Last year saw several developments affecting issuers and borrowers of tax-exempt bonds and operators of projects assisted by industrial development agencies ("IDAs") in New York State. We have highlighted below some of these developments.
Recent Case Clarifying Status as Additional Insured in New York. In September 2016, a New York court held that the unambiguous terms of the additional insured clause required that the named insured execute a contract with the party seeking coverage as an additional insured. Absent an agreement between a named insured and the party seeking additional insured coverage, a named insured's agreement in its contract with a third party (such as a lender or a prime contractor) to procure coverage for the third party's construction manager was insufficient to afford the construction manager with coverage as an additional insured under the named insured's policy.
Amendments Relating to Mortgage Recording Tax Exemption in New York. Legislation recently signed into law by the Governor removes the authority of IDAs to grant mortgage recording tax exemptions on that portion of the mortgage recording tax that goes to certain transportation districts within the State. The Governor signed the legislation on September 30, 2016, and the legislation's stated effective date was immediate. However, the Governor included an approval memorandum with the signed legislation which indicates that the Governor signed the legislation on the basis of the Legislature's agreement to a chapter amendment that would change the effective date of the legislation to July 1, 2017. The State Department of Taxation and Finance has issued guidance indicating that the applicable portion of the mortgage recording tax must be paid upon recording until the chapter amendment is signed into law. Once the chapter amendment is signed into law, we expect that the State Department of Taxation and Finance will issue guidance on how mortgagors may apply for a refund.
Amendments Relating to Forms and Policies of IDAs. An amendment to the General Municipal Law governing IDAs took effect in June 2016 and requires all IDAs (a) to use a standard project application containing information about the applicant, the requested financial assistance, estimates of project costs, equity investment, full-time job creation and retention projections and statements regarding compliance with various New York State laws and (b) to adopt (i) a policy containing uniform criteria for evaluating and selecting projects, (ii) a standard project agreement that sets forth the terms under which financial assistance will be provided, (iii) procedures for reviewing projects on an annual basis for compliance with project agreements and (iv) a policy for the suspension, termination and recapture of financial assistance.
Securities Law Developments. In 2014, the SEC announced the Municipalities Continuing Disclosure Cooperation Initiative (the "MCDC Initiative") that applied to all obligated persons and underwriters. Under the MCDC Initiative, if an obligated person or underwriter voluntarily self-reported to the SEC that "materially" inaccurate statements relating to prior continuing disclosure compliance were contained in official statements, favorable settlement terms might be available to the reporting obligated person or underwriter. The December 15, 2016 edition of The Bond Buyer reported that under the MCDC Initiative, the SEC settled with 72 underwriters and 72 issuers including two states, seven state authorities, 29 localities, seven local authorities, nine school districts or charter schools, six colleges or universities, five health care providers, five utilities and one retirement community. In December 2016, a representative of the SEC announced that the SEC does not expect to recommend actions against any additional parties who self-reported but, rather expects to spend its time identifying violations by others.
In April 2016, the Ramapo Town Supervisor and the former Executive Director of the Ramapo Local Development Corporation were charged in federal court with securities fraud in connection with Ramapo's municipal bonds. These are believed to be first municipal bond-related criminal securities fraud charges ever brought. In October 2016, the SEC announced that Ramapo's outside audit firm and one of its senior partners settled an enforcement action in which it was alleged that they had issued fraudulent audit reports in connection with municipal bond offerings by Ramapo and its local development corporation.
Treasury Regulations and IRS Guidance Relating to Tax-Exempt Bonds.
Private Business Use. Effective for management agreements entered into on or after August 22, 2016, IRS Revenue Procedure 2016-44 amended the safe harbors for projects financed by governmental bonds issued by State or local governments or tax-exempt bonds issued for projects owned by Section 501(c)(3) organizations. Revenue Procedure 2016-44 added flexibility to the existing guidelines that apply to the compensation and term of management or service contracts for bond-financed improvements. Compensation based on net profits is still prohibited, but the new safe harbor is based on principles of control of the bond-financed improvements by the governmental issuer or Section 501(c)(3) organization rather than formulas. Effective for bonds sold on or after January 25, 2016, new rules, set forth in Section 1.141-6 of the Treasury Regulations, apply to the allocation of proceeds of governmental bonds issued by State or local governments or tax-exempt bonds issued for projects owned by Section 501(c)(3) organizations. The new rules expressly authorize floating allocation of qualified equity for purposes of determining compliance with private business use requirements.
Arbitrage Restrictions. On July 18, 2016, the IRS published final regulations amending certain arbitrage regulations promulgated under Section 148 of the Internal Revenue Code. The final regulations included changes and clarifications relating to working capital financings, grants, qualified hedges, recovery of rebate overpayments and valuation of investments. On December 9, 2016, final regulations on the definition of issue price were published in the Federal Register. The final regulations are effective for bonds sold on or after June 7, 2017. Issue price is the basis for the calculation of yield on an issue of tax-exempt obligations.