1200 PR.02 Procedure for Ensuring Post-Issuance Tax-Exempt Bond Compliance

Revision Date: 
September 17, 2015

I.      Organizational Responsibility. 2

II.    Private Business Use. 3

A.        Basic Compliance Methodology. 4

B.        Category-Based Rules. 5

1.    Ownership. 5

2.    Lease of University Property. 7

3.    Use of University Property. 7

4.    Management Contracts. 8

5.    Utility Output Contracts. 9

6.    Sponsored Research Agreements (SRAs) 10

7.    Clinical Trial Agreements (CTAs) 11

8.    Material Transfer Agreements (MTAs) and Other Research Support Agreements. 11

9.    Corporate Researchers Working at the University. 12

10.  Technology Transfer & Licensing Agreement

11.  Unrelated Trade or Business (UTB) Activities. 13

12.  Naming Rights. 17

13.  Joint Venture, Partnership and Limited Liability Company (LLC) Agreements. 18

14.  Other Actual or Beneficial Use of University Property. 18

III.  Record Retention. 19

A.        Basic Compliance Methodology. 19

B.        Category-Based Rules. 19

IV.  Arbitrage. 20

A.        Rebate Policy. 21

B.        Yield Restriction Policy. 22

V.    Replacement Proceeds. 22

A.        Sinking Funds as “Replacement Proceeds”. 23

B.        Gifts as “Replacement Proceeds”. 23

VI.  Allocation of TEB Proceeds to University Expenditures. 24

VII. Refunding. 28

VIII.        Extinguishment/Merger. 29

IX.  Post-Issuance Disclosure. 32

X.    Religious Entanglements. 34

XI.  Remediation. 35

Overview

This Procedure documents the processes adopted by the University to ensure compliance with the tax-exempt bond (TEB) requirements stated in Policy 1200 Post-Issuance Tax-Exempt Bond Compliance (TEBC).  This Procedure also provides guidance to all University units involved in TEBC so they understand and are able to carry out their roles in these processes.

I.Organizational Responsibility

The Vice President for Finance and Chief Financial Officer (VPF) has primary responsibility for ensuring and monitoring post-issuance compliance with TEB regulations.  The VPF is responsible for approving revisions to Policy 1200 TEBC on the recommendation of the Vice President and General Counsel and for approving certain project-level decisions impacting TEBC. 

The TEBC Director is responsible for carrying out the operational responsibilities as set forth in this Procedure and in the job description.  This includes, but is not limited to, analyzing and approving requests to undertake activities that involve private business use or, in certain cases, forwarding a recommendation regarding such activities to the Senior Director–Tax and International Compliance, or the VPF for approval.  The TEBC Director also chairs the Tax-Exempt Bond Compliance Committee (TEBCC) and as such coordinates the work of the Committee and the implementation of its decisions.  The TEBC Director keeps current with TEBC developments by attending training sessions and preparing presentations for internal and external groups.

The TEBCC, whose members include representatives from the Office of the General Counsel (OGC) and the Finance Department, is responsible for recommending revisions to Policy 1200 TEBC, and for developing, approving and implementing procedures (including this Procedure) to implement this Policy.  The TEBCC is authorized to revise Policy 1200 as necessary or advisable to conform to IRS or other regulations or laws.  In addition, the TEBCC is authorized to make clarifying, non-substantive revisions to improve the clarity of the Policy.  The TEBCC recommends workflows, changes to staffing and job positions, IT structures, etc., as necessary to implement Policy 1200, all to be approved through normal channels.  The TEBCC has authority to review the operations of University units to assess compliance efforts.  The TEBCC provides legal, tax and technical counsel and advice to the VPF and the TEBC Director and at least every two years meets with the VPF for a training/briefing session on TEBC issues. The TEBCC sets training requirements for staff, and works with the TEBC Director to deliver and implement the training. 

II.Private Business Use

The University’s TEBs, which are qualified 501(c)(3) bonds, will lose their tax-exempt qualified status if more than 5 percent of the net proceed [1] of the bond issuance or $15 million, whichever is less, are used for any private business use (PBU).   For this reason, Policy 1200 prohibits the approval of any use of TEBs for PBU in excess of 5 percent of a bond series’ net proceeds or $15 million, whichever is less.   Because the IRS considers the use of the bond proceeds to finance the bond issuance costs as PBU, the allowable PBU percentage is reduced by the cost of issuance percentage [2].

PBU occurs when private business users are given special legal entitlements to use TEB-financed property.  Private business users include corporations other than 501(c)(3)s; 501(c)(3)s if their on-campus activities constitute unrelated trade or business for either the 501(c)(3) or the University; and government entities other than the fifty states and their subdivisions.  Special legal entitlements to TEB-financed property fall into the following categories, which are discussed in more detail in the Category-Based Rules section below:

  1. Ownership
  2. Lease of University property
  3. Use of University property
  4. Management contracts
  5. Utility output contracts
  6. Sponsored research agreements (excluding clinical trial research agreements)
  7. Clinical trial agreements
  8. Material transfer agreements
  9. Corporate researchers working at the University
  10. Technology Transfer and Licensing Agreements
  11. Unrelated trade or business activities
  12. Naming rights
  13. Joint ventures, partnerships and limited liability companies agreements
  14. Other actual or beneficial use of, or economic benefit from, University property

Note:  According to the IRS regulations, activities are PBU only if they are carried out in TEB-financed space. Policy 1200 and it associated procedures, however, use the term PBU to refer to activities that arguably meet the criteria set forth in the IRS regulations for PBU, regardless of whether they take place in TEB-financed facilities.

A.Basic Compliance Methodology 

       The University’s policy is to engage in private business use (PBU), only to the extent that sufficient non-TEB funding can be allocated to cover 100% of the PBU, with exception permitted in certain circumstances.  (Note that for capital projects which fall into the Qualified Building Improvement (QBI) exception [3], there is no PBU).  Any allocation of TEB financing to PBU must be approved by the Senior Director– Tax and International Compliance or VPF as an exception.  The University implements this policy by:

  1. Identification: establishing guidance for the University’s units to enable them to identify activities that may be PBU and to report them to the TEBC Director for decision-making (see Procedure 1200 PR.02 Procedure for Ensuring Post-Issuance TEBC).  The identification systems vary by category of PBU. Section B– Category-Based Rules below specifies the identification system for each category.
  2. Decision-making: specifying how the TEBC Director, often in cooperation with OGC, the Tax Office or other units, determines whether the identified activity should be treated as PBU [4] and if so, whether it should be permitted.  Full information must be gathered and reported prior to decision-making, including the details and location of the (proposed) activity (including any use of ISPs or facilities used by multiple users), the financing structure of those facilities, and information about other past or present PBU in those facilities.  The TEBC Director will approve the PBU activity only if:
  3. The proposed PBU would not make the PBU percentage of a building come close to 15 percent [5]; and
  4. Any projects with TEB financing for the facilities used either:
    • meet the Qualified Building Improvement exception; or
    •  have enough non-TEB funding to allow non-TEB funding to be documentably allocated to fully cover the PBU; and
  5. Any allocation of non-TEB funding to the PBU would not use up most of the non-TEB funding available for PBU allocation for that project.

If these three conditions are not met, the TEBC Director will advise the user to explore ways to reduce or eliminate the amount of PBU or, if that is not possible, the TEBC Director will forward the request to the Senior Director, Tax and International Compliance.  The Senior Director, Tax and International Compliance can approve the use of TEBs for PBU as long as the available PBU allowance for the bond series following the approval is greater than 2% of the bond proceeds.  All requests that reduce the available PBU allowance to less than or equal to 2% of the bond proceeds must be approved by the VPF. 

  1. Tracking: tracking all PBU activity by location and duration in a master database maintained by the TEBC Director. At least annually, the TEBC Director will prepare a spreadsheet showing the TEBs used for PBU by project by bond series for Series X forward as required by the IRS for Form 990 Schedule K.  The capital projects to be included in this analysis are those that: (a) are financed with outstanding (i.e. non-retired) TEB series; (b) have remaining expected useful lives; and (c) do not fall into the QBI exception.  If this annual review reveals that more than 5 percent of the net proceeds of the bond issuance or $15 million, whichever is less, is used for PBU [6], then the TEBC Director will work with OGC to remediate the situation in accordance with the requirements under U.S. Treasury Regulation Sections 1.141-12 and 1.145-2.  If self-remediation is not possible, then OGC will attempt to negotiate a closing agreement with the IRS (see Section XI of this Policy).
  1. Training: training staff in how to identify possible PBU and refer the activity for further analysis.  For each category below, appropriate staff will be trained, and the TEBC Director will monitor to ensure that training is repeated periodically and that new staff is trained as appropriate.

B.Category-Based Rules 

      Activities involving external entities are analyzed based upon the following fourteen categories.  An activity that fits more than one of the categories must be analyzed using the rules in each category.  If it is treated as PBU in one category, the fact that it is non-PBU in another is not relevant:  the University must treat it as PBU. 

