We’ve received a number of inquiries recently about the impact of the American Recovery and Reinvestment Act on the financial marketplace. The Act is intended to provide much needed relief to the municipal finance community, and whether or not you are a fan of government intervention, the items in the Act could have a dramatic effect on your bottom line. We’ve summarized below the key provisions in the Act which may be beneficial to you.
Key Benefits for Municipal Entities
• Build America Bonds. Probably the most talked about program in the Act, Build America Bonds (BABs) allow governmental entities to offer their debt in the taxable marketplace (even directly to financial institutions), and then to either (1) receive a 35% subsidy directly from the Federal government to offset a portion of their interest payments or (2) elect for the bondholder to receive a 35% tax credit. Most issuers of BABs have elected the direct subsidy option, with the end result being an all-in rate less than conventional tax-exempt debt. For any new project in years 2009 and 2010, BABs should be carefully considered.
• Recovery Zone Economic Development Bonds. Recovery Zone Economic Development Bonds are one subset of BABs that allow for an even deeper 45% percent subsidy directly from the federal government, resulting in even more savings for the issuer. However, these types of bonds are only available to finance a broad range of qualified economic development projects in a recovery zone with limited available allocations. Since total allocation amounts will be distributed on a “first come, first served” basis, this option must be explored immediately to be viable.
• Tax Credit Bonds for Public Schools. The Act provides tens of billions in funding and new bond authority for school modernization, upgrade, and construction and programs for students with disabilities. There are specific requirements as to how the national limit is to be allocated among the states, with a specified portion to be allocated to certain large school districts. Please contact us for more details to see if this option could be open to you.
Key Benefits for Financial Institutions
• Increased Bank Qualified Debt Limit to $30 million for 2009-2010. The Act increases the small issuer bank qualified limit to $30 million from its current $10 million level. This should allow financial institutions to be more competitive in their bids on projects which are over the $10 million limit.
• Strengthen Ability to Compete For Direct Tax-Exempt Loans to Manufacturers. In one of the more misunderstood areas of tax-exempt financing, financial institutions are not typically able to deduct the carrying costs (i.e. interest expense) of a tax-exempt loan unless it is issued for the benefit of a governmental unit or 501(c)(3) entity. The impact of this is to preclude the interest deduction for “manufacturing bonds”, and in effect, banks are priced out of competing with public offerings for this type of financing. The Act temporarily restricts this prohibition and allows the banks to deduct the interest expense on newly issued bonds in 2009 and 2010, to the extent investment in the bonds does not exceed 2 percent of the bank’s total assets.
• Strengthen Ability to Make Direct Tax-Exempt Loans. Up until the recent marketplace meltdown, municipal issuers have typically received the lowest borrowing costs by issuing tax-exempt bonds in the public marketplace. That may no longer be the case due to the subsidy/tax credit included in the BABs. Since the BABs are taxable obligations, banks are more able to effectively compete on price. As an example, we have been involved in several instances already where the borrowing costs have been significantly lower in a privately negotiated sale of a taxable note directly to a financial institution when the subsidy is factored in. For additional information on what we’re seeing in this regard, please contact us.
Key Benefits for Businesses
• Extended Ability to Qualify for Tax-Exempt Financing. The restrictions on the use of tax exempt financing for the construction of a manufacturing facility have been relaxed, and tax-exempt debt is temporarily available to finance facilities used in the creation or production of intangible property. The availability of such financing had previously been limited to the manufacturing of tangible property.
• Larger Projects Can Seek Tax-Exempt Bank Loans. For 501(c)(3) entities, projects up to $30 million can now be competitively bid on by financial institutions. For private businesses, direct bank loans (issued through an authority) are likely the most attractive option to access the tax-exempt market (and in some situations, may be the only option). As an additional benefit, issuance costs are substantially lower with the direct bank loan option.
• Recovery Zone Facility Bonds. Recovery Zone Facility Bonds (RZFBs) are a new, temporary category of tax-exempt private activity bonds which can be available for large companies typically not eligible for tax-exempt financing. In fact, any trade or business except for residential rental facilities or other specifically listed “bad projects” (e.g. golf courses, massage parlors, gambling facilities, etc.) are eligible to participate. RZFBs are the only new type of bonds where a non-governmental entity can receive the proceeds directly for project costs. However, RZFBs have limited available allocation and are distributed on a “first come, first served” basis. If you have a planned project in the next year, we advise you to contact us to discuss whether RZFBs are a viable option.
We caution that these new programs continue to be updated and clarified almost daily, and any of the options discussed above (including BABs sold as a taxable obligation) must comply with all requirements imposed on typical tax-exempt obligations. For the latest updates and guidance based upon your individual situation, we encourage you to contact us.
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Finance Alert: Build America and Recovery Zone Bonds - A New Way to Finance
07/02/2009
