (IRC 1286) apply Regulations are to be provided 23

24 Fundamentals of TCBs (continued) Carryover of unused credits Applies to all TCBs, including BABs Some differences between BABs and IRC 54A TCBs BABs are not subject to the same tax credit rate pricing and maturity mechanics as IRC 54A TCBs, and have NO allocation limitations BABs are not subject to APP unless the refundable credit option is elected BABs must be eligible to be governmental tax-exempt bonds but for the credit 24

25 Changes to TCBs Allocation for New Clean Renewable Energy Bonds ( New CREBs ) increases from $800 million to $2.4 billion For Qualified Zone Academy Bonds ( QZABs ), 2009 allocation increases from $400 million to $1.4 billion, and the program is extended into 2010 (subject to future carryover) with allocation for that year to be $1.4 billion Allocation for Qualified Energy Conservation Bonds ( QECBs ) increases from $800 million to $3.2 billion For QECBs, implementation of green community programs (which is one of many qualified purposes for QECBs) includes the use of loans, grants, or other repayment mechanisms to implement such programs 25

26 Changes to TCBs (continued) QECBs issued for capital expenditures to implement green community programs shall not be treated as private activity bonds solely because proceeds are to be used for loans or grants to implement green community programs Projects financed under New CREBs, QECBs, QZABs, QSCBs and RZEDs are subject to the prevailing wage standards under the Davis-Bacon Act of

27 Changes to TCBs (continued) Regulated investment companies holding tax credit bonds may elect to pass through the tax credits to their shareholders and are entitled to offset the income with a dividends paid deduction The eligible tax credit bonds include QFCBs, New CREBs, QECBs, QZABs, QSCBs, BABs and RZEDs, including stripped credits therefrom Real estate investment trust beneficiaries may be entitled to the tax credit if the trust holds an eligible tax credit bond 27

28 QSCBs Qualified School Construction Bonds ( QSCBs ) 100% of APP to be used for the construction, rehabilitation, or repair of public school facilities or for the acquisition of land on which a public school facility will be constructed with a portion of the QSCBs Issued by a state or local government within the jurisdiction of which the project is located May allow significant non-governmental involvement 28

29 QSCBs (continued) QSCB allocation $11 billion in each of 2009 and 2010 Additional $200 million in each of 2009 and 2010 for Indian schools, and Indian tribal governments shall be treated as issuers for such purposes Unused allocation may be carried over, and there is not a limit on the years to which it may be carried over Treasury will allocate to the states based upon the amounts a state is eligible to receive under the Elementary and Secondary Education Act of 1965 for the fiscal year prior to the calendar year of allocation 40% of the total allocation for large local education agencies ( LLEA ), using the same allocation methodology for states 29

30 QSCBs (continued) QSCB allocation (continued) A state s allocation is reduced based upon the amount apportioned to the LLEA Any unused LLEA allocation may be reallocated by such agency to the state A qualifying LLEA must meet poverty or financial resources requirements Allocations for possessions reduce the amounts to the states and LLEA 30

31 BABs Build America Bonds ( BABs ) For issuers issuing otherwise tax-exempt governmental bonds (not private activity bonds), the issuer, during 2009 and 2010, may elect to issue such bonds as taxable interest bonds and permit bondholders to receive a tax credit equal to 35% of the interest paid on each interest payment date Capital projects and working capital included Rules similar to tax credit bonds under IRC 54A apply except that credit is determined based upon amount of interest paid 31

32 BABs (continued) BABs (continued) There is NO national ceiling on the issuance amounts There is no APP concept for BABs unless the refundable credit option is elected There must not be more than a de minimis amount of premium over the stated principal amount of the obligation 32

33 BABs (continued) BABs - refundable credit option For capital project BABs issued during 2009 or 2010 (as opposed to financing working capital), issuers may, in lieu of the tax credit to bondholders, instead elect to receive a direct payment from the Federal government equal to the subsidy that would have otherwise been delivered to the bondholders through the Federal tax credit for these bonds The amount of the payment (i.e., the refundable credit) is 35% of the amount of interest payable on the interest payment date Holder receives taxable interest 33

34 BABs (continued) BABs refundable credit option (continued) An interest payment date is any date on which interest is payable by the issuer under the terms of the bond There is NO limitation on the amount of refundable credit BABs that may be issued 100% of APP (net of any amounts placed in a reasonably required reserve fund) must be used for capital expenditures Unless a state s laws are changed after 02/17/09, the taxable interest or credit for any refundable credit bond is to be treated as federally tax-exempt for purposes of such state s income tax laws 34

35 RZEDs Recovery Zone Economic Development Bonds ( RZEDs ) RZEDs are a subset of refundable credit BABs The amount of the refundable credit is 45% of the amount of interest payable on the interest payment date Must be a BAB plus meet the following: 100% of APP (net of any amounts placed in a reasonably required reserve fund) must be used for qualified economic development purposes The issuer must irrevocably elect the refundable credit option 35

