The American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) (“ARRA”) created several new tax credit bond programs, and greatly expanded others, for use by State and local governments for certain enumerated purposes. Although tax credit bonds are taxable bonds, they provide a Federal tax credit to bond holders on quarterly credit allowance dates. The exact credit rate and maximum maturity date for QECBs are set by the Treasury as of the date on which there is a binding contract for sale of the QECBs. The tax credit works as a Federal subsidy that results in the issuer paying significantly lower interest costs than on a comparable tax-exempt bond. Accordingly, tax credit bonds are subject to numerous restrictions to ensure that bond proceeds are used for their intended purposes. This memorandum focuses on one type of tax credit bond program, Qualified Energy Conservation Bonds, that may be issued for specified energy conservation purposes.
ARRA imposes a national bond volume limitation (the “Volume Cap”) for Qualified Energy Conservations Bonds of $3.2 Billion, which was allocated among the States and “large local governments” (defined as any county or city having a population of at least 100,000) within the States based on population (collectively, the “Original Allocation Designees”). Any amount allocated to a large local government may be reallocated back to the State or to another eligible issuer of QECBs (generally, political subdivisions and entities empowered to issue bonds on behalf of such entities). In all events, QECBs must be issued to finance qualified conservation purposes located within or attributable to both the jurisdiction of the issuer of the QECBs and the jurisdiction of the Original Allocation Designee. And although there is no deadline by which QECBs must be issued, the amount of QECBs that may be issued cannot exceed the amount allocated to a given issuer.
It is important to remember that Qualified Energy Conservation Bonds are created by Federal tax law, and thus all Missouri bond laws apply. Before determining whether Qualified Energy Conservation Bonds could benefit your community, you must first determine what type of Missouri bond could be issued. In general, if issued as governmental bonds for public purposes, Qualified Energy Conservation Bonds will likely be general obligation bonds, utility revenue bonds, leasehold revenue bonds, certificates of participation or special obligation bonds. Alternatively, if issued for privately owned or used projects, Qualified Energy Conservation Bonds will likely be Chapter 100 Bonds, industrial revenue bonds, industrial development bonds or another type of private activity bond.
ARRA provides that 100% of “Available Project Proceeds” (essentially, sale proceeds plus investment earnings less amounts in a reserve fund) of Qualified Energy Conservation Bonds must be spent to finance “qualified conservation purposes” within three years of the issue date. In addition, the issuer or borrower, as applicable, must enter into a binding commitment with a third party within six months of the issue date to spend at least 10% of the Available Project Proceeds, and not more than 2% of sale proceeds may be used to pay costs of issuing the bonds. Qualified conservation purposes are defined as:
- 1. capital expenditures for the purpose of (a) reducing energy consumption in publicly-owned buildings by at least 20%, (b) implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs), (c) the production of electricity from renewable energy resources in rural areas, or (d) any of the following qualified facilities if meeting specific criteria set forth under the Code for electricity produced from certain renewable energy resources;
- 2. expenditures for research facilities and research grants to support research in the development of: (a) cellulosic ethanol or nonfossil fuels, (b) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, (c) increasing the efficiency of existing technologies for producing non-fossil fuels, (d) automobile battery technologies and other technologies to reduce fossil fuels consumption in transportation, or (e) technologies to reduce energy use in buildings;
- 3. expenditures for mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting;
- 4. demonstration projects designed to promote the commercialization of: (a) green building technology, (b) conversion of agricultural waste for use in the production of fuel or otherwise, (c) advanced battery manufacturing technologies, (d) technologies to reduce peak use of electricity, or technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; or
- 5. public education campaigns to promote energy efficiency.
Additional restrictions apply to “private activity bonds” (defined below), including QECBs, that do not apply to governmental bonds. Principally, any allocation to a State or large local government must be reallocated in a manner that results in the use of not less than 70% of the allocation to the State or large local government to designate bonds that are not private activity bonds. Without any Treasury Regulations or other guidance from the IRS on this limitation, it appears as though this limitation applies to both the allocation to the State and any reallocation to a large local government. Solely for purposes of this limitation, a special rule for bonds to finance green community programs provides that bonds issued for the purpose of providing loans, grants or other repayment mechanisms for capital expenditures to implement green community programs are not treated as private activity bonds. Secondly, the term “qualified conservation purpose” includes only those expenditures that are considered a capital expenditure for Federal tax purposes. For example, QECBs may be issued to finance public education campaigns to promote energy efficiency, but, to the extent expenditures for this purpose are not capital expenditures, proceeds of a private activity QECB may not be used to finance costs of these public education campaigns.
A “private activity bond” is defined as any bond that meets either the private business tests of Code § 141(b) or the private loan financing test of Code § 141(c). In general, the private business tests are met if more than 10% of the proceeds of the issue are (1) used for any private business use, and (2) directly or indirectly (A) secured by any interest in property used for a private business use, or payments in respect of property used in a private business use, or (B) derived from payments in respect of property, or borrowed money used for a private business use. The private loan financing test is met if the proceeds of a QECB are used to make or finance loans to a private business in excess of the lesser of 5% of QECB proceeds or $5,000.