(i) In general.
The net sale proceeds and investment proceeds of an issue reasonably expected to be allocated to expenditures for capital projects qualify for a temporary period of 3 years beginning on the issue date (the 3-YEAR TEMPORARY PERIOD). The 3-year temporary period also applies to the proceeds of qualified mortgage bonds and qualified veterans‘ mortgage bonds by substituting QUALIFIED MORTGAGE LOANS in each place that CAPITAL PROJECTS appears in this paragraph (e)(2). The 3-year temporary period applies only if the issuer reasonably expects to satisfy the expenditure test, the time test, and the due diligence test. These rules apply separately to each conduit loan financed by an issue (other than qualified mortgage loans), with the expenditure and time tests measured from the issue date of the issue.
(A) Expenditure test.
The expenditure test is met if at least 85 percent of the net sale proceeds of the issue are allocated to expenditures on the capital projects by the end of the 3-year temporary period.
(B) Time test.
The time test is met if the issuer incurs within 6 months of the issue date a substantial binding obligation to a third party to expend at least 5 percent of the net sale proceeds of the issue on the capital projects. An obligation is not binding if it is subject to contingencies within the issuer’s or a related party‘s control.
(C) Due diligence test.
The due diligence test is met if completion of the capital projects and the allocation of the net sale proceeds of the issue to expenditures proceed with due diligence.
(ii) 5-year temporary period.
In the case of proceeds expected to be allocated to a capital project involving a substantial amount of construction expenditures (as defined in section 1.148-7), a 5-year temporary period applies in lieu of the 3-year temporary period if the issuer satisfies the requirements of paragraph (e)(2)(i) of this section applied by substituting “5 years” in each place that “3 years” appears, and both the issuer and a licensed architect or engineer certify that the longer period is necessary to complete the capital project.