4.8.2.2 Expenditure of Gross Proceeds
Understanding whether funds remain “proceeds” at any given time requires an understanding of when funds related to a bond issue will be treated as spent. The following concepts are important to an understanding of expenditures:
EXPENDITURES RELATED TO PURPOSE OF ISSUE – Generally, proceeds may be spent only on capital costs of facilities and costs of issuing the bonds. Once proceeds are actually allocated to a qualified expenditure for a facility, that facility will be treated as financed with proceeds of the bonds. The proceeds will then need to be tracked for purposes of ensuring that the bonds meet the private activity bond or qualified private activity bond requirements, as applicable to the particular type of bonds. If the purpose of the bonds is to finance working capital expenditures, the Regulations provide that proceeds are spent only at times in which the issuer has no “available amounts” on hand available to cover those working capital expenses.
INVESTMENTS – Gross proceeds are considered not spent if they are used to acquire non purpose investment securities (investments purchased before expenditure of the proceeds on their ultimate use). They are simply allocated to those investments temporarily and return to the issuer for ultimate use or reinvestment as the investment securities mature or are sold. During the time gross proceeds are allocated to investment securities, they are tracked for arbitrage purposes, as well as to determine the amounts of investment proceeds that have accumulated.
PAYMENT OF DEBT SERVICE – Generally, gross proceeds that are not sale, investment, or transferred proceeds are spent when they are used to pay debt service on the bonds.
REIMBURSEMENTS – Issuers and conduit borrowers often wish to use bond proceeds to reimburse themselves for costs paid before the issuance of the bonds. Bond proceeds allocated to “reimbursement costs” will be treated as “spent” only if certain requirements are satisfied. See Section 4.4.5, Reimbursement of Prior Expenditures. If these requirements are not satisfied, any bond proceeds that the issuer or conduit borrower attempts to allocate to the reimbursement costs will not be treated as spent and will continue to be subject to the arbitrage yield restriction rules and the rebate requirement discussed in more detail below.