There are costs associated with the issuance of a tax-exempt bond issue such as underwriter's fees, bond counsel, trustees and other charges which may be included in the financing. Tax law limits the amount of these costs of issuance that can be financed with bond or loan proceeds to 2% of net proceeds. If such costs are above this 2% limitation, an equity contribution must be paid by the borrower or from other sources.
Interest payments on the transaction may be financed as part of the issue for a specific period of time. This capitalized interest serves to offset debt service payments when the project is not yet producing revenue.
The borrower should adopt a reimbursement resolution through its Board of Directors regarding the financing as soon as the project is formulated. This resolution may allow the institution to be reimbursed from the issue proceeds for expenses for the tax-exempt project that were paid within sixty days prior to the adoption of such a resolution. CHEFA can give you an example of a form of the reimbursement resolution.
Prior debt may be refinanced on a tax-exempt basis, including an outstanding bond issue, as either an advance refunding or a current refunding. A current refunding is an option when the prior bonds included a call provision, and the prior bonds are currently callable by the institution. The borrower only pays debt service on the new refunding bonds.
It is important to be aware that only one advance refunding is permitted by federal tax law for bonds issued after 1986. There is no limitation on the number of current refundings.