1.Ownership

   Identification: Ownership of TEB-financed property by an entity other than the University, another 501(c)(3) or a state governmental agency is considered to be PBU [7].   An exception to the ownership requirement is described in Section VI.2 of this Procedure.  This exception permits TEB-financed capital projects in leased space under certain conditions.  

‘i.   To ensure that the University’s TEB-financed buildings are not sold to external parties that are neither 501(c)(3)s nor state governmental units, University Properties (UP) must work with OGC on the sale documents and OGC must refer the sale to the TEBC Director for approval before the documents are executed. 

  1. To prevent the possible transfer of ownership to an external party of a TEB-financed capital project in leased space, UP must contact OGC and OGC must refer to the TEBC Director for approval the termination of all long-term leases (that is, leases with an original term more than ten years).   The long-term leases must be referred to the TEBC Director for approval because some of them might have TEB-financed capital projects because they fit into the exception described in Section VI.2 of this Procedure.  
  1. Decision-making:
  1. With respect to University-owned buildings proposed for sale, the TEBC Director will determine if the buyer is a 501(c)(3) or a state governmental agency.  If the answer is yes, then the TEBC Director will approve the sale.  If the answer is no, then the TEBC Director will determine whether there are any TEB-financed capital projects in the building proposed for sale.  If there are not, then the TEBC Director will approve the sale.  If there are, then one of the following actions will be taken in order to comply with IRC Section 145 requirement that all TEB-financed property be owned by the University, another 501(c)(3) or a state governmental agency [8]. Either:

1. The TEBC Director cannot approve the sale; or

2.  The University will redeem any portions of the bonds allocable to the TEB-financed improvements in the building or take other appropriate action (such as removal or destruction of improvements), unless the improvements are worn out, obsolete, or otherwise valueless.

  1. With respect to long-term leases that will be ended, the TEBC Director will determine if the owner of the building is a 501(c)(3) or state governmental agency.  If the answer is yes, then the TEBC Director will approve the termination of the lease.  If the answer is no, the TEBC Director will determine whether there are any TEB-financed capital projects in the leased space.  If there are not, then the TEBC Director will approve the termination of the lease.  If there are, then either:

1. The TEBC Director cannot approve the termination of the lease; or

2.   The University will redeem any portions of the bonds allocable to the improvements or take other appropriate action (such as removal or destruction of improvements), unless the improvements are worn out, obsolete, or otherwise valueless.

c.   Tracking: Not applicable.  There is no “PBU Ownership” to track because PBU ownership of TEB-financed property is not allowed. 

2.Lease [9] of University Property

Lease of TEB-financed property by an entity other than the University, another 501(c)(3) or a state governmental agency is considered to be PBU. 

  1. Nonresidential leases to external entities:
    1. Identification:
      1. At least annually, the TEBC Director will use the Facilities Building List to enter all of the buildings that are leased to external parties into the PBU Database. 
      2. UP, working with OGC, must refer to the TEBC Director for approval any first-time lease of Yale-owned property.  Once a Yale-owned property is approved for lease to external parties, subsequent approvals are not required.
      3. The TEBC Director, working with Financial Reporting, will periodically run reports listing all rental income institution-wide, and then compare the list of buildings with rental income to the list of all University property leased to outside persons and entities in the PBU Database.  The Director will investigate any differences between the two lists and determine which such leases involve TEB-financed space.
    2. Decision-making
      1. Any first-time lease of space must be approved by the TEBC Director or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 prior to execution to control PBU in TEB-financed space.[10]
  1. Tracking: All leases to external parties deemed to be PBU will be tracked in the PBU database. 
  1. Residential leases to external entities
  1. Identification:
    1. Dormitories and other facilities providing housing exclusively for students, faculty, staff, and members of their cohabiting families are not treated as PBU.
    2. Except for student dormitories, residential leases will be treated as PBU if they are not limited to students, faculty, staff, and members of their cohabiting families, or if they permit residents to conduct a trade or business from the premises.
    3. Housing open to the general public is PBU even if it happens to be leased by a student, faculty, or staff member.
  2. Decision-making: First-time lease/use of a University property for a residential use that will be treated as PBU requires TEBC Director, or Senior Director, Tax and International Compliance, or VPF approval as described in Section II.A.2.
  3. Tracking: All residential leases to external parties deemed to be PBU will be tracked in the PBU database.

 

3.Use of University Property

Use of TEB-financed property by an entity other than the University, another 501(c)(3) or a state governmental agency is considered to be PBU unless it fits into an exception as provided by U.S. Treasury Regulation Section 1.141-3(d). 

  1. Identification: 

University departments must work with OGC to execute a use agreement whenever a University facility will be used by an external party.  OGC must refer the use agreement to the TEBC Director for approval before execution of the agreement.

  1. Decision-making

All use agreements must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 prior to execution to control PBU in TEB-financed space.

  1. Tracking: All use by external parties deemed to be PBU will be tracked in the PBU database. 

4.Management Contracts

  1. Identification:
    1. A management contract is defined by the IRS as a management, service, or incentive payment contract with a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility. Examples would include management of a gym, a parking garage, environmental services, building maintenance, food courts, a retail unit, or package handling, where the outside company has an ongoing presence in the facility.  Exemptions include contracts for janitorial services, office equipment repair, and hospital billing.
    2. For management agreements handled by UP: UP must work with OGC on their property management, parking management and tenant services agreements.  OGC must refer all such agreements to the TEBC Director for approval before they are executed.
    3. For all other management agreements: Business Managers and Purchasing Department buyers are responsible for identifying all management contracts. Business Managers should refer to Purchasing any management contracts.   
    4. Management contracts are not treated as PBU when they fit into one of the safe harbors described in Rev. Proc. 97-13 as revised by Section 3.02 of Notice 2014-67 or into one of the exceptions provided by U.S. Treasury Regulation Section 1.141-3(d). 
    5. All management contracts must be forwarded to the TEBC Director.
  2. Decision-making: The TEBC Director will work with the party that identified the management agreement (i.e. UP, Purchasing, or Business Manager) and with OGC to see if the contract can be structured to meet any of the safe harbors of Revenue Procedure 97-13 as revised by Notice 2014-67 or any of the exceptions provided by U.S. Treasury Regulation Section 1.141-3(d).  If not, it will be treated as PBU and must be reviewed and approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
  3. Tracking: All management contracts deemed to be PBU will be tracked in the PBU database.

 

5.  Utility Output Contracts

  1. Identification: The Director of Utilities will refer to OGC for review all contracts in which the University sells utilities (electricity, gas or water) to external entities. OGC screens for PBU.   The principles used by OGC to determine whether a utilities contract is PBU include:
    1. Load response contracts do not create PBU, but should nevertheless be negotiated to fit within the short-term output contract exception if possible, by having a term less than three years. 
    2. Sales to state governmental entities, or to 501(c)(3)s if their activities are not UTB for either the University or the 501(c)(3) are not PBU.
    3. Straightforward pay-for-the-utilities-you-use contracts do not create PBU.
    4. The sale of utilities as part of a lease to private entities is PBU (because the lease is PBU). 

Any contract deemed to be PBU by OGC must be forwarded to the TEBC Director.

  1. Decision-making: All sales of utilities that are treated as PBU must be reviewed and approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A2 above.
  2. Tracking: All utility output contracts deemed to be PBU will be tracked in the PBU database.  Where utilities are provided to a PBU lessee, the lease will be tracked in the PBU database and the corresponding percentage of utilities usage will be allocated as PBU for the generating facility.

 

6.Sponsored Research Agreements (SRAs)

  1. Identification:

Note: For the purposes for Policy 1200 and the associated Procedures, sponsored research agreements (SRAs) are agreements in which a sponsor gives Yale money to do research[11].

  1. Federal SRAs or federal-prime subawards:  If the only intellectual property rights are the Federal Government’s Bayh-Dole rights[12], then these agreements are not treated as creating PBU, per Rev. Proc. 2007-47.  Office of Sponsored Projects (OSP) will identify federal SRAs that do not incorporate Bayh-Dole.  Federal SRAs or federal-prime subawards with intellectual property provisions other than those of Bayh-Dole are treated the same as corporate SRAs. 
  2. Foundation or other charitable organization sponsored research agreements: These agreements rarely, if ever, create PBU because the sponsor is a 501(c)(3) and the activity is not an unrelated trade or business for either the University or the sponsor.  Thus, these agreements are not treated as PBU.
  3. Corporate SRAs:  These agreements must either use the standard Yale Corporate Sponsored Research Agreement, or be screened by OSP to ensure they fit into the Rev. Proc. 2007-47 safe harbor.  If reasonable attempts to negotiate into the safe harbor fail, then OSP must refer the agreement to the TEBC Director for approval.
  4. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU.  Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.  OSP may not process the contract unless and until it is approved.  Approval will be location-specific and duration-specific.  Any changes in location or extensions will require re-approval.
  5. Tracking: Approved PBU contracts will be tracked in the PBU database. 

