Individual municipal bonds can be purchased from bond dealers, banks, and brokerage firms. You may even be able to purchase them straight from the municipality in some situations. You can buy them in one of two ways: on the primary market for newly issued bonds, or on the secondary market for trading bonds after they have been issued on the primary market.
How do I go about purchasing municipal bonds directly?
- Use the services of a municipal securities dealer, such as a broker-dealer or a bank department. A private client broker is a broker who primarily deals with individual investors at a full-service broker-dealer, though they may also be referred to as “financial consultant” or “financial adviser.” The investor must make an explicit order to buy or sell securities in a brokerage account, and purchases and sells of municipal bonds through a broker-dealer must be preceded by a discussion with the investor.
When selling municipal securities, broker-dealers, like all other forms of investment alternatives, have particular responsibilities to investors. For example, when an investor buys or sells a municipal security, a broker-dealer must provide all material information about the investment to the investor and must give a fair and reasonable price. Full-service When broker-dealers buy or sell bonds for investors, they charge a fee. Broker-dealers that act “as principal” (that is, facilitate trades through their own inventory) charge a “mark-up” when selling bonds to investors and a “mark-down” when buying bonds from investors. The fee is called a “commission” when broker-dealers act “as agent” (that is, when they help identify a buyer or seller who deals directly with the investor). The MSRB pamphlet contains useful information on mark-ups and mark-downs, as well as other fees that brokers may charge.
- Engage the services of an investment adviser who can identify and trade bonds based on your specific or broad instructions. A registered investment adviser (RIA) manages accounts and acquires and sells securities in line with an investor’s agreed-upon plan without requiring individual consent for each transaction. When you engage an RIA, you should receive written paperwork that specifies both your account’s investment policy and the RIA’s investment procedure. To get a better price, RIAs frequently bundle purchases for multiple clients by trading in larger blocks. Account holders are frequently charged a management fee by RIAs. Some advisers price differently based on the interest rate environment and the interest profits that come with it.
- A self-managed account allows you to trade straight online. Another alternative for investors who wish to purchase and sell muni bonds on their own is to use a self-managed account, commonly known as “direct online trading,” which allows them to do so without the help of a private client broker or RIA. This is a broker-dealer account that charges commissions, mark-ups, and markdowns just like a full-service brokerage account. The firm has the same responsibilities to investors as any other broker-dealer, but it may perform them in a different way. For example, disclosure regarding a certain bond could be done only through electronic means, with no interaction with a private client broker. A self-managed account necessitates that the investor comprehend the benefits and drawbacks of each transaction.
- Purchase or sell municipal bond mutual fund shares. Another approach to engage in the municipal bond market is to purchase shares in a mutual fund that invests in muni bonds. Municipal bond mutual funds, which invest entirely or partially in municipal bonds, can be a good method to diversify your portfolio. While municipal bond funds can provide built-in diversification, you do not own the bonds directly. Instead, you hold a piece of the fund’s stock. This is significant because interest rate fluctuations have a different impact on municipal bond mutual fund owners than they do on direct municipal bond owners. Many investors who purchase individual municipal bonds aim to retain them until they mature, despite the fact that bond market values fluctuate between purchase and maturity. Mutual fund managers, on the other hand, are aiming for a stable or rising share price. If rising interest rates cause the market value of bonds in a mutual fund’s portfolio to drop, some of those bonds will be sold at a loss to avoid additional losses and pay for share withdrawals. You are subject to potential swings in the mutual fund’s value as a mutual fund stakeholder.
- Purchase or sell municipal bond exchange-traded funds (ETF). ETFs are a hybrid of mutual funds and traditional equities. The majority of municipal bond ETFs are structured to track an index. The share price of a municipal bond ETF can fluctuate from the ETF’s underlying net asset value (NAV) because it trades like a stock. This can add a layer of volatility to the price of a municipal bond ETF that a municipal bond mutual fund does not have. When an investor buys or sells shares of a municipal bond ETF, the transaction takes place over the exchange between investors (buyers and sellers). When an investor buys or sells shares in a municipal bond mutual fund, on the other hand, the transaction is handled directly by the mutual fund company. Municipal bond ETFs trade like stocks during market hours. A single purchase or sale of municipal bond mutual funds is permitted per day.
