Charter Schools

Section 501(c)(3) Organizations
General Rules for Qualified 501(c)(3) Bonds

  • 100% of property financed must be owned by 501(c)(3).
  • No more than 5% of the net proceeds may be used in private trade or business.
  • Must have a TEFRA hearing.
  • No prohibited facilities (skybox, retail liquor, gambling, etc.).
  • Weighted average maturity of Bonds may not exceed 120% of useful life of assets financed (ignore land; life of working capital equals zero).
  • No more than 2% of tax-exempt proceeds may pay costs of issuance.
  • Arbitrage and rebate rules apply.
     

Management Contract Rules Under Rev. Proc. 97-13

  • For-profit manager can be paid expenses and reasonable fee for services.
  • No part of manager’s fee may be based on net revenues.
  • Formulaic approach to permitted duration-15 years if 95% of fee is fixed; 10 years if 80% of fee is fixed; 5 years if 50% of fee is fixed. With 50% fixed fee, contract must be terminable by the 501(c)(3) at year 3 without penalty.

Benefits of Qualified IRC Section 501(c)(3) Bond

  • No Private Activity Bond cap allocation required.
  • No prohibition on advance refundings. No limit on land purchase.
  • No “substantial user/related party” problem. No restriction on acquisition of used property (existing assets).
  • No Alternative Minimum Tax (“AMT”).

7 Warning Signs

  • IRS field agents’ manual highlights 7 “red flags” that suggest possible violations:
    1. Board scattered with no connection to project/community.
    2. Created and controlled by a for-profit.
    3. Organizational/start up costs of the IRC Section 501(c)(3) organization paid by (loan from) for-profit.
    4. For-profit seller of project recently acquired it at significantly lower price.
    5. For-profit seller is buying subordinated debt.
    6. Letter of credit bank or guarantor has control over IRC Section 501(c)(3) organization’s budget/finances.
    7. Management contract violates Rev. Proc. 97-13.