In a surprising development, the Treasury Department announced yesterday that tribal governments in 19 states allocated $1 billion of economic development bonds for 58 projects will be able to issue the debt as taxable Build America Bonds and receive direct-payments equal to 35% of their interest payments.

“That’s good news,” said Townsend Hyatt, a partner with Orrick Herrington & Sutcliffe LLP. “We had thought [that] all along, but there were rumblings within the IRS that some people felt that tribal economic development bonds could not be issued as Build America Bonds.”

The bonds also can be issued as tax-exempts, Treasury said, as the IRS disclosed the allocations under the new program, which was created by the American Recovery and Reinvestment Act.

At least 25, or 43%, of the projects are for tourism or recreational facilities and 11, or almost 19%, are for refinancings, according to the IRS. The exact number is not known because tribes involved in seven of the projects, which were allocated a total of $143.03 million of the bonds, did not consent to the IRS disclosing their application information.

The largest number of projects would be located in California — at least 12 or almost 21%. Another 13 projects, or nearly 22%, would be located in three other states: Oklahoma, with five, and Oregon and Wisconsin, each with four. The largest allocation received was $22.57 million because the IRS allocated bonds to all 58 projects proposed by the tribes and then pro-rated the amounts under a $1 billion ceiling.

Under the program, tribal governments can issue up to $1 billion in each of 2010 and 2011 for projects that are similar to those that currently can be debt-financed by state and local governments.

The IRS confirmed each project’s eligibility for the bonds, but did not prioritize the projects or select them according to merit, a spokesman confirmed. This has led to criticism from some bond lawyers who are concerned some of the projects may not be feasible and are taking allocations from more worthy ones.

The tribal economic development bond program established by the ARRA would expand the types of projects that can be financed by tribal governments with tax-exempt bonds. Historically, tribes have only been permitted to issue tax-exempt bonds for projects that would provide “essential governmental functions.”

As a result tribes have faced more restrictions than state and local governments and have been unable to finance golf courses, hotels and other entertainment venues with debt. The new temporary program essentially removes the essential governmental function restriction.

Of the 58 projects, 23 are for tourism, 11 for refinancings, three for retail facilities, two for recreation, two for water, and two for education. Other single projects are: an airpark, a commercial facility and land acquisition, transportation, manufacturing, health care, parking, corrections, and administrative offices.

Some of the projects are for more than one use, such as one proposed in Oregon for water infrastructure and tourism facility improvements. In addition, some tribes applied for bonds for more than one project.

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