Expenses for mutual funds and ETFs include sales commissions, deferred sales commissions, and a variety of shareholder and running fees. FINRA’s Fund Analyzer allows you to compare fund fees and expenses.
Regardless of how you participate in the municipal bond market, the MSRB advises that you think about your investment needs and get written information from your financial professional regarding how fees are charged and which costs apply to your account before investing in a muni bond.
How do I purchase tax-free bonds?
How to Invest in Municipal Bond Funds That Are Tax-Free. An online brokerage account allows an investor to buy and sell bonds directly. They can also be purchased from a bank or a full-service brokerage. Another option is to buy municipal bonds through an exchange-traded fund (ETF) or mutual fund.
Vanguard offers municipal bond purchases.
Vanguard Brokerage sells CDs as well as US Treasury, federal agency, corporate, and municipal bonds. Fixed-income securities can be purchased on both the primary and secondary markets. Using various bond strategies might assist you in getting the most out of your assets.
How do I purchase tax-free bonds via the internet?
Tax-free bonds include a trading mechanism that allows them to be traded electronically or in person. Investing in such tax-free bonds, on the other hand, is simple and pays off handsomely. When opting for such tax-free bonds, one should keep in mind that the subscription period is only open for a limited time.
To trade tax-free bonds, you must submit your KYC information, which includes your Aadhar card, PAN, passport, and voter ID. Trading is available to you via your Demat account after authentication. As a result, trading tax-free bonds is similar to stock market trading.
Is TreasuryDirect.gov a secure site?
Bonds purchased through TreasuryDirect are kept safe in your account with the US Treasury. You have till they develop or you redeem them, whichever comes first. Using savings bonds to pay for some college expenses also provides additional federal tax benefits if all conditions are met.
Do banks offer municipal bonds for sale?
Municipal bonds can be purchased on the primary or secondary markets, depending on whether you want to use them as part of a socially responsible investing (SRI) plan or just to diversify your portfolio. The primary market is often less popular. Municipal bonds are often purchased from a bond dealer, bank, or broker, such as Ally Invest.
If you don’t want to participate directly in the bond market, you can buy bonds through mutual funds or exchange-traded funds (ETFs) (exchange-traded funds). Both of these investments are similar to baskets in that they invest in a variety of underlying holdings.
When you invest in a bond mutual fund or a bond exchange-traded fund, your portfolio gains exposure to all of the fund’s individual bonds. Bond mutual funds and exchange-traded funds (ETFs) can help diversify your bond portfolio. Bond ETFs, like stocks, trade on a stock exchange, thus they may be a more accessible option to invest in bonds than directly in the bond market. Keep in mind that while mutual funds and some ETFs are actively managed, there are usually costs connected with these investments.
When you’re ready to invest in municipal bonds, think about how long you want to hold them. Your investing objectives, asset allocation, risk tolerance, and available cash may all influence your time horizon. Choose a bond with a maturity date that corresponds to when you anticipate needing the funds.
If munis aren’t ideal for you right now, you might progressively realign your holdings toward fixed-income investments (e.g. municipal bonds) as you approach the time horizon for a specific financial objective, such as a down payment on a house or retirement.
Can a 501(c)(3) organisation sell bonds?
The Internal Revenue Code of 1986, as amended (the Code), gives a concise explanation and overview of tax-exempt Bond financing for 501(c)(3) charitable organizations “I.R.C.” 501(c)(3) tax-exempt organization (3) As described in this memorandum, bonds may be issued for most facilities used for the exempt purposes of Section 501(c)(3) organizations. The low interest rates and attractiveness of the debt to lenders and investors are the main benefits of this type of bond financing. Bond financing may enable a user to complete initiatives sooner, broaden the scope of their projects, or redirect their fundraising efforts to other goals. Fundraising can be devoted to other goals as well as debt reduction when facilities are financed by low-interest, long-term bonds.
