Types of Bond Sales: Bank Qualified or Non-Bank Qualified

January 22, 2015 by Enzo Incandela, Associate | James M. Snyder, Partner
Once the school district makes a decision to raise capital by means of bonding, it must next consider which method of finding a “lender” or buyer of the bonds works best. Illinois school districts have flexibility as to the method of sale. A competitive sale of school district bonds is not required. The method by which to attract potential investors of bonds can be a critical component to the resulting interest rate the school district will pay to service its bonds. A credit rating is not legally required to be obtained by the school district in order to issue bonds. However, a credit rating may help lower interest costs, particularly in the case of public bond issuances. The following parts of this section discuss different forms of offering bonds to investors or “lenders” that are typically used. 

Bank qualified or non-bank qualified. Pursuant to Section 265(b)(3) of the Tax Code, banks and savings and loans are not permitted to deduct interest expenses attributable to taxexempt bonds acquired after the passage of the Tax Reform Act of 1986, or August 1, 1986, unless the “small issuer exemption” applies. If a school district anticipates that it will not issue more than $10,000,000 of tax-exempt debt during the calendar year and the debt is designated as a “qualified tax-exempt obligation” pursuant to Section 265(b)(3), the restriction on the deduction for interest expense does not apply. Issuing so called bank qualified bonds or “BQ” bonds can reduce the interest rate on the bonds since banks that purchase bank qualified bonds do not have a restriction on its interest expense deduction.

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