August 07, 2009

Introduction

On June 23, 2009, the Internal Revenue Service released Notice 2009-51 to solicit applications for allocations of the $2 billion national bond volume limitation for issuance of Tribal Economic Development Bonds (TEDBs) pursuant to the newly created Section 7871(f) of the Internal Revenue Code of 1986, as amended. TEDBs create new economic development opportunities for tribes by expanding the types of projects they can finance with tax-exempt bonds. The Notice provides 1) guidance for eligibility requirements for a project to be considered for an allocation; 2) application requirements, deadlines, and forms for requests for allocations; 3) the method the IRS will use to determine allocations; and 4) other interim guidance related to TEDBs and the application process. (Click here for the application.)

Application Deadlines

The IRS will allocate the TEDB volume cap in two $1 billion tranches. Applications for the first allocation of $1 billion must be submitted by August 15, 2009, and TEDBs under this tranche must be issued by December 31, 2010. Applications for the second allocation must be submitted before January 1, 2010 and must be issued by December 31, 2011. (See Allocation Tranches below.)

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TEDB Overview

The American Recovery and Reinvestment Tax Act of 2009 amended Section 7871 of the Code to create TEDBs, which are a new category of tax-exempt bonds. The national limitation of TEDBs is $2 billion. The difference between TEDBs and tax‑exempt bonds otherwise permitted to be issued by Indian tribal governments is that TEDBs are not limited to financing projects that constitute an “essential government function.” TEDBs may be issued to finance any activity for which a state or local government could issue tax-exempt bonds, including private activity bonds for 501(c)(3) organizations, airports, private water or sewer companies, low-income rental housing, and certain manufacturing facilities. Any facilities financed with TEDBs must be located on an Indian reservation.

The Notice also expressly states that TEDBs may be issued to finance golf courses, convention centers, and hotels, subject to the same limitations as state and local governments. However, TEDBs may not be used for gaming facilities, or any portion of a building in which gaming is conducted or housed. The language of the statute had raised questions as to the extent to which hotels that are part of a resort with gaming facilities could be financed with TEDBs. The Notice provides a bright-line test that would be applied to make this determination. Under the “safe harbor” in the Notice, a structure, such as a hotel, will be treated as a separate building from a gaming structure, and therefore eligible for financing, if the hotel has an independent foundation, independent outer walls, and an independent roof. Connections between two adjacent walls of separate buildings, for example doorways, covered walkways or other enclosed common area connections, would not prevent the qualifying building, such as a hotel, from being treated as a separate structure as long as the connections do not affect the structural independence of either wall. Because the safe harbor focuses on the physical structure of a building, a mixed-use facility with a hotel on the upper floors and a gaming facility on the ground floor would not qualify. Therefore if a tribe intends to use TEDB proceeds to construct a hotel or convention center related to a gaming facility, the tribe should ensure compliance with the safe harbor to maintain the tax-exempt status of the TEDBs.

Other components of a resort complex, such as a public golf course, would generally be eligible for financing because they are not within a building structure. It is especially helpful that the Notice specifically states that golf courses can be financed, as the IRS had challenged on audit whether resort-type golf courses met the “essential government function” requirement that applies to the traditional tribal bonds.

The Notice provides that TEDBs may also be used to refund prior bonds or taxable debt in the same manner as other state and local governments, including an advance refunding of prior governmental bonds, subject to all of the applicable requirements of TEDBs. For example, a tribe would be able to refinance on a tax-exempt basis a taxable loan obtained to finance a health facility on an Indian reservation that is leased to a 501(c)(3) organization. Because TEDBs are subject to volume limit, refunding of prior tax-exempt bonds may be a less desirable use of TEDBs because the bonds already have the benefit of exemption, but the Notice provides issuers with this flexibility.