The goal of this overview is to provide you a general idea of what this document is about. This overview examines tax-exempt bond financing for 501(c)(3) nonprofit organizations (hence referred to as the 501(c)(3) nonprofit organizations) “Under the Internal Revenue Code (I.R.C.), a nonprofit organization is defined as one that is “not for profit.” The information presented may be relevant in assessing if bond financing will be accessible in specific circumstances, how the transaction will be organized and carried out, what benefits will be available, and what restrictions will be imposed. However, Bond Counsel should be consulted early in the process to help determine whether a project qualifies and to ensure that all legal criteria are completed.
BOND FINANCING
What is Bond Financing and How Does It Work? Bond finance is provided by a local government organization, usually a development authority or development corporation (the “Issuer”), in the form of loans, leases, or installment sales. State legislation on bonds differ, although they are available in the majority of jurisdictions. The interest rate is low because the Issuer’s bonds are eligible to pay tax-exempt interest to investors under the Internal Revenue Code, and the Nonprofit benefits from the low interest rate. The money collected from the Bonds is either re-loaned to the Nonprofit by the Issuer or used to acquire facilities that the Issuer will lease or sell to the Nonprofit. The Issuer pledges the loan, lease, or sale agreement as a payment source for the Bonds, and the Issuer is not otherwise liable for the Bonds. Variable and fixed interest rates, prepayment, and long and short maturities are just a few of the terms that can be used to structure bonds. Tax-exempt Bonds issued to fund facilities for use by governmental entities and for-profit organizations are discussed in detail in our “Overview of Governmental Financing” and “Overview of Private Activity Bond Financing and Incentives,” both of which are available upon request.
What Are the Benefits of Bond Financing? Interest on a qualifying 501(c)(3) Bond is excluded from federal income taxation, the alternative minimum tax, and, in most cases, state income taxation. Bond borrowing rates are significantly lower than traditional borrowing rates. SEC and blue sky registrations are frequently waived for such Bond issuance. Another benefit of using Bond financing is that public participation in the financing can generate significant community interest in and support for the nonprofit.
Bonds are repaid in a variety of ways. Bond financing is often secured exclusively by the Nonprofit’s credit and any credit enhancements it provides, as well as assets or other security pledged by the Nonprofit for this reason. To support Bonds issued for their facilities, non-profits frequently use bank letters of credit or other kinds of “credit enhancement,” such as bond insurance. Investors scrutinize and rely on the credit enhancer’s financial health, not the Nonprofit’s, to ensure that the Bonds can be easily sold and earn the lowest interest rates. However, in order to acquire this sort of financing, the Nonprofit’s credit, financial condition, operating history, and fundraising must all satisfy the credit enhancer.
Who is it that buys the bonds? Tax-exempt bonds can be offered publicly or privately. Bonds can be sold to institutional investors, mutual funds, and individuals through an underwriter or placement agent, especially if they are credit improved. Banks may purchase 501(c)(3) Bonds and keep them as loans, albeit the Internal Revenue Service charges higher interest rates on bank-held Bonds unless they are “Bank-Qualified,” as explained below.
What do you mean by “Bank-Qualified Bonds”? Banks and other financial institutions that hold tax-exempt Bonds are generally not eligible to a tax credit for their related carrying expenses, or “cost of funds,” which is defined by the ratio of the institution’s borrowed funds to its equity, making tax-exempt Bonds comparatively unappealing. Most Issuers, however, may designate 501(c)(3) or governmental bonds as “Qualified Tax-Exempt Obligations” provided they expect to issue no more than $10,000,000 in any calendar year. Banks prefer to hold “Bank-Qualified” bonds since they are only subject to a 20% disallowance of the allocable carrying cost. Obligations of the Issuer and any subordinate businesses, as well as some obligations of superior entities, must be aggregated to determine compliance with the $10,000,000 threshold. It’s worth noting that an Issuer’s Bank-Qualified Bonds may affect the superior entities’ capacity to issue Bank-Qualified obligations.
