In many instances, tax-exempt financing is the lowest cost source of financing for bank customers who qualify. Tax-exempt financing is also one of the most complex, and often misunderstood, topics for commercial bankers. Opportunities do not present themselves as often as they did prior to the Tax Reform Act of 1986, but it still represents an important lending tool for commercial bankers. This article discusses tax-exempt financing opportunities for manufacturing facilities.
The Internal Revenue Code of 1986 eliminated commercial Industrial Development Bonds (IDBs), sometimes referred to as Industrial Revenue Bonds (IRBs), except for nonprofit corporations. The Code also established a 1989 sunset date for the "manufacturing facilities" IDB program. The sunset date was extended on a year-to-year basis and eventually extended permanently. The 1986 Internal Revenue Code also eliminated bank deductibility of carrying costs for purchased tax-exempt bonds (except for "Qualified Tax-Exempt Obligations" of small governmental units and nonprofit corporations). Manufacturing IDBs can never be a "Qualified Tax-Exempt Obligation." This created a narrower band of economic feasibility for financing industrial projects on a tax-exempt basis. The following lists the opportunities and critical issues for commercial bankers.
Business Opportunities for Tax-Exempt Financing
* Manufacturing facilities.
* 501(c)(3) organizations.
* Low/moderate income housing.
* Solid waste.
* Hazardous waste.
* Wastewater treatment.
* Docks and wharves.
* Enterprise communities and empowerment zones.
Critical Issues For Manufacturing IDBs
* Governmental issuer. Tax-exempt bonds must be issued through a state or local governmental entity (the "Governmental Issuer").
* Manufacturing facilities only. At least 95% of the net proceeds of the bonds must be spent:
1) by facilities that are used in the manufacturing or production of tangible personal property; and
2) for land or depreciable property (primarily new plant and equipment although some used may qualify under certain restrictions). No more than 25% of bond proceeds may be used for land.
* Reimbursement with bond proceeds. With limited exceptions, the governmental issuer must declare an official intent to reimburse an expenditure with IDB proceeds no later than 60 days after the expenditure.
* $10 million capital expenditures. The law limits any capital expenditures of the borrower and related entities, including the financed project, in the municipality where the project is located for six years - three years back plus three years forward, if the bond issue exceeds $1 million.
* $40 million aggregate cap. The cap exists for all outstanding IDB bond issues for the borrower and related parties, regardless of location.
* IDB proceeds. The proceeds are subject to Internal Revenue Code provisions with respect to limitations on the yield on investments of bond proceeds and amounts pledged to secure bonds.
* Issuance of tax-exempt bonds. The issuance is subject to a cap on IDBs, allocated through each state's treasury department. Some states have cap allocation available all year, while others run out the first week of January. If a cap is temporarily unavailable, the project, with the approval of bond counsel, can be financed conventionally or with taxable notes until such time that an allocation becomes available. However, it is necessary to comply with the reimbursement requirements.
Structure of the Financing
Banks can offer borrowers a variety of structuring alternatives, including the following:
* Direct bank-purchase of tax-exempt bonds with convertible interest rate options. The borrower can select a variable or fixed-rate and/or convert at any time from a variable rate to a fixed rate. …