WASHINGTON -- The new law permitting issuance of enterprise zone bonds is so complicated that small businesses may shy away from using the bonds unless the Treasury Department writes simple, clear regulations for the statute, a group of bond lawyers said last week.

"The statutory scheme is a complicated one in relation to" the small amount of enterprise bonds likely to be issued and the unsophisticated nature of the small businesses using bond proceeds, said the lawyers, who are all members of the American Bar Association's taxation section.

"In general, the regulations should strive to simplify the rules for the benefit of the expected borrowers and minimize the number of new rules and definitions" so that issuers can keep legal and underwriting fees to a minimum, the lawyers said in written comments to the Treasury. They said their comments did not represent a formal position of the bar association's tax section.

Regulations governing enterprise zone bond issuance are expected to be part of the private-activity bond rules that the Treasury and Internal Revenue Service are slated to publish by the end of the year. Department officials have urged municipal market participants to come forward with suggestions for the rules.

Those rules will implement legislation enacted in 1993 that provides for 104 enterprise zones, composed of nine empowerment zones eligible for a wide array of tax incentives and grants, and 95 enterprise communities with a narrower range of benefits. The zones will be in existence for 10 years.

In July, Clinton Administration officials said they plan to name the zones by the end of the year, and last week lobbyists said they expect the designations to be announced in December.

Both types of zones will be eligible to issue a new category of tax-exempt bonds to finance loans to zone businesses. Under the statute, the bond is an exempt-facility bond that is subject to the private-activity bond volume cap. The amount that can be used for a business in any one zone is capped at $3 million. The limit that any one business can use in all zones is $20 million.

The ABA lawyers said the $3 million and $20 million limits will "make it very difficult for small borrowers to access the market" given the high transaction costs they will incur.

To alleviate that problem, the regulations "should encourage issuance of pooled bonds by providing specific guidance in this area," the lawyers said. For example, the regulations should encourage loans-to-lenders programs by stating that the $3 million and $20 million limits are to be applied at the level of the ultimate borrower, they said.

Another problem with the law is the definition of an enterprise zone business. which constitutes "a highly technical set of rules which may discourage businesses from exploring the enterprise zone option," according to the lawyers.

The Treasury could take several steps to ease the effect of the statute's strictures, the lawyers said.

For example, the law states that 35% of the employees of a zone business must be residents of the zone on an ongoing basis. The Treasury could write rules stating that, in order to remain eligible for tax-exempt financing, a business would be deemed to still be in compliance if it failed to maintain the 35% level due to unforeseen circumstances. The lawyers also proposed that businesses, for purposes of qualifying for bond financing, would have to maintain the 35% level only for a specified period.

The lawyers also asked the Treasury to clarify a number of issues that were not addressed in the statute. For example, the department should make clear that proceeds of enterprise zone bonds can be used to finance purchases of equipment previously used outside the zone, for use inside the zone, they said.

The department's regulations should also clarify that the bond-financed cost of a substantial renovation can include the cost of paying off an earlier mortgage on the property, as long as the site would have met the definition of a qualified zone property had the law been in place at the time the debt had been incurred, according to the lawyers.

The lawyers said technical problems that need to be resolved include clarifying that enterprise zone bonds are permitted to have a final maturity beyond the 10-year life span of the zones, as long as the maturity does not extend beyond 120% of the reasonably expected economic life of the facilities financed with bond proceeds.

The regulations also need to clarify that allocations made for enterprise zone bond issues under the private-activity bond volume cap may be carried forward into the next year if they are not used in the year in which the allocation is made, the lawyers said. Carryforward is currently permitted for most types of private-activity bonds except for small-issue industrial development bonds and for the private-use portion of a public purpose bond.

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