Many of the tax-favored bond programs in the American Recovery and Reinvestment Act of 2009 (ARRA) expired at the end of 2010, but qualified energy conservation bonds (QECBs) survived. QECBs must finance “qualified conservation purposes.” Of the many qualified conservation purposes, two desperately needed clarification – capital expenditures for: (1) reducing energy consumption in publicly owned buildings by 20 percent and (2) green community programs. The IRS recently provided this clarification in Notice 2012-44.
The Notice describes how an issuer should calculate energy consumption. The rules are taxpayer-friendly and give issuers plenty of flexibility. Importantly, the Notice establishes a “reasonable expectations” test as of the QECB issuance date. That is, even if the energy savings that the issuer reasonably expects don’t materialize, it won’t jeopardize the tax status of the QECBs. The Notice also generally allows an issuer to meet this requirement by having an engineer certify the expected energy savings, and the Notice provides a sample engineer’s certification.
The Notice also defines “green community program.” It provides a list of permitted purposes for a green community program and sets forth a requirement not previously stated, but which frankly makes good sense and shouldn’t be hard to satisfy – the green community program must provide property or loans that are available to the general public. As an example, the Notice says that a program to replace street lights with LED lights that consume less electricity is a green community program eligible for QECB financing.
Like most of the other ARRA tax credit bond programs, an issuer must have QECB allocation to issue these bonds. However, few QECBs have been issued to date, so there is substantial volume cap remaining. ARRA allocated the authority to issue QECBs among the states and large local governments based on population. The IRS allows these recipients to transfer their allocation to other eligible tax exempt bond issuers, but doesn’t tell them how to transfer it, leaving that question to state and local law. The states and large local governments have taken many different approaches to handling their allocations.
The public finance and public finance tax lawyers at Squire Sanders have experience navigating the allocation process and in issuing QECBs.