In recent years, issuers of municipal bonds – and other participants in the capital markets – have focused increasingly on the post-issuance compliance of tax-exempt bonds with the provisions of the Internal Revenue Code. Because of stepped-up enforcement by the Internal Revenue Service and the Securities & Exchange Commission, issuers have had to focus more on whether they have met expenditure exceptions to the obligation to rebate arbitrage earnings. They have also had to assure that assets financed with tax-exempt securities have retained a governmental purpose.
It was in this context that the Town of Swampscott, Massachusetts needed to remedy a “change in use” of an asset purchased with tax-exempt bonds. This asset was a former synagogue that the Town purchased in 2006 with the proceeds of tax-exempt bonds. At that time, the Town planned to convert the building into a police station or other Town offices.
As time passed, the Town’s plans changed. The Town decided to build an entirely new police station and the Town renovated its Town Hall. The Town decided that it did not have any further use for the former synagogue – and so offered the building for sale. That sale, closed in November 2013, was to a private developer. Because the sale was to a private party, the Town was required under the Internal Revenue Code to apply the proceeds of the sale, which totaled $1,850,000, to (1) defeasing to maturity or first redemption date any outstanding bonds issued to finance the purchase of the synagogue, (2) defeasing any other bonds issued for a similar capital purpose, (3) funding directly any similar capital purposes, and (4) reasonable costs of the defeasance transaction.
UFASI assisted the Town with identifying the bonds to be defeased, structuring a defeasance escrow (using U.S. Treasury State and Local Government series securities, or SLGs), and executing necessary documents, including replacement bonds. While the main objective of the transaction was maintaining the tax-exemption of the Town’s bonds, the transaction was executed efficiently, producing economic debt service savings of approximately $95,000.