With reinvestment rates hovering around zero, private activity bonds issued to finance multifamily housing or other exempt facilities are often issued as “draw down bonds” to avoid negative arbitrage. Draw down bonds have traditionally been treated as “issued” for the purpose of using volume cap when the first $50,000 is advanced, but interest only accrues on proceeds as they are advanced. So, for example, if $50,000 of a $20 million bond issue is advanced at closing, the entire $20 million would be deemed to be “issued” and to have used $20 million of volume cap.

Guidance issued by the IRS in December 2010 threw a wrench into this common practice by requiring that individual bonds be treated as issued only when proceeds were advanced. At best this change increased costs, requiring updated bond counsel opinions and the filing of 8038’s with the IRS with each draw. At worst, this ruling jeopardized the availability of volume cap for a bond issue.

On August 3 of this year, the IRS issued Notice 2011-63, modifying the 2010 guidance to once again permit an entire private activity bond issue to be treated as “issued” for volume cap purposes when the first $50,000 is advanced. This treatment is subject to the condition that all proceeds are advanced before the earlier of (a) the statutory deadline for issuing the bonds, and (b) the end of the third year following the date of the initial advance of $50,000.