 

7.Clinical Trial Agreements (CTAs)

  1. Identification
    1. Clinical Trial Agreements (CTAs) that OSP classifies as “Organized Research” for F&A purposes are considered to be SRAs for purposes of Policy 1200 and this Procedure (see previous section). 
    2. CTAs that OSP classifies as “Other Sponsored Activities” for F&A purposes are treated as being primarily for patient care, and are not considered to be SRAs and thus are not generally PBU.[13]
  2. Decision-making: Not applicable because CTAs are either (1) classified as “Organized Research” and subject to the process described for SRAs above; or (2) classified as “Other Sponsored Activities and not PBU.
  3. Tracking: Not applicable because the patient-care CTAs subject to this section are not PBU. 

 

8.Material Transfer Agreements (MTAs) and Other Research Support Agreements

  1. Identification:

Note: Material Transfer Agreements (MTAs) are agreements in which a sponsor gives Yale materials (e.g., a unique strain of mice), free or for a nominal charge, to do research. 

Note: For purposes of PBU analysis, agreements for other forms of research support are treated the same as MTAs as described below.  Examples include agreements where external parties provide equipment, software, or intellectual property rights to assays or other experimental methods. 

  1. MTAs from the federal government:  If the only intellectual property rights are the Federal Government’s Bayh-Dole rights,[14] then these agreements are not treated as creating PBU, per Revenue Procedure 2007-47.  OSP will identify federal agreements that do not incorporate Bayh-Dole.  Federal MTAs with intellectual property provisions other than those of Bayh-Dole are treated the same as corporate MTAs. 
  2. Foundation or other charitable organization MTAs: These agreements rarely, if ever, create PBU because the sponsor is a 501(c)(3) and the activity is not an unrelated trade or business for either the University or the sponsor.  Thus, these agreements are not treated as PBU.
  3. Corporate MTAs:  These agreements must be screened by OSP to ensure they fit into the Rev. Proc. 2007-47 safe harbor.  If reasonable attempts to negotiate into the safe harbor fail, then OSP must refer the agreement to the TEBC Director for approval.
  4. Purchases: When the University pays full price for the material, the agreement is not analyzed as a research contract and thus is not treated as PBU.  It is only PBU if there are special legal entitlements for the sponsor, such as assignment of space to the sponsor.
  5. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU.  Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.  OSP may not process the MTA unless and until it is approved.  Approval will be location-specific and duration specific.  Any changes in location or extensions will require re-approval.
  6. Tracking: Approved PBU MTAs will be tracked in the PBU database. 

 

9.Corporate Researchers Working at the University

  1. Identification: OSP screens all research contracts for clauses authorizing a corporate researcher to work at the University.  OSP requires a separate Visiting Scientist Agreement for such arrangements, which provides that any resulting Intellectual Property (IP) belongs to the University consistent with Rev. Proc. 2007-47’s safe harbor.  If reasonable attempts to negotiate into the safe harbor fail, OSP must refer the agreement to the TEBC Director for approval. 
  2. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU.  Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VP F&BO as described in Section II.A.2 above.  OSP may not process the Visiting Scientist Agreement unless and until it is approved.  Approval will be location-specific and duration-specific.  Any changes in location or extensions will require re-approval.
  3. Tracking: Approved PBU contracts will be tracked in the PBU database. 

 

10.Technology Transfer & Licensing Agreements

  1. Identification

Infrequently, the Office of Cooperative Research (OCR) negotiates a technology transfer and licensing agreement that includes some sponsored research as part of the whole arrangement.  These agreements will be treated as SRAs for purposes of PBU analysis.  If indicated under Section II.B.6 Sponsored Research Agreements above, OCR must refer such arrangement to the TEBC Director for approval. 

  1. Decision-making: The TEBC Director and OGC will determine whether the agreement is PBU.  Any PBU agreement must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.  OCR may not execute the agreement unless and until it is approved.  Approval will be location-specific and duration specific.  Any changes in location or extensions will require re-approval
  2. Tracking: Approved PBU license agreements will be tracked in the PBU database. 

 

11.Unrelated Trade or Business (UTB) Activities

  1. Background

Use of bond proceeds or bond-financed property by a 501(c)(3) organization such as the University in an unrelated trade or business (UTB) activity is treated as PBU for TEBC purposes. 

Definition:  The term “unrelated trade or business” means any trade or business that is not substantially related to the organization’s charitable (e.g., educational, research, and patient care) purpose.  An activity rises to the level of a trade or business only if it is carried on in a regular and continuous manner, is considerable in scope, and is entered into with the intent of realizing a profit. The fact that an activity does not actually produce a net profit in a given year is not sufficient to exclude it from the definition of trade or business.

The scope of UTB is broader than activities that generate unrelated business taxable income (UBTI), since the latter generally excludes dividends, interest, rents, royalties, gains and other income categories. 

Exceptions include any trade or business (1) in which substantially all the work is performed for the organization without compensation; (2) which is carried on primarily for the convenience of members, students, patients, officers, or employees; or (3) which is the selling of merchandise received as gifts or contributions. 

  1. UTB Category-Based Rules

The following is a nonexclusive list of potential UTB activities and the specific University processes to ensure compliance with the limitation on PBU.

  1. Sale of merchandise: The sale of merchandise in TEB-financed facilities can occur in permanent locations on a full-time basis (e.g. Peabody Museum Store) or in temporary locations on a temporary basis (e.g. selling Yale-insignia clothing during reunions on tables).

Note: Sale of merchandise directly related to the University’s educational purpose is a related activity and is thus not considered UTB.  For example, book sales related to and directly preceding or following a University sponsored lecture or talk are not UTB.

  1. Identification:
    1. Permanent locations for the sale of merchandise:  The TEBC Director and the Tax Office will review sales activity and determine whether the activities constitute UTB.
    2. Temporary locations for the sale of merchandise: Business managers must identify these situations as they arise and report them to the TEBC Director.
  2. Decision-making:
    1. Permanent Locations:  The TEBC Director and the Tax Office will determine whether the proposed sales activity constitutes UTB.  Approval by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF is required to create new UTB sales locations as described in Section II.A.2 above.  Expansion or relocation of existing UTB sales locations must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
    2.  Temporary Locations:  Sales in temporary locations will be reviewed by the TEBC Director and the Tax Office for UTB.  All UTB sales must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
  3. Tracking: The locations of the UTB activities from the sale of merchandise will be tracked in the PBU database.  
  1. Technical Service Agreements (TSAs)[15]
    1. Identification: By definition (see footnote 15),these agreements are UTB because they are not substantially related to the University’s educational, research and patient care missions and they have a profit motive.  Yale executes a sufficient number of TSAs for it to be considered a trade or business.  Therefore, OSP will forward all TSAs to the Tax Office and the TEBC Director, with the exception of TSAs requested by Internal Service Providers (ISPs), which are discussed in the following section. 
    2. Decision-making:  The Tax Office and the TEBC Director will reach agreement as to whether the TSAs are UTB.  TSAs that are deemed to be UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
    3. Tracking:  The TEBC Director will track all UTB TSAs in the PBU database.
  2. External Sales by Internal Service Providers (ISPs)
    1. Identification:  An ISP sale to an external client may constitute UTB if providing the service to that client is unrelated to the University’s mission and if the activity can be considered a trade or business because it is continuous, regular and considerable and is entered into with the intent of making a profit.  ISPs generally use TSAs to sell services to external parties.  External sales by ISPs are identified at two points.
      1. Before an ISP provides services to external users, the ISP must obtain approval from the University’s ISP Standards committee; and
      2.   Annually, all ISPs must report their external and internal revenues to the ISP Standards committee.

A Tax Office representative and the TEBC Director are both members of the ISP Standards committee.

