When an entity first decides to undertake a new capital project, one of the most important decisions it will make is choosing what kind of financing method to use. A common option for 501(c)(3) organizations, including hospitals and health care systems, is to issue tax-exempt bonds, which are obligations of a state or political subdivision, the interest on which is exempt from federal income taxation. For some projects, tax-exempt bonds are issued before any spending has begun on the project, but at other times, a borrower may wish to commence, or even complete work, before debt is incurred and reimburse itself for such spending with the proceeds of a later tax-exempt debt issue. Other than for certain preliminary expenditures, for a borrower to reimburse itself for funds expended prior to the issuance of tax-exempt bonds, a borrower must have in place a “reimbursement resolution” that meets the requirements of Treas. Regulation 1.150-2 (the “Reimbursement Regulations”).
Of note, a reimbursement resolution does not commit a borrower to issuing tax-exempt bonds at any point in the future. Rather, it provides flexibility for borrowers, so that if they do wish to issue tax-exempt debt in the future, they have the ability to do so.
For governmental and qualified 501(c)(3) bonds, a reimbursement resolution may be adopted by the bond issuer, or in a conduit borrowing (such as a qualified 501(c)(3) bond, issued by a state or local government entity), by the conduit borrower.
The Reimbursement Regulations stipulate that in order to be effective, a reimbursement resolution (also known as a “declaration of official intent”) must contain certain key pieces of information and must be made within a certain window of time as compared to the date of the expenditures to be reimbursed.
Required Information
- The reimbursement resolution must generally describe the project for which expenditures are to be reimbursed. Reasonable deviations in project description are permitted.
- The reimbursement resolution must state the maximum principal amount of obligations expected to be issued for a project. While the borrower is under no obligation to finance, via reimbursement or otherwise, the full amount stated, the borrower cannot reimburse itself for more than the maximum stated amount without adopting additional reimbursement resolutions.
Timing Limitations
- A reimbursement resolution applies to expenditures made up to 60 days prior to the date such reimbursement resolution is adopted, as well as expenditures made on and after the date such reimbursement resolution is adopted.
- However, in most cases bonds must be issued to reimburse the borrower for such expenditures no later than 18 months after the later of (i) the date the original expenditure is paid; or (ii) the date the project is placed in service, but NOT more than 3 years after the original expenditure is paid.
In practical terms, this generally means that for purchases of equipment, or projects nearing completion, for a borrower to reimburse itself, bonds will need to be issued relatively quickly. For long-term construction projects, if both the entity that has adopted the reimbursement resolution and a licensed architect or engineer certify that at least 5 years is necessary to complete construction of the project, the maximum reimbursement period may be extended to no later than 18 months after the date the project is placed in service but not more than 5 years after the original expenditure is paid.
Exceptions
Under the Reimbursement Regulations:
- A borrower need not have adopted a reimbursement resolution, nor be subject to the above-described timing limitations for (1) costs of issuance; or (2) the lesser of $100,000 or 5% of the proceeds of the issue.
- Certain preliminary expenditures, up to 20% of the issue price of the issue, do not require a reimbursement resolution, and are not subject to the above-described timing limitations. Preliminary expenditures include architectural, engineering, surveying, soil testing, reimbursement bond issuance and similar costs incurred prior to commencement of acquisition, construction or rehabilitation of a project. Land acquisition, site preparation and similar costs do not qualify as “preliminary expenditures.”
Other Considerations
A reimbursement resolution may be made in any reasonable form, including (i) one or more resolutions of the board of directors of the appropriate entity, (ii) action by a person authorized or designated to declare projects for reimbursement on behalf of the appropriate entity, or (iii) specific legislative authorization for issuing obligations for a particular project.
Of note, reimbursement resolutions are project-specific. A reimbursement resolution may include multiple projects, or a borrower may adopt multiple reimbursement resolutions, but the analysis as to timing and amount will be specific to each included project.
While a borrower is not obligated to incur future debt if it adopts a reimbursement resolution, the Reimbursement Regulations require that on the date the reimbursement resolution is adopted, the entity adopting it has a reasonable expectation that it will reimburse itself for such expenditures with proceeds of a borrowing. That is to say that a borrower cannot, as a matter of course, make blanket declarations of intent to reimburse itself for expenditures in order to preserve flexibility but without any actual intent to make such reimbursement. A pattern of regularly adopting reimbursement resolutions, but seldom actually making such reimbursements, could constitute evidence of a lack of a reasonable expectation of reimbursement.
Practical Takeaway
Though seemingly simple, the successful reimbursement of capital expenditures is a detail-oriented process that depends on careful compliance with Treasury Regulation Section 1.150-2.
For more information about capital expenditure reimbursements from tax-exempt bond proceeds, please contact:
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