The following are the contents of this Memorandum. The remainder of this memorandum will discuss who can issue 501(c)(3) Bonds and for what purposes, the limitations and requirements imposed by state and federal law on 501(c)(3) Bond financing, typical structures for such transactions, the steps required to complete them, other incentives, and the role of Bond Counsel.
WHEN A PROJECT IS FINANCEABLE
What can be financed? Most facilities utilized for the operation of 501(c)(3) non-profit organizations, such as charities and certain educational and healthcare institutions, can be financed with 501(c)(3) bonds. A maximum of 5% of the profits of such Bonds may be utilized for property that meets both of these criteria “Private business tests” are defined further down. In many circumstances, outstanding conventional debt or loans can be refinanced using 501(c)(3) Bonds if the debtor paid financeable charges and Bond Counsel is satisfied with the documentary record.
Private Business Examinations If more than 5% of the revenues are put to “private business use” directly or indirectly, and if payment of more than 5% of the Bonds is directly or indirectly secured by or to be obtained from property placed to “private business use,” a 501(c)(3) Bond will be disqualified for tax exemption (or payments with respect to such property). Usage by the 501(c)(3) organization that would be considered as “unrelated taxable business revenue” or use by others in any nongovernmental trade or company is referred to as “private business use.” In layman’s terms, while property financed with 501(c)(3) Bonds can be used for exempt purposes by the 501(c)(3) organization, the general public, or governmental units, issues arise when the property is used for non-exempt purposes by other people or entities, or by the 501(c)(3) organization itself. Leases, management contracts, and other similar user arrangements involving funded property are of particular relevance. If the private loan financing test is met, a 501(c)(3) Bond will likewise be disqualified for tax exemption. If the smaller of 5% of Bond proceeds or $5,000,000 is used directly or indirectly to make or fund loans to people other than governmental units, the private loan financing test is met. An indirect loan could be found, for example, if borrowings are used to fund facilities that are used by a smaller percentage of the general public and are funded through user fees. Bond Counsel should review any private company difficulties in light of precise regulations.
Safe Harbors in Management Contracts For-profit firms sometimes manage or run facilities that are supported by 501(c)(3) organizations, notably healthcare organizations. “To ensure that such agreements do not jeopardize the tax exemption of 501(c)(3) Bonds, “safe harbor” principles can be applied. In a nutshell, the guidelines mandate that the compensation of the manager or operator be determined by a periodic fixed fee, a capitation fee (an amount per person regardless of services rendered), a per-unit-of-services fee, or a percentage of gross revenues or expenses, but never by a percentage of net revenues or profits. The maximum length of a contract (including all obligatory renewal options) is determined by the type of remuneration; the higher the fixed compensation, the longer the contract can be extended. Contracts may be for a term of up to 15 years if compensation is based on at least 95% fixed fees; if at least 80% fixed fees, 10-years; if 50% fixed fees or 100% capitation fees (or a combination), 5-years (if the contract is cancellable by the 501(c)(3) within 3 years); if per-unit fees, 3-years (if the contract is cancellable by the 501(c)(3) within 2 years). If the contract has a term of two years or less (cancellable by the 501(c)(3) within one year), a special rule applies to new facilities during a start-up period or to facilities primarily providing services to third parties: compensation can be based entirely on a percentage of fees charged, or a combination of per-unit-of-services fees and a fixed fee (or during the start-up period, a percentage of gross revenues, adjusted gross revenues, or expenses).