  1. Decision-making: Prior to approval by the ISP Standards committee, the new or existing ISP’s external activities must be reviewed for UTB by the Tax Office and the TEBC Director.  If deemed to be UTB, the external activities must be approved by the TEBC Director or the Senior Director. Tax and International Compliance, or the VPF as described in Section II.A.2 above.
  2. Tracking:  Approved UTB by ISPs will be tracked in the PBU database.
  1.  Use of University Property
  1. Identification. Yale Conferences & Events, Athletics, the Peabody Museum and any other department that would like to permit an external party to use University facilities must work with OGC to execute a use agreement.  Before the use agreement is signed, OGC must refer the agreement to the TEBC Director for approval  
  2. Decision-making:  The TEBC Director and the Tax Office will determine whether the proposed use is considered UTB because it does not support the University’s mission and can be considered to be a trade or business because it continuous, regular and considerable and is entered into with the intent of making a profit.  Use of University facilities by external parties for educational, research or patient care purposes is a related activity and does not constitute UTB.  All use of University facilities by external parties must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A2.
  3. Tracking:  The UTB uses will be tracked in the PBU database.  
  1. Sponsored research agreements (SRAs) and clinical trial agreements (CTAs)
    1. Identification: These agreements are rarely UTB because they are generally both “related” and lack a profit motive.  Nonetheless, OSP will identify possible UTB when it reviews proposed SRAs and CTAs and report them to the TEBC Director. 
    2. Decision-making: The Tax Office and the TEBC Director will review these agreements and determine whether the SRAs and CTAs are UTB.  Any agreement involving UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
    3. Tracking: The TEBC Director will track UTB SRAs and CTAs in the PBU database.
  2. Activities that Generate Dividends, Interest, Capital Gains, Royalties  and Rents
  1. Identification: These activities may be considered UTB if the activity is unrelated to the University’s mission and if the activity is considered to be a trade or business because it is continuous, regular and considerable and is conducted with an intent to make a profit. The TEBC Director in cooperation with the Tax Office and Financial Reporting will monitor and review these revenues on a periodic basis to identify possible UTB activities. 
  2. Decision-making: The Tax Office will determine whether the identified activities are UTB.  All activities deemed to be UTB must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2 above.
  3. Tracking: Those activities deemed to be UTB will be tracked in the PBU database.  
  1. Other UTB activities
  1. Identification: The TEBC Director and the Tax Office will monitor and review external revenues periodically, and UBTI activities reported on the Form 990-T annually, to:
    1. Identify UTB activities that should have been (but were not) pre-approved by the TEBC Director, or Senior Director, Tax and International Compliance, or the VPF under one of the preceding sections; and
    2. Identify types of UTB activities that are not covered in one of the preceding sections.
  2. Decision-making: In this case, the identification of the possible UTB occurs after the occurrence so steps must be taken to ensure identification and approval before recurrence.  Depending on the reason for the post-occurrence identification, the TEBC Director will take one of the following actions.
    1. If the department with unreported UTB activity should have reported the UTB activity according to Policy 1200, the TEBC Director will contact the department to inform it that either the unreported activity is retroactively approved or, if it is still ongoing, that it must be discontinued.  The TEBC Director will also inform the department of the reporting and approval requirements of Policy 1200 and this Procedure to avoid unreported UTB activities in the future.
    2. If the UTB activity was not reported because it was not included in Policy 1200 and this Procedure, the TEBC Director will recommend that the Policy and Procedure be amended to include the omitted type of UTB.

The TEBC Director, in coordination with the TEBCC, is authorized to develop and impose interim procedures and requirements to address types of UTB not reflected in Policy 1200 and this Procedure while such a policy amendment is pending. 

  1. Tracking:  The locations of any income generating activities that constitute UTB will be tracked in the PBU database. 

 

12.Naming Rights

  1. Identification
  1. When the University enters into a contractual agreement giving a party legal entitlement to name a TEB- financed facility, or portion thereof, after a for-profit entity, such contract may give rise to PBU with respect to the named space.  This also applies when the space is named after an individual or nonprofit entity whose name overlaps with the name of a commercial business with which such individual or nonprofit is associated (e.g. Donald Trump or the Donald J. Trump Foundation, and The Trump Organization.)
  2. If a facility is named after a for-profit entity other than pursuant to a legally binding commitment – e.g., in gratitude for the donation of an unrestricted gift—such naming opportunity might not be treated as PBU, but this will depend on the facts and circumstances. 
  3. The following naming opportunity will not be treated as PBU: If a facility is named for an individual or nonprofit entity whose name does not overlap with the name of a for-profit entity with which the person or nonprofit is associated (e.g., Bill Gates and Microsoft Corporation).
  4. The Office of Development will identify all naming opportunities that do not fall within the exclusion described in sub-paragraph (i)(c) above and will refer them to the TEBC Director for review and approval prior to any final decision or the execution of any enforceable agreement.
    1. Decision-making: Any naming opportunity identified by the Office of Development and referred to the TEBC Director under paragraph (i)(d) above will be reviewed for purposes of determining whether such opportunity gives rise to PBU.  If the TEBC Director determines that such naming opportunity would give rise to (or should be treated as giving rise to) PBU, it will be referred to the VPF for approval. 
    2. Tracking: Naming opportunities that are referred to and approved by the VPF will be tracked in the PBU database following execution of the final agreement.

 

13.Joint Venture, Partnership and Limited Liability Company (LLC) Agreements

  • Identification: Yale University’s Policy 3411 on Joint Ventures defines certain arrangements between the University and external parties as “joint ventures”.  According to Policy 3411, the proposer of a joint venture is responsible for reviewing it with the University’s Tax Department, OGC and TEBC Director.   In general, an arrangement may be PBU if it is a joint venture, partnership, or LLC agreement that includes at least one entity that is not a 501(c)(3) and that involves the use of space in a University facility.   Also note that joint ventures might be UTB and result in unrelated business taxable income (UTBI).
  • Decision-making: The TEBC Director, in conjunction with the Tax Office and OGC if appropriate, will determine if the use constitutes PBU.  All PBU use of University property must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2.
  • Tracking: Those activities deemed to be PBU will be tracked in the PBU database.  

 

14.Other Actual or Beneficial Use of, or Economic Benefit from, University Property

  1. Identification: Any other arrangement that conveys special legal entitlements for beneficial use of University property or that creates priority rights to the use or capacity of a facility or that provides special economic benefits (even if there are no special legal entitlements) must be reported to the TEBC Director for approval.
  2. Decision-making: The TEBC Director, in conjunction with OGC if appropriate, will determine if the use constitutes PBU.  All PBU use of University property must be approved by the TEBC Director, or the Senior Director, Tax and International Compliance, or the VPF as described in Section II.A.2.
  3. Tracking: Those activities deemed to be PBU will be tracked in the PBU database.  

III.Record Retention

A.Basic Compliance Methodology

The University will retain all records for the length of time required to comply with IRS TEB regulations or the Tax Regulatory Agreements (TRAs) associated with each bond issuance, whichever is longer.   Currently, records of TEB issuances and related post issuance compliance documentation must be maintained for the life of the bond (which, for the University, has ranged from 25 to 40 years) plus three years per IRS regulations and for the life of the bond plus six years per the TRAs.  For refundings, the record retention period includes the original issuance. 

The TEBC Director is responsible for identifying the documents to be retained, for identifying and training the person responsible for retaining each type of document, for maintaining records showing the responsible person and the exact location of the records (either physical or electronic), and for periodically auditing the records.

If records are moved from the location recorded by the TEBC Director (e.g. sent to an offsite storage facility or moved to a different server), notice of such relocation must be given to the TEBC Director in advance, describing the destination of the records and providing sufficient information to permit prompt retrieval of the records.  If hard-copy records are transferred to electronic storage, advance approval must be obtained from the TEBC Director.  All electronic files and information must satisfy the IRS’s requirements for electronic storage systems.

No employee shall discard or destroy any information identified in the TEBC Director’s inventory during the period such records are required to be maintained. 

B.Category-Based Rules

The following categories of documents evidencing use of facilities will be retained as follows:

  1. Research Contracts and Grants[16]
  2. The Office of Sponsored Projects’ (OSP’s) electronic record retention system will retain the executed award document and any subsequent modifications/amendments along with the following key identifying fields: PBU status (Y/N), beginning and end dates, primary locations, and principal investigator.  OSP will provide the TEBC Director with those documents and field information upon request. Management Agreements

The TEBC Director will retain all management contracts and associated documents along with key fields including PBU status (Y/N), beginning and end dates, and locations.

  1. Leases

University Properties will retain the lease and sublease documents along with a summary document with key identifying fields, such as, for example, address, beginning and end dates, and square footage.  University Properties and the TEBC Director will determine whether other key identifying fields and field information needs to be retained.  University Properties will provide the TEBC Director with those documents and field information upon request.

An exception to the preceding paragraph is made for one-year leases for graduate student, faculty and staff housing.  Because it is infeasible to retain the high volume of these short-term leases for the life of the bond series, University Properties, the Office of Graduate Housing, OGC and the TEBC Director agreed upon an alternative strategy for documenting compliance.  Annually, University Properties and the Office of Graduate Housing certify, in writing, that (1) the residential facilities were only leased to Yale graduate students, faculty and staff and (2) the leases prohibited lessees from operating a business from the Yale facilities.  These certifications are supported by a copy of the lease and addendum, if any, that were in use during the prior year.

IV.Arbitrage

TEBs lose their tax-exempt status if they violate the IRS’s arbitrage rules. In general, profits or “arbitrage” is earned when the gross proceeds of a bond issue [17] are used to acquire investments that earn a yield that is in excess of the yield on the bonds issued.  Because Congress did not intend TEBs to be used to earn arbitrage, the Internal Revenue Code contains two separate sets of arbitrage requirements. They are:

  •  Yield restriction requirements, which generally provide that in the absence of an applicable exception, bond issue proceeds may not be invested at a yield that is “materially higher” than the yield on the bonds issued; and
  • Rebate requirements, which generally provide that when arbitrage is earned on an issue, the excess earnings must be paid to the U.S. Department of Treasury, even if an exception to the yield restriction requirements applies.

Arbitrage may be earned in two ways:

  • Directly, if the bond proceeds are invested at an interest rate higher than the interest rate the University pays on the bonds; and
  • Indirectly, if the bond proceeds are used to “replace” funds, called “replacement funds”, which are then invested at an interest rate higher than the bond interest rate.   Gifts or funds in the endowment can be viewed as replacement funds if they were reasonably expected to be available for a capital project that is TEB-financed instead.  Replacement proceeds can also be sinking funds which are reasonably expected to be available to pay debt service or provide security for TEBs.

