On July 16, 2012, the IRS released Notice 2012-48, which solicits applications for the allocation of available amounts of national bond issuance authority limitation (volume cap) for Tribal Economic Development Bonds (TEDBs) under Internal Revenue Code Section 7871(f). The Notice provides guidance on the application requirements and forms for requests for volume cap allocations, the general process that will be used by the IRS to allocate the volume cap, and information reporting to the IRS concerning various aspects of the allocation process and the issuance of TEDBs.
Background on TEDBs
TEDBs were authorized as part of the American Recovery and Reinvestment Act of 2009. TEDBs allow Indian tribal governments to issue bonds without having to satisfy the "essential governmental function" test and provide relief from the general prohibition on tribal issuances of private activity bonds. However, tribes had to apply for a TEDB allocation, as the legislation contained a $2 billion limitation that was allocated in two tranches.
Notwithstanding IRS notices extending the initial deadlines for tribes to issue their allocation of TEDBs authorized in both the 2009 allocation tranche and 2010 allocation tranche, as of March 31, 2012, $1,802,846,643 of volume cap previously allocated had been forfeited and has now been made available for reallocation under the Notice.
Key Provisions Under the Guidance
- Qualified Issuer. Although only an Indian tribal government is a qualified applicant, the guidance makes it clear that the government can "assign" its allocation to its Section 17 corporation or to a political subdivision of the tribe.
- Joint Ventures. The guidance also makes it clear that an Indian tribal government can apply for TEDB financing to finance its share of a joint project — "provided that the joint project will be located entirely on one or more of the reservations of any of the Indian tribal governments receiving an allocation with respect to such project." This clarification could provide opportunities for credit-worthy tribes to pair up with land-rich tribes. It also does not exclude public-private partnerships, although only the tribal government can use the TEDB financing.
- Impact of Unused or Forfeited Allocations from Earlier Tranches. Tribes that forfeited their 2009 first and/or 2010 second TEDB allocations will not be at a disadvantage in applying again for a new allocation, but future forfeitures will have to be adequately explained or they will count against the forfeiting tribe. Also, tribes that used their prior allocations will be permitted to apply for additional allocations.
Plan of Financing. The IRS Notice contains more stringent requirements that appear to be aimed at preventing tribes that are not "shovel-ready" or "credit-worthy" from securing allocations that might not be issued.
- In general, the new application requires significantly more detail about the projects, the project costs, other sources of financing for the projects and certifications regarding permits and approvals.
Specifically, the description of the financing plan in the application must include, among other things, documentation from an independent third party evidencing that the proposed bonds are reasonably expected to be marketable, including any of the following:
- a credit quality assessment showing that the bonds are investment grade
- a credit enhancement commitment letter
- a letter from an underwriter or financial advisor stating that the sale of the proposed bonds are likely to be successful in a timely manner before the expiration of the volume cap allocation, etc.
The caveat regarding third-party documentation is that the third party must be knowledgeable about the marketability of tax-exempt bonds, so not all financial advisors would be qualified.
- Compliance with Federal Tax Law. The applicant has to certify that it reasonably expects that the proposed bonds will meet the requirements of Code Section 7871(f) and that the applicant has engaged "bond counsel" to render an opinion to the effect that the proposed bonds will meet those requirements.
- Significant Increase in Cap Per Tribe/Applicant. One of the biggest changes under the new methodology is that the IRS has dramatically increased the cap on allocations to allow for larger projects to be financed with TEDBs. The cap will be set by the IRS every two months at the greater of 20 percent of the available allocations or $100 million. The cap will begin at $360 million, but under a formula in the guidance, this amount will decrease as allocations are made (on a first-come, first-served basis to those who submit complete applications).
Specific Application Requirements
The application requirements are similar in many respects to the requirements for the 2009 first and 2010 second allocations. The new or changed requirements set forth in the Notice are as follows:
- Submission Date. Under the Notice, applications will be accepted by the IRS on an ongoing basis; however, an allocation will be deemed forfeited if TEDBs are not issued within 180 days of allocation. Any forfeited amounts may be available for future allocations.