It is necessary to document the intention to finance costs. An agreement must be reached for facility costs to be paid prior to the Bond issuance and to be financed with tax-exempt 501(c)(3) Bonds “Not later than 60 days following the payment of those costs, a “official intent” to finance those costs must be stated. A resolution of the 501(c)(3) organization’s board of directors indicating such desire is a basic form of such declaration. An is a “Official intent” means declaring a willingness to finance, establishing a maximum amount of debt covered, and describing the project in general. To determine the sufficiency of an agreement, bond counsel should be engaged “Intentions official”. An “Inducement (described below under “Procedural Steps) by the Issuer also will serve as a declaration of official intent. Bonds may be issued as late as 3 years after the declaration of official intent and as soon as 18 months after the facilities are completed if a declaration of official intent is made. Adopting an eco-friendly lifestyle has no drawbacks “It only preserves the possibility of using Bonds in the future, according to the official intent.
Uses that are not permitted. A 501(c)(3) bond cannot be used to fund an airplane, a private luxury box, a gambling facility, or a liquor store.
BOND ISSUERS
State law applies. Government authorities must issue bonds for 501(c)(3) organizations. Almost every state allows bond financing, yet the types of Issuers and projects that can be funded differ. Preliminary studies, direct project expenses, attorneys’ fees and other financing and issuing charges, interest paid during construction, and some reserve monies are frequently included in financeable costs. Several of the Issuers in Georgia are described below for illustration reasons.
Authorities in charge of development. Development Authorities, which are established by statute in every Georgia city and county and are active in many, can issue 501(c)(3) Bonds to fund the acquisition, construction, improvement, modification, renovation, or rehabilitation of any land, buildings, structures, facilities, fixtures, machinery, equipment, furniture, or other property, provided that a majority of the Development Authority’s directors determines by resolution that the project will develop and promote trade. A Development Authority may not fund a facility unless it will increase or maintain permanent employment in the jurisdiction. Georgia has also established a number of regional development authorities.
Authorities in charge of downtown development. Any incorporated municipality in Georgia can create a Downtown Development Authority. A Downtown Development Authority can fund 501(c)(3) initiatives that it believes would advance the public purposes for which it was established. Downtown Development Authorities, on the other hand, can only fund projects in designated downtown development districts.
Authorities in charge of healthcare. Hospital Authorities and Residential Care Facilities for the Elderly Authorities exist or can be activated in each county, with the ability to issue 501(c)(3) Bonds for specific healthcare projects.
Authorities established under the Constitution. By amending the Georgia Constitution, special authorities with the authority to issue bonds have been established in around two-thirds of Georgia’s counties. In each case, the relevant legislation must be consulted.
ARBITRAGE
Restriction on Arbitrage If bonds are classified as “arbitrage bonds,” they are not eligible for tax exemption. Arbitration rules are complicated, so we’ll just give you a quick rundown. If more than the lesser of 5% or $100,000 in bond proceeds is reasonably expected to be utilized, or to replace funds used, directly or indirectly to acquire higher yielding investments, the bonds are arbitrage bonds. Bond revenues can include cash pledged to pay Bonds, sinking funds, or other sources from which Bonds are expected to be repaid. The term “investment” covers a wide range of contracts and properties that can be assigned a rate of return. Exceptions are made for the temporary investment of proceeds, such as the temporary investment of funds in a bona fide debt service fund or a fund for proceeds awaiting use. Three years is the temporary time for investing proceeds until their use in the acquisition or building of property. Investment yield restrictions do not apply to amounts in a reasonably required reserve or replacement fund, as long as the reserve or replacement fund does not exceed 10% of the issuance proceeds.
Fundraising and Replacement Funds If Bonds are used to support facilities for which other funds have been set aside, these money (together with other School funds that guarantee Bond repayment or have a sufficient “nexis” to the Bonds) may be subject to arbitrage yield restrictions. This can happen if there will be funding associated with the project. Bond counsel should be engaged early to see whether such “replacement funds are formed.
Rebate for Arbitrage Even if Bonds follow the above-mentioned arbitrage criteria, arbitrage earnings in excess of the Bonds’ yield must be rebated to the federal government on a regular basis. The rebate requirements demand that computations and filings be done on a regular basis. There are certain exceptions to the rebate requirement, such as “2-year construction,” “18-month construction,” and “6-month construction.” The Nonprofit’s capacity to comply with the relevant exemption may have an impact on when it wants to finalize the Bond offering.