In general, the University will seek to comply with certain exceptions to the arbitrage requirements, as described in this section, to avoid having to restrict yields and/or pay rebates on bond proceeds. The University will also seek to avoid having funds be characterized as “replacement funds” as described in the following section.

A.Rebate Policy

  1.  The University will seek to comply with the Construction Exception to the rebate requirements for all construction bond issues.[18]  Pursuant to this exception,  Controller’s Office must ensure that all “available construction proceeds” will be allocated to expenditures within the time periods indicated below (measured from the issue date of the bonds):
    • At least 10% within 6 months;
    • At least 45% within 12 months;
    • At least 75% within 18 months; and
    • 100% within 24 months (subject to certain limited exceptions).
  2. For purposes of this Section A, available construction proceeds will be deemed to have been “allocated” to expenditures at the time the University pays for the expense with University funds.  While not required, it is the University’s practice to expend funds and submit requisition requests to CHEFA well in advance of these deadlines[19].
  3. If an issue is not a construction bond issue or if the University fails to satisfy the requirements of the Construction Exception in connection with a construction bond issue,  the Controller’s Office should consult OGC regarding complying with alternative exemptions from the rebate requirements or making appropriate rebate payments.

B.Yield Restriction Policy 

  1. To the extent the University issues construction bonds and satisfies the requirements of the Construction Exception, the University will in all likelihood also satisfy the less stringent requirements of the Reasonable Temporary Period Exception to the yield restriction requirements.[20]
  2. If the University complies with the Reasonable Temporary Period Exception, the net sale proceeds and investment proceeds of the issue may be invested until needed for the project in higher yielding investments for a “reasonable temporary period” of three years (or a special five-year period if a licensed architect or engineer certifies that such longer period is necessary to complete the project). 
  3. If an issue is not a construction bond issue or is a construction bond issue that fails to satisfy the requirements of the Construction Exception, the Controller’s Office should consult with OGC to develop a plan to comply with the Reasonable Temporary Period Exception or some other applicable exemption from the yield restriction requirements or, in the alternative, to ensure that the University makes appropriate yield reduction payments.

V.Replacement Proceeds

“Replacement proceeds” are subject to the same yield restriction and rebate requirements as bond proceeds.  Replacement proceeds are amounts that have a sufficiently direct “nexus” to an issue or to the purpose of the issue to conclude that the amounts would have been used for that purpose if the proceeds of the issue were not used or expected to be used for such purpose.  Replacement proceeds include, but are not limited to, pledged funds and sinking funds.  A pledged fund is any amount that is directly or indirectly pledged to pay principal or interest on an issue.  A sinking fund includes any debt service,[21] redemption, reserve, replacement[22] or similar fund to the extent reasonably expected to be used to pay principal or interest on an issue.  Sinking funds include funds that are formally designated as such, as well as any fund that is expected to be used (even indirectly) to pay debt service on an issue.  If amounts are deemed to be replacement proceeds of an issue, the University is required to comply with the yield restriction rules or an exemption therefrom in respect of such amounts in order to prevent the bonds from being subject to arbitrage rules.     

A.Sinking Funds as “Replacement Proceeds” 

  1. The University seeks to avoid having its endowment, or any portion thereof, constitute a sinking fund.  To that end:
  1. The University will not make principal or interest payments directly out of its endowment; all interest and principal payments on TEBs will be provided for as part of the University’s operating budget; and
  2. The University will avoid any internal or external communications that suggest that its endowment is a dedicated source of funds for the satisfaction of interest and principal payment obligations on TEBs.
  1. More generally, the University will seek to avoid actions or statements that might support the characterization of any portion of its endowment or other financial assets of the University as a sinking fund. 

B.Gifts as “Replacement Proceeds”

  1. For any facility whose construction costs will be financed at least in part with TEBs, the University will endeavor to structure and size the issue to take into account any gifts that are expected to be received.
  2. The University will seek to avoid having gift amounts treated as replacement proceeds by ensuring that:
    1. Fundraising materials do not solicit donations specifically for the “bricks and mortar” of the TEB-financed facility or for the payment of debt service on such facility;
    2. The facility is not the principal focus of fundraising materials, even if the materials do not restrict any donated funds to the costs of that project; 
    3. Unless donor considerations dictate otherwise, gift instruments are clear that donated funds can be allocated to items that are not directly related to the cost of constructing the facility; and 
    4. If a donor cannot be persuaded to include language in the gift instrument disclaiming any obligation on the University’s part to use the gift for any particular purpose (including construction of the building being named for the donor), the gift instrument is at least clear that the gift can be used to fund maintenance expenses, a depreciation reserve or the programs conducted in the facility, rather than being restricted to “construct,” “build” or “establish” the TEB-financed facility.
  3. With respect to any facility the construction of which was less than 100% financed by TEBs, it is permissible to deviate from the guidelines set forth in paragraph 2 above with respect to solicitations for gifts in amounts equal to or less than the portion of the construction cost that was not financed with TEBs (i.e., the non-TEB cost shortfall); any amounts raised in excess of such non-TEB cost shortfall through the use of fundraising materials or gift instruments that deviate from the guidelines set forth in paragraph 2 above, however, will most likely be deemed to be replacement proceeds of the bond issue. The Controller’s Office should consult with OGC to develop a plan to comply with the yield restriction requirements or an applicable exemption therefrom or, in the alternative, to ensure that the University makes appropriate yield reduction payments with respect to such excess amounts.
  4.  If a pledged gift or an anticipated bequest has a connection to a particular project, the Budget and Planning Office will consult with OGC to determine whether the connection constitutes a sufficiently strong “nexus” to the project such that non-TEB funds, such as taxable debt or department reserves, should be used to pay for the project pending receipt of the pledged gift or anticipated bequest.
  5. The appropriate Development Office personnel and attorneys in OGC will be apprised of the guidelines set forth in this section.  The TEBC Director will monitor to ensure that training is repeated periodically and that new staff and attorneys are trained as necessary.

VI.Allocation of TEB Proceeds to University Expenditures

There are a number of federal requirements that must be met when allocating TEB proceeds to University expenditures.  These requirements relate to what kind of University expenditures can be financed with TEBs, what documents must be created and retained to document the allocation, and the timeframes within which the allocations must be made.  The Controller’s Office allocates TEBs to University expenditures and thus has primary responsibility for ensuring that this allocation complies with the following federal requirements and University policies.

1)   Use of TEB Proceeds:  The University’s policy is to use TEB proceeds only for capital expenditures (as determined at the time the expenditure is made) and costs of issuance.

2) 100% Ownership Rule:  To comply with federal tax law[23], the Controller’s Office will allocate TEB proceeds only to capital projects that will be owned by Yale or by another 501(c)(3) organization or by a state governmental unit. Capital projects that will not be owned by Yale, another 501(c)(3) or a state governmental unit will be funded with non-TEB funding sources.

An exception is made for capital projects in space that is not owned by Yale, another 501(c)(3) or a state governmental unit if the following conditions are met:

  • The useful life of the capital project does not exceed the remaining term of the lease and the landlord can terminate only for breach; and
  • It is reasonably expected that the University will lease the building indefinitely or purchase the building eventually.

3)   Private Business Use:  To comply with federal tax law, Capital Management the Controller’s Office will not allocate TEB proceeds to capital projects in space that is or may be used for PBU by:

