The Issue Spot: Reimbursement Rules

The Issue Spot PUBL I C F I NANCE I N FOCUS

Reimbursement Rules It is not uncommon for an issuer to begin paying project costs from sources other than bond proceeds with the intent that it ultimately reimburse itself for those costs with proceeds of a future bond issue. If properly reimbursed, the issuer is permitted to treat the proceeds of the bonds as spent – and thus not subject to yield restriction and rebate. Recognizing that an issuer could attempt to avoid the arbitrage restrictions by allocating bond proceeds to expenditures made far in the past, the Treasury Regulations provide rules that establish threshold requirements for using bond proceeds to reimburse expenditures paid prior to the issue date. 1. Nature of Expenditure Requirement Generally, capital expenditures and costs of issuance are eligible for reimbursement. Other limited categories of expenditures, including certain extraordinary working capital expenditures and grants, are also eligible. 2. Official Intent Requirement An official intent – often referred to as the “reimbursement resolution” – must be adopted prior to or within 60 days after the expenditure. The reimbursement resolution must: • be in a reasonable form, indicating the expectation of reimbursement, • contain a general functional description of the project, • indicate the maximum principal amount of the debt to be issued, and • not be made as a matter of course or in an amount substantially in excess if what is reasonably necessary (i.e. no “blanket” resolutions). The three general reimbursement rules are:

3. Reimbursement Period Requirement A reimbursement allocation generally must be made no later than 18 months after the later of:

• the date on which the original expenditure was paid or • the date the property is placed in service

BUT in no event later than three years after the date the original expenditure was paid.

It is useful to note that the requirements set forth in 2 and 3 above do not apply to reimbursements for preliminary “soft cost” expenditures (so long as they do not exceed 20% of the bond proceeds) or de minimis amounts that, in the aggregate, do not exceed the lesser of $100,000 or 5% of the proceeds of an issue.

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Example City begins constructing a project on October 1, 2016. City adopts an reimbursement resolution on January 15, 2017, stating its intent to issue a maximum of $5,000,000 of bonds for the project. The project is placed into service on March 1, 2019. All invoices relating to the project are paid by June 1, 2019.

City issues $7,000,000 of tax-exempt bonds on December 1, 2019. On the issue date of the bonds, the City may properly reimburse from bond proceeds:

• Preliminary expenditures relating to the project, regardless of the date the expenditure was paid, so long as the total amount of the preliminary expenditures reimbursed does not exceed $1,400,000 (i.e., 20% of $7,000,000).

• Construction expenditures for the project paid on or after December 1, 2016, that are not in excess of $5,000,000. Although the “60-day lookback” suggests that any amounts paid on or after November 15, 2016, would be eligible for reimbursement, the reimbursement period requirement provides that an allocation must be made no later than three years after the date of the original expenditure. Furthermore, construction amounts may only be reimbursed within the limit authorized under the reimbursement resolution.

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Key Contacts

Victoria N. Ozimek Partner Austin

Brian P. Teaff Partner Houston

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