Project Description. The application must set forth a reasonably detailed description of the project to be financed, and must include each of the following:
- a certification that the project will qualify for TEDB financing under Code Section 7871(f)
- the reasonably expected cost of the project, including any portion to be financed by sources other than the TEDBs
- a certification that the project is entirely within the applicant’s reservation, or, if a joint project, within one or more of the reservations of the Indian tribal governments receiving an allocation of volume cap for the joint project
- a certification that no portion of the proceeds will be used to finance any portion of a building in which gaming activities will be conducted or housed
- a statement that all required federal, state, local and tribal approvals for the project, the proposed bonds and any other required financing for the project have been obtained, or if not obtained, a certification that the applicant reasonably expects to receive all required approvals in sufficient time to permit issuance of the proposed bonds within 180 days after allocation of the TEDBs
Financing Plan. As noted above, the application must contain a reasonably detailed plan of financing for the project, including each of the following:
- the dollar amount of TEDBs expected to be issued and the amount of the proceeds to be allocated to the project
- any reasonably expected other sources of financing for the project and a description of how such financing will be allocated to the project
- documentation from an independent third party who is knowledgeable about the marketability of tax-exempt bonds evidencing that the proposed bonds are reasonably expected to be marketable prior to the expiration of 180 days after the volume cap allocation is made; such evidence may include a credit-quality assessment showing that the bonds are investment grade, a credit enhancement commitment letter or a letter from an underwriter or financial advisor stating that the sale of the proposed bonds are likely to be successful in a timely manner before the expiration of the volume cap allocation
- Statement of Readiness. The application must include a certification that the applicant reasonably expects to use the volume cap allocation by issuing the proposed bonds within 180 days after its allocation is made. The IRS may require the applicant to provide additional information or supporting documentation to demonstrate the applicant’s readiness to issue such bonds.
- Multiple projects. An applicant may submit either a single application for volume cap that covers multiple projects (so long as the application includes sufficient information required by the Notice for each project independently of any other project covered by the application), or separate applications for separate projects.
- Joint projects. An applicant may submit an application for an allocation of volume cap to finance its share of a joint project all of which will be owned by Indian tribal governments or which will, in part, be owned by an entity that is not an Indian tribal government, provided that the joint project will be located entirely on one or more of the reservations of any of the tribal applicants receiving an allocation with respect to such project and is subject to the private activity bond restrictions on tax-exempt bonds under Code Section 141.
- Required Declaration. The application must include a declaration of an authorized official under penalty of perjury that, among other things, the application is true, correct and complete.
Volume Cap Allocation Process
- As discussed above, the volume cap amount will be allocated on a first-come, first-served basis.
- Applicants have 180 days from the date of the allocation letter to issue the proposed bonds, or that portion of an allocation for which bonds have not been issued will be treated as forfeited and will be available for reallocation.
- The IRS does not expect to grant extensions to the expiration date of the volume cap allocation; however an Indian tribal government that is unable to issue the proposed bonds within the 180-day period from the date of the allocation letter may reapply for an allocation.
Consent to Public Disclosure By IRS
The IRS requests (but does not require) that the applicant allow IRS to disclose the name of the issuer, the type of the project to be financed, the reservation on which the project is to be located, the cost of the project and the allocation amount awarded.
Deviations from Issuance of Bonds, Proposed Use of Proceeds
The applicant must give the IRS notice of deviations from the proposed use of allocated TEDBs, even though such deviations are insubstantial in nature and otherwise do not require IRS approval. An allocation of volume cap under an application is invalid if there is a significant change relating to the issuance of the proposed bonds or if the allocation of the proceeds of the TEDBs substantially deviates from the information submitted in the application.
New Reporting Requirements
Not later than 15 days after issuance of the proposed bonds, the applicant must send to the IRS a Notice of Issuance of the bonds, which must include the following information: (1) the applicant’s name and taxpayer identification number; (2) the issue price of the bonds issued; (3) the issue date of the bonds; and (4) a description of the project financed with the bonds. This is in addition to reporting the issuance on IRS Form 8038-G.