On December 31, 2018, the Internal Revenue Service (“IRS”) published final regulations (the “Final Regulations”) regarding the public approval requirement for tax-exempt private activity bonds.

The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) set forth in the Internal Revenue Code (the “Code”) a public approval requirement for private activity bonds to qualify as tax-exempt. Each issue of private activity bonds by a governmental unit must receive approval from the issuing governmental unit or, if issued on behalf of a governmental unit, approval from the governmental unit the issue was issued on behalf of, after a public hearing is held with reasonable public notice provided.

The Final Regulations apply to public approvals that occur on or after April 1, 2019. A summary of the Final Regulations is provided below.

Publication Requirement

The Final Regulations shorten the required minimum notice period from 14 calendar days to seven calendar days before the public hearing.

Publication Methods

Residents of the governmental unit that issues the bonds, or the governmental unit on behalf of which the bonds are issued, must receive public hearing notice. Under the Final Regulations, permissible public hearing notice publication methods include: (a) publication in at least one newspaper of general circulation available to the residents; (b) publication via radio or television broadcast to the residents; (c) publication on the approving governmental unit’s primary public website, in an area of the website that is used to inform residents about events affecting such residents (e.g., public meetings) or on the public website of the conduit issuer; or (d) a publication method permitted under state law for public hearing notices of the approving governmental unit, so long as the public hearing notice is reasonably accessible.

Notably, the IRS rejected proposed regulations that required a second publication method when notice was published on a website. Issuers remain responsible, however, for maintaining records showing that a public notice was timely posted to an appropriate website.

Public Hearing Notice Content

The required content of the public hearing notice remains unchanged and must include: (a) a general functional description of the type and use of the project; (b) the maximum stated principal amount of the bonds to be issued for project financing; (c) the name of the initial legal owner or principal user of the project; and (d) a general description of the project location.

The Final Regulations, however, provide additional clarification to the public hearing notice content:

a. The term “project” rather than “facility” is used to provide greater flexibility, particularly for a single project.

b.  A project description is sufficient if it identifies the project by reference to a particular category of bond to be issued, together with information on the type and use of the project to be financed (e.g., “a qualified 501(c)(3) bond as defined in Section 145 of the Code for a hospital facility” or “a qualified small issue bond as defined in Section 144(a) of the Code for a manufacturing facility”).

c. Notice and approval for multiple projects being financed must separately specify the maximum stated principal amount of bonds to finance each separate project unless (i) they are located on the same site, or on adjacent or proximate sites, and used for similar purposes or (ii) the assets are used in an integrated operation.

d. The maximum principal amount for each project may be determined on any reasonable basis and take into account contingencies, whether reasonably expected or not.

e. Street address, geographical boundaries, or other descriptions of specific geographical location can satisfy the general description of project location requirement.

f. Notice and approval can include a significant beneficial party of interest as an alternative to the name of the initial legal owner or principal user of a project (e.g., a 501(c)(3) organization that is the sole member of a limited liability company or a general partner of a partnership that owns a project may be treated as a true beneficial party of interest).

Guidance on Deviations

The Final Regulations provide guidance addressing deviations in the actual use or amount of bond proceeds.  Deviations of no more than ten percent between the stated principal amount of bonds in the notice and amount of bonds actually used for the project are treated as insubstantial. The use of proceeds to pay working capital expenditures “directly associated with any project” is also an insubstantial deviation. Deviations from the stated use or amount of bond proceeds that are not insubstantial (referred to as “substantial deviations”) will cause the bond issue to fail to satisfy the public approval requirement. The Final Regulations allow, however, for a post–issuance supplemental public approval in order to cure a substantial deviation , provided that (i) as of the issue date the issuer reasonably expected that there would be no substantial deviations; (ii) the substantial deviation results from unexpected events or unforeseen circumstances that occur after the issue date; and (iii) the supplemental approval is obtained before any such use of the proceeds in a manner or amount that was not provided for in the original approval.