36 RZEDs (continued) RZEDs (continued) Qualified purposes are described as expenditures for purposes of promoting development or other economic activity in a recovery zone and include capital expenditures paid or incurred with respect to property in the zone, expenditures for public infrastructure and construction of public facilities and expenditures for job training and educational programs A recovery zone is an area (i) designated by the issuer with significant poverty, unemployment, rate of home foreclosures or general distress, or as economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990, or (ii) with an effective designation as an empowerment zone (under IRC 1391 (b)(2)) or renewal community (under IRC 1400E (a)(1)) 36

37 RZEDs (continued) RZEDs (continued) There is an allocation of $10 billion to be apportioned among the states with each state receiving an amount of allocation determined according to a ratio of that state s 2008 employment losses to such losses for all states Each state is guaranteed to receive at least 0.9% of the total allocation Each state shall apportion the allocation within the state among counties and large municipalities according to a ratio of their employment losses versus the state s losses 37

38 Private Activity Bonds The Stimulus Act includes provisions affecting: Recovery Zone Facility Bonds Industrial Development Bonds High Speed Rail Tribal Economic Development Bonds Multifamily Housing Tax Credits 38

39 Recovery Zone Facility Bonds Another category of exempt facility bonds under IRC % or more of net proceeds used for recovery zone property Recovery Zone Property is depreciable property that is located and first used in the active conduct of a qualified business in a recovery zone Property must be constructed, reconstructed, renovated or acquired by the borrower after the date the recovery zone was designated Recovery Zone has same definition as for Recovery Zone Economic Development Bonds 39

40 Recovery Zone Facility Bonds (continued) Qualified Business means any trade or business other than: Residential rental property or Facilities described in IRC 144(c)(6)(b) (i.e., commercial golf course, country club, massage parlor, hot tub, suntan, racetrack, gambling facility, or business that sells drinks off premises) Total allocation: $15 billion for the period Allocated to states based on proportion that state s unemployment decline from 12/07 to 12/08 is to unemployment decline for the same period in all states States are then to allocate it to counties and large municipalities (100,000+ population) using the same method, looking at unemployment within the state 40

41 Industrial Development Bonds Qualified small issue bonds under IRC 144(a) Proceeds can be used to finance a manufacturing facility that is defined as any facility which is used in the manufacturing or production of tangible personal property For , the definition of manufacturing facility is broadened to include creation or production of intangible property described in Section 197(d)(1)(c)(iii) IRC 197(d)(1)(c)(iii) intangible property is any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item 41

42 Industrial Development Bonds (continued) In addition, for 2009 and 2010, manufacturing facility definition includes a facility that is functionally related and subordinate to a manufacturing facility located on the same site; functionally related and subordinate is defined in the regs for exempt facility bonds ( (a)(3)) and is required to be of a character and size commensurate with the character and size of the manufacturing facility Functionally related and subordinate facilities can be financed even if the manufacturing facility is not being financed with bonds (i.e., already exists) 25% ancillary and related definition does not apply for bonds issued in 2009 and

43 High Speed Rail Exempt facility bonds (i.e., private activity bonds) issued for the purpose of financing high-speed rail facilities under IRC 142(a)(11) and (i) High Speed Rail definition changed from trains expected to operate at speeds in excess of 150 mph to trains that are able to attain a maximum speed in excess of 150 mph Other provisions applicable to high speed rail bonds still apply Private owner must elect not to depreciate and not to take tax credits otherwise available Any bond proceeds not used within three years of issuance must be used to redeem bonds 43

44 Tribal Economic Development Bonds Indian tribal government may issue bonds for any purpose that a state or local government can issue bonds, the interest on which would be exempt under IRC 103 Essential government function test does not apply Can be governmental bonds or private activity bonds so long as meet the requirements to be tax-exempt May not be used for property used in the conduct of Class II or Class III gaming (i.e., all gambling other than social games for prizes of minimal value) Facilities must be located on an Indian reservation $2 billion in allocation, to be allocated to Indian tribes at the Secretary s discretion after consultation with Department of Interior Tribal government must designate 44

45 Multifamily Housing Tax Credits Grants to be made to each state in an amount equal to 85% of the sum of 100% of LIHTC received under IRC 42(h)(3)(i) and (iii) and 40% of (ii) and (iv) of such section, multiplied by 10 Agency uses grants to make sub-awards to finance construction/acquisition and rehabilitation of low income housing; can be done with or without an allocation of tax credits under IRC 42; grant to be made only after good faith attempt to find investment commitments Grants subject to same set aside requirements as tax credits Grants not included in basis of the building for tax credit purposes Grants reduce amount of credits available State agencies will develop process for allocation 45

46 Conclusion Questions? Contacts Moderator Drew Kintzinger (202) Panel Speakers Wally McBride (919) Doug Lamb (804) Mary Nash Rusher (919) Commentators Laura Jones (804) Chris Kulp (804) Bryar Nettles - (804) bnettles@hunton.com Dean Pope - (804) dpope@hunton.com Darrell Smelcer - (404) dsmelcer@hunton.com Caryl Smith - (404) carylsmith@hunton.com 46