Construction Exemption for 2 Years. The construction exemption applies to financings in which at least 75% of the obligations’ “net revenues” will be used for construction, reconstruction, or rehabilitation. If the net proceeds are spent in accordance with the following minimum requirements, the rebate requirement is waived: 10% within six months, 45 percent within one year, 75 percent within 18 months, and 100 percent within two years (except that the two year period may be extended to three years if the requirement would have been met within two years but for a reasonable retainage not exceeding 5 percent required to ensure compliance with the terms of a construction contract). The proceeds of the offering (save for monies placed in a reasonably required reserve fund) plus investment proceeds obtained before the end of the period are referred to as “net proceeds.” If an election is made on the closing date, however, net proceeds exclude interest earnings on any reasonably required reserve fund; however, interest earnings on such a fund will be subject to the rebate requirement beginning on the closing date, rather than at the end of the two-year expenditure period. If the Issuer elects to pay a penalty in lieu of paying the rebate amount on or before the closing date, the rebate requirement is deemed satisfied if the Issuer pays a penalty equal to 1.5 percent of the amount of the net proceeds of the issue that are not spent as required at the close of each six-month period after the closing date.
Exemption for 18 months. If all gross revenues (excluding those placed in a reasonably required reserve fund) are expended in accordance with the following schedule, the rebate obligation is waived: Within 6 months, at least 15%; within 12 months, at least 60%; and within 18 months, at least 100% (with an exception for reasonable retainage spent within 30 months).
Exemption for six months. If all gross proceeds (excluding those held in a reasonably required reserve fund) are spent within six months, the rebate obligation is waived.
Exemptions are limited. The need to rebate arbitrage from investment of a reasonably required reserve fund or arbitrage on a bona fide debt service fund in excess of $100,000 per year is not relieved by compliance with the construction, 18-month, or 6-month exemptions.
OTHER LIMITATIONS
Length of 501(c)(3) Bond Financing. Federal law limits the average maturity of a 501(c)(3) Bond issue to 120 percent of the project’s average reasonably projected economic life. The average economic life must be weighed by taking into consideration the costs of the project’s various components. The economic life of a Bond is calculated from the date it is issued or the date the facilities are put into service, whichever comes first. Midpoint lives for personal property under the former ADR system and guideline lives for buildings under Revenue Procedure 62-21 may be used as safe harbors when determining economic lives. Land normally is not to be taken into account in computing the average.
Prohibition on Federal Guarantees. 501(c)(3) Bonds are not entitled to tax exemption if the payment of principal or interest is directly or indirectly guaranteed in whole or in part by the United States or any of its agencies or instrumentalities. Bonds will be recognized as guaranteed by the federal government if 5 percent or more of the proceeds are utilized to make loans guaranteed by the federal government or to invest in federally insured deposits or accounts. Exceptions are given to permit proceeds to be invested in United States Treasury liabilities and to authorize investments of bona fide debt service funds, reasonably required reserve funds, and funds to hold proceeds prior to their initial use.
Projects that are purely speculative. The specific assets to be financed with a 501(c)(3) Bond must be determined with reasonable certainty prior to issuance to comply with several provisions of federal and state law. A 501(c)(3) bond cannot be used to fund unspecified projects or contingencies, or in an amount that is much greater than that required for the project.
Issuance Costs. No more than 2 percent of the profits of a 501(c)(3) Bond may be utilized to pay expenditures associated with the issue of the Bond. Any costs that are not covered by the budget can be covered by other means.
Change in Use. A change in use of a facility financed with a 501(c)(3) Bond to a use for which such a Bond may not have been issued may result in the interest on the Bond becoming taxable or other consequences.
