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Guidelines, applications for tax-exempt bonds now available

WASHINGTON – The Internal Revenue Service has published guidelines for tribes to file applications for up

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to $2 billion in tax-exempt bonds for economic development projects in Indian country approved in the American Recovery and Reinvestment Act.

But time is of the essence: the first application deadline is Aug. 15. The guidelines, called “Notice 2009-52 (Tribal Economic Development Bonds),” were expected to be issued in April after the IRS and the Interior Department received and reviewed comments from the nations. The document was posted on the IRS Web site June 23, leaving nations slightly less than 45 working days to gather and prepare information needed for the 11-page application, which is included with the guidelines.

President Barack Obama’s stimulus package – passed by Congress in February – greatly expands tax-exempt bonding opportunities for tribal governments. For the first time, tribal governments will have all of the same economic tools available as state and local governments to finance public works, home ownership and private economic development.

The new bond provisions allow tribal governments to borrow money at a lower tax-exempt cost; issue a new type of tax credit bond; provide tax credit subsidies of up to $400 million for tribal school construction; and add other incentives to make tribal bonds more appealing to investors and lenders.

The $2 billion figure, also known as “volume cap,” is a nationwide allocation to be shared among tribal governments that apply.

The guidelines detail eligibility requirements; application requirements, deadlines and forms, the method the IRS and Interior Department will use to allocate the money; which is based on project proposals, and “certain interim guidance in this area.”

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According to the guidelines, there will be two $1 billion rounds of applications. The deadline for the first round closes Aug. 15, and bonds must be issued by Dec. 31, 2010 or the cap is forfeited. Applications for the second round are due Jan. 1, 2010, and bonds must be issued by Dec. 31, 2011. Any amounts forfeited in the first round will be reallocated in the second round.

A tribe can apply for a maximum of $30 million regardless of the number of projects it has planned.

If the applications total less than $1 billion, every applicant will receive the full amount requested. If the requests exceed $1 billion, each applicant’s amount will be reduced on a pro-rata basis, or by a percentage of the excess.

The applications require a description of the project, a plan and status for financing, and a statement of readiness to issue bonds by the deadline, as well as certification that the project is within a reservation and that none of the proceeds will be used “to finance any portion of a building in which. ... gaming. ... is conducted or housed” or to finance other property actually used in conduct of gaming.

There was an ambiguity in the gaming limitation, said Townsend Hyatt of the law firm and bond counsel Orrick. He specializes in financial transactions for tribal governments and enterprises.

“The statutory limitation could be interpreted in two different ways: (1) if gaming occurs in any portion of a building, no proceeds can be used to finance any costs of that building, or (2) if gaming occurs in a portion of a building, no proceeds may be used to finance costs of that portion. The Notice (guidelines) indicates that the IRS interprets the statute narrowly to mean that if gaming occurs in any portion of a building, no proceeds can be used to finance any costs of that building. The Notice provides a safe harbor definition of a building for this purpose.

“A structure will be treated as a separate ‘building’ if it has (1) an independent foundation, (2) independent outer walls and (3) an independent roof. Covered walkways and enclosed common areas can be disregarded as long as they don’t affect structural independence of the walls of either building.”

That means a nation can issue tax-exempt bonds to build a stand-alone parking garage for casino clients.

Tom Rodgers of Carlyle Consulting, the leading lobbyist on the issue of tax-exempt bonds for tribal governments for more than six years, welcomed the release of the guidelines, but expressed frustration and a sense of urgency about the little time left for nations to prepare their applications.

“It’s wonderful that this money – $2 billion – has been allocated for economic development for Indian country to do what state and local governments have always been able to do. This is one of the largest, probably second only to the Indian Gaming Regulatory Act, economic development initiatives. So on a substantive level, they’ve made progress and I applaud them, but what is critically important is not only substance but communication of that guidance – it took two-and-a-half months longer than it should have – because every day we lose is a concern.

“Forty-five days is not a lot of time for people to do due diligence, an inventory of needs, to reach out to their local bond counsel and their bankers and, on top of that, there’s a major holiday and it’s summer.”

Rodgers said it’s critical to submit good projects and use all the $2 billion allocation in order to build the case for continuing tribal tax-exempt bond provisions when the stimulus package sunsets in two years. He is urging Indian country to “move quickly and aggressively” on preparing and submitting applications by the deadline.

“We’ve been able to overcome opposition from the previous administration and previous legislators and now Indian country will be able to build hotels and golf courses, and other things that will provide the tribes with money to send their kids to school and provide health services to their people. It’s not about tax-exempt bonds; it’s about building dreams.”