  • Only allocating TEB proceeds to projects specified by the TEBC Director; and
  • Not financing any capital projects with 100% TEBs to allow at least some future intended or unintended PBU of the project.
  1.   Declarations of Intent:  In general, whenever a capital project is approved and a reasonable expectation has been formed that the project will be paid for in whole or in part with TEBs, the approval of the project will be accompanied by a written declaration by the Yale Corporation (or other authorized approver) of its intent to use TEB proceeds to finance all or a portion of the project’s costs (a Declaration of Intent).[24]  The Controller’s Office will ensure that a Declaration of Intent is approved for all such projects.  The Controller’s Office will also only allocate TEBs to capital projects that have been properly approved and included in a Declaration of Intent. 
  2. Maturity Limitation:  The average maturity of qualified 501(c)(3) bonds may not exceed 120% of the average reasonably expected economic life of the financed facilities[25].  Before requisitioning TEB proceeds from CHEFA to repay or reimburse the University for qualified expenditures, the Controller’s Office will calculate and compare the average maturity of the issue and the average economic life of the financed facilities and ensure compliance.
  3.  TEFRA List:  The Controller’s Office will only requisition TEB proceeds from CHEFA to repay or reimburse[26] the University for expenditures related to projects that are on a current TEFRA list.
  4. Specific Tracing:  The University follows the “Specific Tracing” methodology for allocating TEB proceeds to expenditures by keeping all records that are needed to trace the outlay of University funds for project expenditures to specific requisition requests made to CHEFA by bond series[27].  The Controller’s Office will also retain copies of all requisition requests and supporting documentation.
  5. Reimbursement of Pre-Issuance Expenditures:  In the case of expenditures that are incurred prior to the date the TEBs that will finance the project are issued,  the University may pay for such expenditures with its own funds and then reimburse itself for such cash outlays with proceeds from TEBs that are issued after the date of the original expenditure.  In such circumstance, the proceeds of the issue (called a “reimbursement bond”) will be treated as having been allocated to the expenditure as of the date of the reimbursement allocation (i.e., as of the date of the requisition request made to CHEFA), and not as of the date the University made its pre-issuance outlay of cash for the expenditures, if the following requirements are satisfied:
    1. The Controller’s Office will ensure that no more than 60 days after the University makes an expenditure, it declares its intent to reimburse the expense with proceeds of a future tax-exempt borrowing.  This declaration may be made in any reasonable form and is currently included in the University’s current Declaration of Intent.  Any changes to the University’s current form of Declaration of Intent as of the date of this policy must be discussed with OGC.
    2. The reimbursement allocation will be made by the Controller’s Office no later than 18 months after the later of (x) the date the original expenditure is paid with University funds or (y) the date the project is either placed in service or abandoned.  In no event, however, will the reimbursement allocation be made more than three years after the date the original expenditure is paid with University funds.[28]
    3. The University may reimburse (i) certain preliminary expenditures[29] in an amount up to 20% of the aggregate issue price, (ii) the costs of issuance of any TEB[30] or (iii) an amount not in excess of the lesser of $100,000 or 5% of the proceeds of the issue, without regard to the foregoing requirements.
  6. Repayment for Post-Issuance Expenditures:  In the case of expenditures that are incurred after the date the TEBs that will finance the project are issued, the University generally uses University funds to pay for such expenditures and the Controller’s Office submits a requisition request to CHEFA for TEB proceeds to repay the University for its cash outlays.  It is the Controller’s Office’s practice to submit a requisition request to CHEFA to release TEB proceeds to repay the University for such post-issuance cash outlays in the month following the month during which such outlays were made, but in any event within a timeframe that permits the entire issue to satisfy the requirements of the Construction Exception.
  7. Initial Allocations of TEBs to Expenditures and Reallocations of TEBs from One Capital Project to Another[31]: For TEBs issued on or after May 16, 1997, the following requirements must be satisfied with respect to original allocations of TEB proceeds and reallocations of TEB proceeds from one capital project to another:
  1. For purposes of compliance with the guidelines set forth in this Section Paragraph 10, an “allocation” is deemed to be made as of the date the University requisitions funds from CHEFA (and not as of the date the University makes an outlay of University cash for a project expenditure). 
  2. The University  may make an original allocation of TEB proceeds to project expenditures by any allocation method it chooses within 18 months after the later of (x) the date the expenditure is paid with University funds or (y) the date the project is placed in service; provided, that the original allocation must be made by the Controller’s Office no more than 60 days after the fifth anniversary of the issue date or, if earlier, 60 days after the retirement of the issue (the “18 Month / 5 Year Allocation Window”).[32]
  3. Reallocations of TEB proceeds from one capital project to another are permissible only within the 18 Month / 5 Year Allocation Window.[33]
    1. The Controller’s Office will ensure that the expenditure to which proceeds are being reallocated pursuant to this Paragraph 10(c) will have been made, or that the project to which the expenditure relates will have been placed in service, no more than 18 months prior to the date of the reallocation.
    2. Records of any reallocation made pursuant to this Paragraph 10(c) will be maintained by the Controller’s Office.
  1. Abandoned Projects:  From time to time, the University may abandon a project that it originally expected to undertake as a capital project.
  1. Pre-Issuance Abandonment:  If the University has made expenditures for a capital project that it intended to reimburse with the TEB proceeds of a future issue, and the project is abandoned prior to the issue, the University will not seek to reimburse such expenditures with TEBs.
  1. Post-Issuance Abandonment: Within the 18 Month/5 Year Allocation Window.   If the University abandons a capital project after expenditures on such project have been repaid with TEB proceeds but prior to the expiration of the 18 Month/5 Year Allocation Window, the University may, but is not required to, reallocate the TEBs originally allocated to the project to another capital project pursuant to Paragraph 10(c) above.
  1. Post-Issuance Abandonment: Outside the 18 month/5 Year Allocation Window.  If the University abandons a capital project after expenditures on such project have been repaid with TEB proceeds and the 18 Month/5 Year Allocation Window has expired at the time of abandonment, the University cannot reallocate the TEBs originally allocated to the project to another capital project.

VII.Refunding

A refunding issue is an issue the proceeds of which are used to pay principal, interest or the redemption price on a prior issue.  A refunding can be either “current” or “advance”.[34]

  1. The University will comply with the following refunding rules:
  1. New money TEBs issued on or after January 1, 1986 can be advance refunded only once. 
  2. Assuming that the University has outstanding less than $150 million of non-hospital TEBs issued prior to August 5, 1997, new money TEBs issued before January 1, 1986 can be advance refunded twice, with all advance refundings that took place before March 1986 counting as a single advance refunding for this purpose.  (If the University has more than $150 million outstanding of non-hospital bonds issued prior to August 5, 1997, see Section VI.A.5.c. below.)
  3. TEBs refunded by an advance refunding with resultant present value debt service savings must be redeemed on their first call date.
  4. Current refundings may be done without limitation as to number.
  5. A bond issued after August 5, 1997 to finance or advance refund capital expenditures (other than hospital expenditures) incurred prior to August 5, 1997 will not be treated as a tax-exempt bond (i.e., will be treated as a taxable bond) if the face amount of the issue, when increased by the amount of the University’s outstanding tax-exempt non-hospital bonds, exceeds $150 million.[35]  Expressly excluded from the application of this volume restriction are the following permissible actions:
  1. Issuing TEBs after August 5, 1997 for the purpose of financing costs incurred after that date in connection with capital projects;
  2. Engaging in current refundings (regardless of when the refunded bonds were issued) (A) if the amount of the refunding bonds does not exceed the outstanding amount of the refunded bonds, and (B) if either (1) the weighted average maturity of the refunding bonds does not exceed 120% of the weighted average reasonable expected economic life of the facilities financed with the refunded bonds, or (2) the last-maturing bond in the refunding issue matures no later than 17 years after the issue date of the refunded bonds; and
  3. Engaging in a single advance refunding after March 1986 of any bond issued before January 1, 1986; provided, however, that any such advance refunding is counted as outstanding for purposes of determining whether subsequent new money or advance refunding bonds may be issued.
  1. In addition, the University’s Finance Department will monitor the investment by CHEFA or the bond trustee of the proceeds of an advance refunding that are being held in escrow pending the time when the bonds to be refunded become callable, as well as any transferred, unspent proceeds from the refunded bonds, to confirm that such funds are invested in a yield-restricted manner.[36]  If the Finance Department determines that yield restriction requirements are not being satisfied, it will contact the TEBC Director, who will work with OGC to remediate such non-compliance.

VIII.Extinguishment/Merger

An issuer generally may not purchase and hold its own TEBs without causing a retirement or extinguishment of such TEBs for purposes of Section 103 of the Internal Revenue Code.  In general, it is the University’s policy not to purchase its own TEBs.  The Yale Investments Office, which controls the University’s fixed income investment, will consult with OGC and the TEBC Director before making an exception to this policy.

IX.Post-Issuance Disclosure

The University is subject to continuing disclosure requirements in two different documents. 

  • The first document is the Continuing Disclosure Agreement (“CDA”), which is executed by the University and the Indenture Trustee at the closing of each TEB series.  The legal basis for a formal ongoing disclosure obligation is Securities and Exchange Commission Rule 15c2-12 (the “Rule”), which requires the underwriter of an issue of municipal securities to obtain a commitment from the issuer or the conduit borrower in the case of qualified 501(c)(3)s to provide this ongoing disclosure. In keeping with the Rule, the University’s CDAs require it to provide two types of ongoing disclosure—an annual report and, if and when any occur, notices of reportable events.[37]
  • The second document requiring continuing disclosure is the loan agreement between CHEFA and the University for each TEB series.  Like the CDA, the loan agreement requires an annual report and notice of reportable events.  In addition, the loan agreement requires the annual submission of three other documents (described below).
  1. The Annual Report
  1. Contents:  The annual report is required to contain annual financial and operating data of the type contained in the final official statement under which the bonds were issued as well as the most recent financial statements.
  1. Timing:  The CDA requires delivery of the annual report to the Municipal Securities Regulatory Board (“MSRB”) by December 1 following the close of each fiscal year (or if Yale’s fiscal year ceases to conclude on June 30, within 150 days of the end of its fiscal year). The Loan Agreement requires that, within 120 days of the end of the fiscal year (which would be October 28), the University provide CHEFA and/or the Indenture Trustee (as noted below) with the following documents:
    1. the annual report (to both CHEFA and the Trustee);
    2. a letter from the independent public accountants regarding audit findings (CHEFA);
    3.  the Officer’s Annual Compliance Certificate (both); and
    4.  the Officer’s Annual Certificate as to Equal Employment Opportunity (EEO) Compliance (CHEFA).
  1. Responsibility:  The Financial Reporting Office is responsible for submitting the appropriate documents to CHEFA and the Indenture Trustee as required by the loan agreement.  The Indenture Trustee, in turn, submits the Annual Report to MSRB (via MSRB’s Electronic Municipal Market Access (“EMMA”) website) to fulfill the CDA requirements.
  1. Reportable Event Notices

1.   Content and Timing: Both the CDA and the loan agreement also require the University to provide notice of reportable events “in a timely manner” (which the CDA further clarifies as “not in excess of ten business days after the occurrence of” the event).   Reportable events are certain types of events that are likely to be material to bondholders or potential investors. The Rule was amended, effective December 1, 2010, to introduce the ten-business-day deadline for disclosure, to expand the list of reportable events and to make a number of the events reportable without regard to materiality.  The reportable events under the CDA and the loan agreement are listed below and are the same with one exception.  The last reportable event in the first column is only required by the loan agreement.

