Financial Assistance - Industrial Revenue Bonds Fact Sheet         This information will provide a brief description of tax-exempt industrial development bond financing. The determination of whether a particular project qualifies for such financing, and of whether such financing would be beneficial, would require an analysis of the details of the project, the credit of the borrower and the credit markets at the time of the financing. Background Industrial development bond financing is a method of financing manufacturing facilities costing under $10 million for private entities through the issuance of long-term obligations by governmental entities at lower interest rates than those born by conventional borrowing. Typically, an industrial development authority or other governmental body will issue tax-exempt revenue bonds ("the bonds") to be repaid only by payments made by the private entity using the facility financed by the proceeds of the sale of the bonds. Since no government funds are at risk, the governmental authorities can authorize the issuance of such bonds without a vote of the local electorate. The governmental authority serves as a conduit for the private financing in order to encourage economic development within its borders. The primary attraction to the borrowing private entity is that the interest rate paid on its debt is typically 1 1/2% to 2 1/2% percent per annum less than on conventional debt. This can vary due to a variety of factors including the credit strength of the borrower, the nature of the project and the credit markets in general. Since the interest on the bonds is tax-exempt, the holders of the bonds can obtain a satisfactory yield even though the interest rate is lower than in a conventional financing. We are also advised that sometimes borrowers are able to obtain other financing terms with bonds, which they view as being more favorable than in a conventional financing. This includes obtaining longer maturities. What Qualifies as A Manufacturing Project Only "manufacturing" facilities within the meaning of the Internal Revenue Code (the "Code") qualify for industrial development bond financing. Even if the private entity is a manufacturer, the proposed project to be financed out of bond proceeds must still constitute a "manufacturing" facility within the meaning of the Code. As a general rule, a facility can qualify if the activity that occurs at the site involves taking two or more components and combining or assembling them to create something new. For example, if the private entity simply purchases long pieces of pipe and cuts them into short pieces of pipe, it probably wouldn't qualify as manufacturing. Other non-profit entities are those qualified under Section 501(c)(3) of the IRS Code (i.e. hospitals and nursing homes) while exempt facilities are those defined under Section 142 (a) of the Code including industrial sewage and solid waste facilities. TOP Limitations of Financing of Manufacturing Projects The financing of a manufacturing facility may be for construction of a new or an expanded facility, for acquisition of an existing facility or for the acquisition of equipment. Yet, the following limitations are imposed by the Code: 1.  Non-core. Not more than 25% of the proceeds of the bonds may be used to finance non-core items at manufacturing facilities. Non-core items include space used for: lunchrooms, warehouses, showrooms, offices, loading docks, testing labs, employee parking lots and land improvements. Accordingly, usually blue prints or plans need to be reviewed to determine whether the proposed facility meets the 25% test. 2.  Land. Not more than 25% of the proceeds of the bonds may be used to acquire land. 3.  Existing facility. If acquiring an existing facility, the user must incur "rehabilitation expenditures" within two years of the date of issuance of the bonds, equal to 15% of the bond-financed portion of the acquisition cost of the building. 4.  Used equipment. With a few hard-to-meet exceptions, used equipment generally can't be bond-financed. 5.  Capital expenditure limit. Generally, the principal amount of the bond issue, when added together with the capital expenditures made by user and related parties in the same municipality cannot exceed $10 million during the six-year period beginning three years before the bonds are issued and ending three years after. This can involve a complex analysis in some cases. Allocation to Avoid Problems Meeting Code If only a portion of the facility to be financed would cause a problem meeting one of the above-described limitations in 1 thru 5, it is often possible to allocate equity contributed by the borrower to the financing of the problem use. In lieu of equity, a small amount of conventional financing or taxable bonds can often be used to cure the problem. Such allocations of equity or other financing can often help in meeting the above described limits on the amount of bond proceeds that can be used for land acquisition, acquiring non-core or used equipment, etc. State Allocation Needed The Code imposes an annual limit on the number of tax-exempt industrial revenue bonds that can be issued in each state (i.e. approximately $260 million in Missouri). Accordingly, the local governmental issuer must obtain an allocation from the State prior to issuance of the bonds. This can sometimes be a complex process. In some years the entire state allocation has been inadequate to satisfy the demand. In addition, sometimes the State will withhold allocations during the course of the year until it can determine the total volume and can make determination as to the most worthy projects. Further, the State can decide for any reason not to grant an allocation. Structure of a Typical Bond Issue Usually all of the financial terms of the bond issue, such as the repayment terms, the collateral, any guaranties and all financial covenants are negotiated between the private borrower entity and the bond purchaser. The governmental issuer typically does not dictate any such terms. TOP The bonds can be issued in a private placement involving a bank or institutional investor. This makes the arrangements very similar to a bank loan, which happens to be tax-exempt. Alternatively, the bonds can also be issued in an underwriting to the public in which a brokerage firm will negotiate the terms with the private entity and buy the bonds for resale to the public. In such public offerings it is often necessary to have a bank letter of credit to guaranty the bonds since the borrowing private entity is usually not a credit that is well-known to potential bond purchasers. A private placement would involve lower up-front issuance costs while a public offering might allow a longer maturity and more flexible covenants. The borrowing entity must also decide the relative merits of a fixed rate versus a floating rate financing. How to Qualify The Borrower must obtain a preliminary inducement resolution from the state, local development authority or municipality where the facility is or will be located to receive initial approval of the project. The passage of an inducement resolution granting preliminary approval of the project indicates the good faith intent both of the Issuer as well as the Borrower to use bonds for the financing of the project. This is a critical step from the borrower's perspective. In general, until the inducement is received, no contract for construction of a building or order for purchase of production equipment should be executed by the Borrower. Further, in the case of a contract to purchase either land or an existing building, an inducement resolution must be issued before the buyer can take title to the property. Upon passage of the inducement resolution, all eligible project costs incurred after that date are eligible for reimbursement of expenditures. The IDB may not be used to reimburse the borrower for any prior expenditures if the inducement resolution has not been passed at the appropriate time. Timing A typical time frame for completion of a bond issue is two months after a bank or brokerage firm has been selected and the basic structure of the financing has been agreed to by the parties. Of course, this time schedule can be shorter or longer depending on the facts of the particular financing. If it is necessary to expend funds on the project prior to the issuance of the bonds these funds can typically by reimbursed out of the bond issue proceeds assuming the local governmental issuer has previously passed an inducement resolution indicating its intent to issue the bonds: Issuers will generally adopt such resolutions upon request. Conclusion Industrial development bond financing can be an attractive option for many manufacturing companies planning capital expenditures. Determining the eligibility of any such project requires an analysis of the particular facts of each case. In addition, the borrowing entity should carefully calculate the relative costs, interest rates and other potential benefits of bonds versus conventional financing. These can vary greatly from one borrower to the next and from one project to the next due to a variety of factors. This has been only a brief description of industrial development bond financing. TOP Back to Industrial Revenue Bonds Economic Development Center 5988 Mid Rivers Mall Dr. Suite 100, St. Charles, MO 63304 Phone: 636.441.6880, Toll Free: (877) 441-6880, Fax: 636.441.6881 E-mail: info@edcscc.com Advanced Technology Center 118 N. Second Street St. Charles, MO 63301 Phone: 636.410.0300, Fax: 636.940.0408 E-mail: info@edcscc.com Site Concept and Design ©2009 / Maintenance and Hosting provided by jWeb.