On April 11, 2018, the Internal Revenue Service published Revenue Procedure 2018-26 (“Rev. Proc. 2018-26”), providing new guidance to issuers on the availability of remedial actions to preserve the status of tax advantaged bonds to cure nonqualified use of bond proceeds.

Prior to the issuance of the new Revenue Procedure, the only remedial action available in connection with certain long-term private leases financed with tax-exempt bonds was a redemption or defeasance of the bonds. Now, however, the expansion of the remedial action rules allows for an alternate use of “disposition proceeds.” An issuer may now take cash lease payments received from the disposition of an “eligible lease” (defined below) and put them towards “good” governmental use, thereby preserving the tax-exemption of the applicable bonds. The issuer is time-limited and must make such expenditure within two years of the date of the lease.

A lease is an “eligible lease” if (a) the consideration for the lease is exclusively cash lease payments (regardless of when paid) that are not themselves financed with tax-advantaged bond proceeds, and (b) the term of the lease (i) is at least equal to the lesser of 20 years or 75 percent of the weighted average reasonable expected economic life of the leased property, or (ii) runs through the earlier of (x) the end of the reasonably expected economic life of the leased property at bond issuance or (y) the latest maturity date of the bonds.

This expansion of remedial action options for eligible leases provides a less-expensive means than the sale of those facilities and the redemption or defeasance of related tax-exempt debt. In addition, such expansion will be helpful to issuers that wish to convert bond-financed facilities into public-private partnerships using long-term lease arrangements.

Rev. Proc. 2018-26 provides additional cures for non-qualified use of bond proceeds for Build America Bonds and other direct-pay bonds. Now, an issuer may cure a non-qualified use by simply reducing the amount of the refundable federal tax credit. This is achieved by excluding the portion of the interest allocable to the non-qualified bonds that accrues on or after the date of the non-qualified use on the first Form 8038-CP filed after the non-qualified use occurs. The Form 8038-CP will need to be marked up to include an explanation of this action.

Lastly, Rev. Proc. 2018-26 extends the availability of certain existing remedial actions to direct pay bonds and tax credit bonds that weren’t previously covered. An issuer may now cure a non-qualified use by redeeming or defeasing non-qualified bonds or applying disposition proceeds to an alternative qualified use.

This revenue procedure applies to a non-qualified use that occurs on or after April 11, 2018, and may be applied to a non-qualified use that occurs before April 11, 2018.

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