Reportable Events

Events that Always Require Notification                Events that Require Notification if Material

●  Principal and interest payment delinquencies

●  Unless described in the left-hand column, adverse tax opinions or other material notices or determinations by the IRS with respect to the tax status of the securities or other material events affecting the tax status of the securities;

●  Unscheduled draws on debt service reserves reflecting financial difficulties;

●  Unscheduled draws on credit enhancements reflecting financial difficulties;

●  Modification to rights of holders of the securities;

●  Substitution of credit or liquidity providers, or their failure to perform;

●  Optional, unscheduled or contingent Bond calls;

●  Issuance by the IRS of proposed or final determination of taxability or of a Notice of Proposed Issue (IRS Form 5701 TEB);

●  Release, substitution or sale of property securing repayment of the securities;

●  Non-payment related defaults;

●  Tender offers;

●  The consummation of a merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms; or

●  Defeasances;

●  Rating Changes;

●  Bankruptcy, insolvency, receivership of similar event of the obligated person; or

  • Failure to submit the Annual Report to the required parties in the required timeframe.[38]

●  Appointment of a successor or additional trustee or the change of name of a trustee.

  1. Responsibility: Whenever anyone becomes aware of any of the reportable events in the previous section, that person should immediately notify the Associate Controller, Financial Reporting.  The Associate Controller is responsible for reporting the event to CHEFA and the Indenture Trustee.  The Indenture Trustee, in turn, will report the event to the MSRB via the EMMA website. In addition, the TEBC Director will annually send a reminder to the Investments Office, the TEBCC, and other relevant people, reminding them of their responsibility to inform the Associate Controller, Financial Reporting, of reportable events. 

C.        Incentive for Compliance

If the University fails to report any instances of material noncompliance as required by the CDA or the loan agreement, the University will disclose that fact in each of the its official statements for a period of five years following the noncompliance, even if the noncompliance has been cured, as required by the Rule.

X.Religious Entanglements 

The allocation of TEBs for projects that will be used for religious purposes raises issues under the First Amendment of the U.S. Constitution (and possibly also under the Connecticut State Constitution) concerning the prohibition on the establishment of religion.  Unlike other restrictions on the use of TEBs that are based on Treasury regulations and provisions of the Internal Revenue Code, the following guidelines are derived from case law and are therefore subject to change as a result of developments in existing state and Federal Constitutional jurisprudence.  

Based on U.S. Supreme Court cases in this area,[39] current doctrine provides that if the law or program under which the bonds are issued is neutral, secular and generally available to users of all religious affiliations, and the portion of the project that is financed with TEBs is not used in sectarian worship or religious indoctrination, the use of TEBs will not violate the First Amendment’s prohibition on the establishment of religion. 

The University will identify any project on a current TEFRA list that is expected to be used for religious purposes and will conduct an internal diligence review as to the specific nature of the religious use.  Any project or portion of a project that affects devotional space (which, for purposes of this policy is defined as space that is intended to be used for religious services or observances (such as a chapel, sanctuary or church), and is so used for at least a majority of the time that the space is actually in use) must be funded entirely with non-TEB sources.

If a project or portion of a project to be used for religious purposes affects non-devotional space, it may be financed up to 100% with TEBs only if the space will not at any time be limited to use by persons of a specific religious affiliation (i.e., only if the space will be accessible by persons of all denominations at all times).[40]  If, however, non-devotional space will be used for religious purposes on terms that cause the space to be limited to use by persons of a specific religious affiliation for any period of time, such space may be financed with TEBs only to the extent of the percentage of non-exclusive religious use and non-TEB funding must be allocated to the space to the extent of the exclusive religious use.  Thus, for example, if a non-devotional space such as a classroom will be used exclusively by persons of one religious affiliation for only two hours, once a week, equity must be allocated to cover that exclusive use. As another example, a library devoted exclusively to housing religious texts may be financed up to 100% with TEBs if it may be visited by persons of any religious affiliation at all times.

XI.Remediation 

Adherence to Policy 1200 and this Procedure will enable the University to identify violations of federal tax-exempt bond requirements in a timely manner.  Whenever anyone identifies any potential violation of a federal tax requirement or Policy 1200 or this Procedure, that person should immediately notify the TEBC Director.  The TEBC Director will determine whether it is in fact a violation and, if so, will work with the OGC to determine whether there are any feasible self-remediation actions available under applicable regulations. 

If the TEBC Director and OGC decide to self-remediate the violation by establishing an irrevocable defeasance escrow or by redeeming the nonqualified bonds, the OGC will ensure that the defeasance or redemption complies with all of the applicable requirements of the Internal Revenue Code and the Regulations thereunder, including, without limitation, U.S. Treasury Regulations Section1.141-12(d) “Redemption or defeasance of nonqualified bonds”. 

If no self-remediation actions are available or desirable, the OGC will attempt to negotiate a closing agreement with the IRS under the Voluntary Closing Agreement Program (VCAP).   

Acronyms

CHEFA- Connecticut Health and Educational Facilities Authority

CTA- Clinical Trial Agreement

IRS- Internal Revenue Code

IRS- Internal Revenue Service

ISP- Internal Service Provider

MTA – Material Transfer Agreement

OCR – Office of Cooperative Research

OGC- Office of the General Counsel

OSP – Office of Sponsored Projects (fka GCA- Grant and Contract Administration, and GCFA-Grant and Contract Financial Administration)

PBU- Private Business Use

QBI- Qualified Building Improvements

SRA- Sponsored Research Agreement

TEB- Tax Exempt Bond

TEBC- Tax Exempt Bond Compliance

TEBCC - Tax Exempt Bond Compliance Committee

TEFRA- Tax Equity and Fiscal Responsibility Act

TSA- Technical Service Agreements

UP- University Properties

UTB- Unrelated Trade or Business

VPF- Vice President, Finance and Chief Financial Officer


[1] Under IRC section 150(a)(3), “net proceeds” means the proceeds of the issue (which under U.S. Treasury Regulation Section 1.141-1 generally means the sale proceeds plus investment proceeds) less proceeds held in a reserve fund.  Since Yale has not set aside funds in a reserve fund, “net proceeds” for Yale’s purposes are sales proceeds plus investments proceeds. 

[2] IRC Section 147(g) limits the amount of bond proceeds that may be applied to finance the costs associated with the issuance of qualified 501(c)(3) bonds to 2% of the proceeds of the bond issue. 

[3] Per the Qualified Building Improvement exception (U.S. Treasury Regulation Section 1.14-3(d)(6)), TEBs used for building improvements that meet certain criteria are not deemed to be used for PBU.

[4] A decision to treat an activity as PBU does not mean it necessarily is PBU.  If there is doubt about how to characterize the activity, it should generally be treated as PBU in order to avoid unreasonable risk.

[5] One of the Qualified Building Improvement criteria is that no more than 15 percent of the improved building be used for PBU.  To simplify our TEBC analysis, the University will strive to limit PBU in buildings to less than 15% so that capital projects in those buildings will fall into the Qualified Building Improvement exception (assuming the projects meet the other Qualified Building Improvement exception criteria).

[6] The 5 percent or $15 million maximum can be applied to the annual PBU amount or to the average of the annual PBU amounts within the measurement period (i.e. the term of the bond issue).  U.S. Treasury Regulation Section 1.141-3(g)(3).

[7] The 100% ownership requirement of IRC Section 145 requires all TEB-financed property to be owned by a 501(c)(3) or a state governmental agency.

[8]  In contrast to the private business use rules in IRC Section 141-3 which allow  up to 5% of the net proceeds or $15 million, whichever is less, to be PBU, the 100% ownership requirement of IRC Section 145 requires all TEB-financed property to be owned by a 501(c)(3) or a state governmental agency.

[9] Leases and uses together are broadly defined to include licenses, rental agreements, use agreements, and other use of University space by an outside party.

[10]Leases to certain tenants are not PBU: (1) leases to state government entities and (2) leases to 501(c)(3)s where the lease is not UTB for either Yale or the tenant.  But such leases could nevertheless give rise to PBU if the tenant engages in PBU.  Also, when that tenant leaves, the lease would be PBU if the following tenant were a private entity.  For these reasons, the TEBC Director will generally treat all leases as PBU.  

