IRS Updates, Modernizes and Simplifies TEFRA Public Notice and Approval Regulations 

January 9, 2019

Final TEFRA regulations issued by the IRS were published in the Federal Register on December 31, 2018. They apply to qualified private activity bonds (e.g., qualified 501(c)(3) bonds and exempt facility bonds) issued pursuant to public approvals occurring on or after April 1, 2019.

The Final TEFRA regulations in large part simplify, modernize, and relieve administrative burdens of the public notice, hearing, and approval process required by Section 147(f) of the Internal Revenue Code of 1986, as amended (Code).

Virtually all issuers, borrowers, and public finance professionals involved with the issuance of qualified private activity bonds have had exposure to the highly technical TEFRA requirements of the previous temporary regulations that have been in place since 1983 (Temporary TEFRA regulations), urgently in need of modernization and revision to reflect frequent statutory changes.

For ease of reading, what follows is an executive bullet point summary of the major improvements and changes to the Temporary TEFRA regulations that have now been updated and replaced to reflect statutory changes, allow greater flexibility, permit certain curative actions, and recognize the increased speed of information dissemination.

Major Improvements and Changes

  • 14-day minimum notice of hearing period shortened to seven days.
  • Notice of hearing may be by web posting on the public website of either the approving governmental unit or the on behalf of issuer in areas used to inform residents about events affecting them.
  • The term project is used rather than the term facility to provide greater flexibility.
  • Project descriptions are limited to a general functional description of type and use of the project. References to categories of exempt facilities or type and use of the project for other categories of qualified private activity bonds are now sufficient (e.g., a qualified 501(c)(3) bond as defined in section 145 of the Code for a hospital facility and a qualified small issue bond as defined in section 144(a) of the Code for a manufacturing facility).
  • Notice and approval for multiple projects being financed must separately specify the maximum stated principal amount of bonds financing each separate project unless they are (i) located on the same site, adjacent, proximate, and used for similar purposes or (ii) the assets are used in an integrated operation.
  • The maximum principal amount for each project may be determined on any reasonable basis and take into account contingencies, whether or not reasonably expected.
  • Street address, geographical boundaries, or other description of specific geographical location can satisfy the location identification requirement.
  • 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.
  • No “host” approval is required for mortgage revenue bonds, student loan bonds, and the portion of qualified 501(c)(3) bonds that finances working capital expenses.
  • There is a special two-stage public approval process for pooled financings with qualified 501(c)(3) bonds.
  • Deviations of no more than 10 percent between the stated principal amount of bonds in the notice and amount of bonds actually used for the project are treated as insubstantial. Also, use of proceeds to pay working capital expenditures “directly associated with any project” is an insubstantial deviation. Substantial deviations between the stated use(s) or amount(s) in the notice and actual use(s) or amount(s) may be cured by a supplemental public approval before use in a manner or amount not provided for in the original notice.
  • The guidance regarding deviations in public approval information may be applied in whole, but not in part, effective immediately to bonds issued pursuant to a public approval occurring before April 1, 2019. 
  • In person public hearings are still required and may not be canceled.

Related Practices

For further information, readers are invited to call their regular contact in Public and Project Finance at Cozen O’Connor or Jerry Spector at 215.665.2039.