INDUCEMENT
Resolutions to induce inducing inducing inducing inducing inducing Although not strictly required, the first stage in a 501(c)(3) Bond transaction generally involves getting an inducement resolution and agreement from the Issuer (the “Inducement). This constitutes an agreement in principle by an Issuer to issue Bonds for a proposed Project. The Inducement can be used as a declaration of intent “In lieu of a School’s board resolution, the “official intent” stated above will be used.
Expiration. An inducement can have an expiration date or not. In any instance, a 501(c)(3) Bond must be issued within three years following the announcement of official purpose and eighteen months after the later of the date a Project is purchased or placed in service.
FORM OF TRANSACTION
General. Because a 501(c)(3) Bond transaction involves the employment of an Issuer as an intermediary, it differs from a traditional finance transaction. The precise form to be utilized is determined by the parties’ interests as well as local requirements. The Issuer sells the Bond and uses the profits to fund the Project in any transaction. Loans, leases, and installment sales are the three most typical types of transactions.
Loans. By statute, an Issuer may be allowed to loan proceeds from 501(c)(3) Bonds to a Nonprofit for use on a project. The Nonprofit enters into a loan agreement with the Issuer and normally delivers its note as evidence of the loan when this form is employed. The loan agreement and note will be assigned as security for the Bond by the Issuer. The Nonprofit holds title to the project in such a transaction. This is the most basic and widely used configuration.
Leases. The majority of Issuers can, and some must, own the financed project and lease it to the Nonprofit. When this form is employed, the project site is usually ceded to the Issuer, and the project is built or acquired in the Issuer’s name using the Bond proceeds. The project is then leased to the Nonprofit, which agrees to pay rents that will be used to pay down the Bond’s principal and interest. As security for the Bond, the Issuer assigns its lease rights. When the Bond is paid, the Nonprofit usually purchases the project for a little fee.
Sales made in installments. It’s not uncommon to use an installment selling transaction. The Issuer takes title to the project in this transaction, which is analogous to a lease transaction. Rather than leasing the project, the Nonprofit enters into an installment sale arrangement, agreeing to pay purchase price installments equal to the Bond’s debt service. The project’s title may be transferred to the Nonprofit immediately or after the Bond is paid.
Control of the project by a non-profit. The Nonprofit is typically responsible for insurance, taxes, and upkeep under any arrangement, loan, lease, or sale, and has design and construction freedom, and may be considered the project “For all intents and purposes, you are the “owner.” The Nonprofit has nearly the same influence over the project over the length of the funding as it would under traditional financing. Covenants and security mechanisms that are common in traditional lending can also be included in a Bond transaction.
Bonds are eligible for credit. In most cases, neither the Issuer, the local government, nor the state provides any credit for the Bonds, regardless of the transaction’s structure. The bondholders look to the Nonprofit’s underlying commitment, as well as any guaranties, mortgages, security instruments, insurance, letters of credit, or other cash or credit improvements that the Nonprofit may offer to pay the Bonds.
“Demand Bonds with Variable Rates” In the Bond market, specialized financing solutions have emerged that offer extremely attractive terms. ‘The’ “The “variable rate demand bond (VRDB)” or “lower floater” style of financing accesses short-term markets for a longer-term stated maturity, but with a “put” option that allows the bondholder to cause the Bond to be repurchased on behalf of the Nonprofit at regular intervals (typically weekly). owing to the “A variable rate demand Bond with the “put” feature can be sold in the short-term market, which has the lowest interest rates. A remarketing agency can change the interest rate on a Bond like this. A variable rate demand Bond may be kept by a single holder for any length of time and is typically sold at a discount “put” if the holder has other financial obligations or market interest rates have risen to the point that the Bond’s rate is no longer desirable. If a lower floater Bond is “put” due to an upward rate shift, the remarketing agent will set a new, higher rate at which the Bond can be re-placed; if market rates fall below the Bond rate, the agency will reset the rate to the lowest rate that will prevent the Bond from being “put.” Any variable rate demand Bond that is repurchased must have a credit facility from a rated institution available to advance the repurchase price “reintroduce”
PROCEDURAL STEPS
Placement of Bonds. Following the receipt of an inducement and the determination by Bond Counsel that the transaction can be structured as a 501(c)(3) Bond initiative, the Nonprofit will typically place the Bonds through an investment banker or underwriter. Bonds can be placed privately, for example, with an investor group or a financial institution, or sold publicly through a mutual fund. When a bond fund or a public sale is used, disclosure documents are usually prepared. A trustee may be appointed for the issuance depending on the nature and number of bonds.