[11] U.S. Treasury Regulation 1.141-3(b)(6) identifies “research agreements” as one category of  private business use.  This Policy breaks down “research agreements” as identified by the IRS regulation into the following three subcategories:  Sponsored Research Agreements (Section II(B)(6)), certain Clinical Trial Agreements (Section II(B)(7)(i)(a)), and Material Transfer Agreements and other Research Support Agreements (Section II(B)(8)). 

[12] 37 C.F.R 401

[13] Clinical trial research agreements that are classified as Other Sponsored Activities are by definition not research agreements, and therefore are not analyzed as research agreements under the research agreement safe harbor.  Instead, they are treated as patient care agreements.  There is no special category of patient care agreements for PBU analysis.  Therefore, they are only PBU if they have some feature creating PBU under all the facts and circumstances.

[14] 37 C.F.R 401

[15] Technical service agreements are agreements in which an external entity pays Yale for technical services that support the research and/or development efforts of the entity.  Yale enters into the agreement primarily to generate funds and/or provide service to a corporation and secondarily to advance knowledge or provide training to the students/staff/faculty working on the project, in support of Yale’s educational, research and/or patient care mission.  There is no reasonable expectation of publication; no testing of the principal investigator’s hypothesis; and no meaningful likelihood of expansion of generalized knowledge.  Often, Yale does not retain any data or other resulting output.  Yale might not take possession of input data or materials.

[16] For purposes of this section, research contracts and grants includes sponsored research agreements, clinical trial agreements, material transfer agreements, visiting scientist agreements, technical service agreements and other types of agreements handled by OSP that could involve PBU.

[17] Gross proceeds consist of “proceeds” and “replacement proceeds”.  “Proceeds” of an issue include sale proceeds, investment proceeds, and “transferred proceeds”.  If bonds are issued to refund a prior issue, unspent proceeds of the refunded bonds become “transferred proceeds” of the refunding issue as principal of the refunded bonds is paid off by the refunding issue.  “Replacement proceeds” are defined in Section V.

[18] A construction bond issue is one for which Yale reasonably expects as of the date of issue that at least 75% of “available construction proceeds” will be allocated to “construction expenditures.”  “Available construction proceeds” means, in general, the sale and investment proceeds of the bonds, excluding any sale proceeds used to fund a reserve fund or pay costs of issuance, but including any earnings on a reserve fund during the two-year period following issuance (or during the construction period, if shorter) and any earnings on proceeds used to pay the costs of issuance.  “Construction expenditures” means, in general, capital expenditures allocable to the cost of real property or constructed personal property, including the cost of construction, reconstruction, or rehabilitation of such property (but not including the cost of acquiring any interest in land or other existing real property).

[19] CHEFA has recommended that Yale do so in order to enable CHEFA, in turn, to draw down the proceeds by the deadlines, which will make it easier for CHEFA to prove to its auditors based on its own records that Yale has satisfied the Construction Exception.

[20] The Reasonable Temporary Period Exception generally requires a borrower to reasonably expect the following as of the issue date of the bonds: (a) net sale proceeds and investment proceeds of the issue will be used for capital projects; (b) at least 85% of net sale proceeds will be spent within three years of the issue date; (c) it will incur a binding obligation to spend at least 5% of the net sale proceeds on the projects the bonds were issued to finance within six months of the issue date; and (d) it will proceed with due diligence towards expending the proceeds on and completing the projects.

[21] It should be noted that bond proceeds that are placed in a “bona fide debt service fund” have a 13-month temporary period during which they may be invested without regard to the yield restriction rules.  In addition, amounts held in a bona fide debt service fund are excluded from the rebate requirements for all years if the average annual debt service on the issue is not greater than $2.5 million.  If the average annual debt service on the issue exceeds $2.5 million, the debt service fund for the issue will not be subject to rebate for a particular year if the earnings on the debt service fund for that year were less than $100,000.  A “bona fide debt service fund” is a fund that is (1) used primarily to achieve a proper matching of revenues with principal and interest payments within each bond year and (2) is depleted at least once each bond year, except for a reasonable carryover amount not to exceed the greater of (i) the earnings on the fund for the immediately preceding bond year or (ii) one-twelfth of the principal and interest payments on the issue for the immediately preceding bond year.

[22]  Notwithstanding the broad definition of sinking fund, amounts held in a “reasonably required reserve or replacement fund” may be invested without regard to the yield restriction requirements.  A reserve fund qualifies as a “reasonably required reserve or replacement fund” if it does not exceed the lesser of (i) 10% of the stated principal amount of the bond issue (or, where the issue price deviates by more than 2% from the face amount, the issue price), (ii) the maximum annual principal and interest payment on the bond issue, or (iii) 125% of the average annual principal and interest requirements on the bond issue.  If bond sale proceeds in excess of 10% of the stated principal amount of a bond issue are used to fund a reserve or replacement fund, however, the bond issue is considered an arbitrage issue (even if the proceeds are not invested in higher yielding investments).  A reserve or replacement fund may be funded with moneys other than sale proceeds from an issue.  Amounts in the reserve or replacement fund in excess of the amount that is reasonably required are not part of a reasonably required reserve or replacement fund and must be invested in a yield restricted manner. 

[23] IRC Section 145(a)(1).  This section states “all property which is to be provided by the net proceeds of the issue is to be owned by a 501(c)(3) or governmental unit”.

[24] As a matter of pre-issuance compliance, the project will also be included on the Tax Equity and Fiscal Responsibility Act (“TEFRA”) list for the current TEB issuance, and/or on the TEFRA list for each future TEB issuance some of the proceeds of which are reasonably expected to be used for that project.

[25] IRC Section 147(b).

[26] Post-issuance expenditures are “repaid” by CHEFA, while pre issuance expenditures are “reimbursed” by CHEFA.

[27] Records of the University’s cash outlays for expenditures are kept in the University’s general ledger.

[28] There are special rules that extend the permitted reimbursement period from “3 years” to “5 years” for certain issues financing long-term construction projects.

[29] Reimbursable preliminary expenditures include architectural, engineering, surveying, soil testing and similar costs that are incurred before commencement of acquisition, construction or rehabilitation of a project, other than land acquisition, site preparation and similar costs incident to the commencement of construction.

[30] Costs of issuance may be paid with proceeds from the issuance up to a cap equal to 2% of the bond proceeds. In addition, issuance costs that are paid with proceeds from the issue must be treated as being private use for purposes of the 5%/$15 million cap on private use.

[31] See Treasury Regulation 1.148-6(d)(iii).

[32] Once the 18 Month / 5 Year Allocation Window has passed, original allocations of TEB proceeds may be made only by using the Specific Tracing method.  As of March 2010, CHEFA’s policy is that Specific Tracing outside the 18 Month / 5 Year Allocation Window may be accomplished by submitting requisition requests in the same manner that Yale submits such requests inside the 18 Month / 5 Year Allocation Window.  It should be noted that other state issuing authorities may take a different view and may require that Specific Tracing be accomplished other than through submitting requisition requests for reimbursement or repayment once a borrower is outside the 18 Month / 5 Year Allocation Window.

[33] If, after the 18 Month / 5 Year Allocation Window has passed, the University discovers that it has allocated too many TEBs to a project expenditure, the Controller’s Office should consult with OGC.  This circumstance might arise, for example, in a case where some years after a project has been completed, the University receives a refund of project costs that were paid with TEBs, perhaps as a result of a settlement of disputed costs or due to a larger than expected contribution to total costs from gift funding.

[34] A refunding is “current” if the proceeds of the refunding bonds are used to pay off the prior bonds within 90 days of issuance.  A refunding is “advance” if the prior bonds cannot be currently refunded because they are not yet callable.  The proceeds of an advance refunding bond must be placed in a refunding escrow and pledged irrevocably to pay off the prior bonds.

[35] From 1986 to 1997, 501(c)(3) institutions with more than $150 million of outstanding (non-hospital) TEBs were prohibited from issuing additional tax-exempt debt.  This cap was repealed for non-hospital bonds issued after August 5, 1997, 95% or more of the net proceeds of which are used to finance capital expenditures incurred after such date.   

[36]  In general, proceeds from an advance refunding that are held in a refunding escrow qualify for only a temporary 30-day period before they are subject to yield restriction.

[37] Of course, if an issuer or other person (including the conduit borrower) obligated with respect to post-issuance disclosure is making statements that it should reasonably expect will reach the securities market, it has an obligation to make sure those statements are not misleading to investors.  Even in connection with informal statements, the issuer/obligated person should always consider whether other material information also must be disclosed to avoid being misleading.

[38] This continuing disclosure requirement is only imposed by the loan agreement; not by the CDA.

[39] The U.S. Supreme Court case, Mitchell v. Helms, addressed this area in 2000 and, as of November 2015, subsequent cases have reaffirmed the conclusions of this case.

[40] Note that as a formal matter, neither sectarian use nor use for religious indoctrination constitute private use. Therefore, although the University will finance projects (or portions of projects) that affect devotional space or that are limited to use by persons of a specific religious affiliation for some period of time with non-TEB funds, such religious uses, even if funded with TEBs, would not be counted for purposes of the 5% / $15 million cap on private use.