Because TEDB proceeds may be used like the proceeds of any tax-exempt bonds issued by a state, TEDBs can be used to stimulate the financing and development of projects that traditionally could not be financed with tribal tax-exempt bonds. In addition, it may now be more attractive for tribes to use TEDBs to finance projects that have typically been financed by private commercial loans. Tax-exempt bond interest rates are typically lower than private commercial loans.

Application Process and Allocation Amounts

The Notice includes a form of application for a TEDB allocation. The application requires the tribe to provide information such as a project description, project location, expected date the project will be acquired or placed in service, a plan of financing, the allocation amount requested, and a certification that if awarded an allocation, the tribe is ready to issue the TEDBs on or before December 31, 2010, or December 31, 2011, depending on the allocation date. Items requiring a longer lead time for purposes of submitting a complete application include the question of whether all necessary federal, state, and local regulatory approvals for the project have been obtained and the request to provide a reasonably detailed description of the plan of financing, including named underwriters or named investors in a private placement and the status of all other financing sources for the project, including the names and addresses of all entities expected to provide any financing. This information will give the IRS an indication of whether the financing can close by the deadlines provided in the notice.

The application must be submitted by an Indian tribal government that appears on the most recent list published by the Department of the Interior in the Federal Register. If not listed, the tribe must submit a letter from Interior that states it has been acknowledged as a federally recognized tribe. The application must be submitted in hard copy (two copies) and on a compact disc.

If an award is made, the IRS will permit only insubstantial deviations from the application submitted, and even those deviations must be approved by the IRS. A tribe will need to evaluate potential projects to ensure that they are well-defined to avoid having to request changes if it receives an allocation.

Allocation Tranches

The $2 billion TEDB maximum issuance limitation will be allocated in at least two tranches.  The first $1 billion will be allocated to the applications received on or before August 15, 2009.  If the total amount of allocations applied for by August 15, 2009, is less than $1 billion, then each qualified project will receive the full amount requested, and any remaining amount will be available for allocation during the second round of applications, which are due January 1, 2010.  If applications during the first round request more than $1 billion, then each qualified project will be allocated an amount reduced pro rata such that the total allocation does not exceed $1 billion.  The maximum allocation any tribe may request during the first round of applications is $30 million. Tribes may assign their allocations to another tribe for a pooled TEDB offering, and then the tribe issuing the TEDBs may lend the TEDB proceeds back to the other tribes in the pool. As mentioned above, tribes receiving an allocation during the first round of applications must be ready to issue the TEDBs on or before December 31, 2010.

The second application round will allocate the remaining $1 billion, plus any portion of the first unallocated $1 billion. Applications may not be submitted until after August 15, 2009, and must be filed before January 1, 2010. Tribes receiving an allocation must issue the TEDBs by December 31, 2011. The IRS expects the maximum allocation request to be limited to $30 million for the second application round as well, but the IRS reserves the right to increase, decrease, or eliminate this limit.

For the second allocation, a tribe must inform the IRS if it has previously received an allocation of TEDBs for the same project or a “related” project. The Notice provides that a project is related if it is (1) owned by the same entity, (2) located at or near the same site, and (3) is integrated, interconnected, or dependent on the initial project receiving an allocation based on all the facts and circumstances. The IRS has left open the possibility that a tribe could receive a TEDB allocation in excess of $30 million for the same project by applying during both application rounds.

If TEDBs are not issued by December 31, 2010, or December 31, 2011, as applicable, then the TEDB allocation is forfeited. Any allocation amounts forfeited may be available for allocation by the IRS as part of an allocation process to be announced by the IRS in the future.

Additional Assistance

If you have further questions regarding TEDBs or require assistance drafting a TEDB allocation application, the attorneys at Ballard Spahr stand ready to assist. Please contact:

Roxann S. Gallagher (602.798.5431, [email protected]),
Nancy M. Lashnits (602.798.5413, [email protected]),
Frederic L. Ballard, Jr. (202.661.2210, [email protected]),
Linda B. Schakel (202.661.2228 or [email protected]), or
Zachary D. Sakas (602.798.5454, [email protected]).

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