Public Charter Schools Borrowing With Tax-Exempt Bonds, Second ...

chapter four
Eligible Uses of Bond Funds
There are five eligible categories of expenditures of the proceeds of tax-exempt debt:
(1) capital expenditures, (2) refinancing prior debt, (3) reimbursing prior capital
expenditures, (4) working capital, and (5) financing costs such as costs of issuing the
bonds, capitalized interest and reserves. A single bond issue may combine more than
one or even all of these purposes. In addition, proceeds of tax-exempt bonds may
be invested during the period prior to their expenditure for the above mentioned
purposes, creating an opportunity for permissible arbitrage earnings.
A. Capital Expenditure Projects
The most common use of any debt is the acquisition or construction of a project—
land, buildings, equipment and/or related infrastructure. The primary limitation
on the types of projects that can be financed with tax-exempt bonds is that they
must be owned by the nonprofit corporation (public charter school or CMO)
or by a governmental entity. Such projects may not be used (i) in a manner that
constitutes an unrelated trade or business under Section 513(a) of the Internal
Revenue Code (which generally means that it be used in a manner consistent with
the nonprofit purpose of the corporation) or (ii) in the trade or business of another
person or entity (other than another 501(c)(3) corporation or governmental entity)
(a “non-exempt person”).
B. Refinancing Prior Debt
Refinancing outstanding taxable debt, including construction financing, tax credit
financing, bank loans and mortgages, is a very common use of tax-exempt bonds,
particularly (but by no means exclusively) by first time users of tax-exempt debt.
The primary limitation is that the proceeds of the prior debt were used for capital
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