Discussion 8

Tax-Exempt Governmental entities and 501(c)(3) non-profit organizations, as well as private entities, in certain circumstances. Only governmental issuers can issue tax-exempt bonds. Non-profit entities may borrow using tax-exempt debt, but virtually all must do so via a "conduit financing" with a governmental entity. In conduit financing, the governmental entity issues the bonds, then loans the bond proceeds it receives to the non-profit entity. Investors - whether banks, bond funds, or individuals - buy and hold the bonds. The purchase price paid is used to finance projects of the governmental or non-profit entity. The investor holding the bond typically receives interest while the bond is outstanding and is repaid the principal amount of the bond over time The benefit to borrowing using tax-exempt debt is that tax-exempt financing allows governmental entities and tax-exempt borrowers to borrow at lower interest rates. Bonds are not deemed tax-exempt solely because the borrower is a governmental or tax-exempt entity. There are many complicated rules that must be followed both as the financing is structured and after the bonds are issued. These rules include restrictions on how the borrowed funds can be used, restrictions on how the borrowed funds can be invested, deadlines for spending the borrowed funds, as well as certain recordkeeping and reporting requirements. Non-profit organizations typically apply for assistance from the appropriate state governmental entity that will issue the bonds and loan the funds received to the non-profit borrower. The proposed issuance is discussed at a public meeting of the issuer. After issuer approval, the governmental issuer and the non-profit borrower work with attorneys, financial advisors, as well as other professionals to structure and document the financing.