On January 13, 2014, the IRS released Notice 2014-9 which contains guidance on the refunding of Recovery Zone Facility Bonds (“RZFBs”) with another issue of RZFBs if certain conditions are met.
What are Recovery Zone Facility Bonds?
RZFBs are a type of bond authorized under the American Recovery and Reinvestment Act of 2009 that could be used to finance recovery zone property located within a designated recovery zone. Under the Section 1400U-3 of the Internal Revenue Code, a recovery zone was an area (1) designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress, (2) designated by the issuer as economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990, or (3) for which a designation as an empowerment or renewal community is in effect as of February 17, 2009. RZFBs financed projects that, historically, could not be financed with tax-exempt bonds.
RZFBs could not be issued without a volume cap allocation for each issuance and such bonds had to be issued before January 1, 2011.
What requirements apply to a refunding of RZFBs?
Until Notice 2014-9, the statute was silent on whether RZFBs could be refunded after January 1, 2011. In the Notice, the IRS has indicated that an RZFB may be currently refunded if it meets the following requirements: (1) the original RZFBs must have been issued prior to January 1, 2011, (2) the issue price of the current refunding issue is no greater than the outstanding stated principal amount of the refunded bonds (with certain requirements for original RZFBs that were issued at a premium or discount), (3) the current refunding issue meets all applicable requirements for the issuance of tax-exempt private activity bonds as qualified bonds (except for the January 1, 2011 deadline) including, without limitation, the requirement under Section 147(b) that the average maturity of the current refunding bonds is no longer than 120% of the average reasonably expected economic life of the facilities financed or refinanced with the net proceeds of such issue.
If an issuance of refunding bonds meets the above requirements, the refunding bonds will be treated as qualified bonds without the necessity of re-designating the recovery zone or the refunding bonds as RZFBs.
The Notice does not apply to any other types of bonds such as Build America Bonds and Recovery Zone Economic Development Bonds.
Notice 2014-9 can be accessed at http://www.irs.gov/pub/irs-drop/n-14-09.pdf.