Documentation required by law. The terms and provisions of the Bond, as well as the supporting paperwork, must be negotiated and agreed upon once the form of Bond sale has been selected. The majority of the transaction’s documentation will be prepared by Bond Counsel. If funds are available, acquisition and building of the Project could begin during this time if a declaration of official intent has been made.
“Hearing on the TEFRA Act. A public hearing is required by federal law “TEFRA” hearing be held at least 14 days after public notice of a proposed 501(c)(3) Bond, as well as the nature and location of the project, is published. Following the public hearing, the Bond must be approved by both the Issuer and an appropriate elected official or legislative body with jurisdiction over the project.
Other Procedures and Validation Prior to the issuance of a Bond, many states need additional procedural requirements. Most Bonds in Georgia, for example, must be judicially validated in a case in which the State, the Issuer, and the Nonprofit all participate. This proceeding will require the publication of a new public notice. The closing date is influenced by both TEFRA and state procedures.
Report on Information. An information report detailing the 501(c)(3) Bond, the Issuer, the Nonprofit, and the project must be filed with the Internal Revenue Service in conjunction with the transaction’s closure.
LIVING WITH A BOND ISSUE
After the Bonds are issued, the Nonprofit has only a few requirements that are different from a traditional loan. The nonprofit’s 501(c)(3) status must be maintained, and the project must not be used by for-profit businesses or operations. The Nonprofit must avoid arbitrage techniques and pay arbitrage rebate if an exemption does not apply.
BOND COUNSEL
Bond Counsel should be retained if they have knowledge with municipal bond law. Bond Counsel’s role is to organize and document the transaction, as well as to provide an opinion on the Bond’s validity and tax status. Bond Counsel fees are paid by the Nonprofit out of the Bond revenues. Other parties may be represented by Bond Counsel, or the Nonprofit, the Issuer, and the Bond purchaser or underwriter may be represented separately. Smith, Gambrell & Russell, LLP is a Bond Counsel firm that is included in the “Red Book.”
SUMMARY
This paper is intended to provide you a quick overview of 501(c)(3) Bond financing. Tax-exempt bonds may offer significant benefits, but they are subject to rigorous federal and/or state regulation. This summary can only touch on a few of the most important problems and should not be construed as a comprehensive examination of all legal issues. Instead, this Overview gives some background material that might be used to start a conversation with Bond Counsel.
Is it wise to invest in municipal bonds in 2022?
The key drivers of the municipal market are all positive, therefore 2022 is expected to see ongoing robust demand for municipal bonds. Taxes are first and foremost. Investors are still concerned about increasing taxes and will do everything possible to avoid them, keeping demand high.
Is it possible to buy bonds through a broker?
Individual bonds can be purchased through a broker or directly from the issuing government agency. The opportunity for investors to lock in a specific yield for a set length of time is one of the most common reasons for purchasing individual bonds. The yield on a bond mutual fund or fixed-income exchange traded fund (ETF) changes over time, whereas this technique provides stability.
It’s crucial to remember that individual bonds must be purchased in their entirety. Because most bonds are sold in $1,000 increments, you’ll need to fund your brokerage account with at least that amount to begin started. While US Treasury bonds have a face value of $1,000, they have a $100 minimum bid and are offered in $100 increments. U.S. Treasury bonds can be acquired through a broker or directly through Treasury Direct.
The foundations of buying an individual bond remain the same whether you’re looking into municipal bonds, corporate bonds, or treasuries: you can acquire them as new issues or on the secondary market.