Companies seeking to finance new manufacturing plants or improvements to existing manufacturing plants can obtain long-term financing at favorable interest rates through the use of industrial development bonds (IDBs)An IDB is a form of tax-exempt municipal bond issued by a state or local government entity to finance the acquisition, construction or equipping of a facility.
IDB tax-exempt financing for manufacturing projects has been restored under the federal Revenue Reconciliation Act of 1993 on a permanent basis. Today IDBs continue to provide companies with an important alternative to conventional financing of manufacturing projects. Some of the benefits of IDBs are:
Sub-prime pricing. Since interest earned on IDBs is exempt from federal
income taxes, IDBs provide lower interest rates than conventional financing.
100% project financing. IDBs enable companies to finance virtually all the
costs of a project, including site preparation, capitalized interest during
construction and most issuance costs, up to $20 million.
Long-term financing. IDBs can have an average maturity of up to 120% of
the economic life of the assets financed.
It is important for the company to get "induced" before spending money on the project in order for the project costs to be reimbursed from bond proceeds. This is done by having the issuing authority adopt an Inducement Resolution. These bonds may be issued by a local Industrial Development Authority or the Virginia Small Business Financing Authority (VSBFA). For purposes of this overview, however, the discussion will only cover the issuance of bonds statewide by VSBFA.
The following is a brief outline of the procedural steps for VSBFA industrial development bond financing.
The company contacts the Virginia Small Business Financing Authority to
discuss the proposed project to be financed through the bond issue. After
discussing the nature of the project and determining that it is eligible
for tax-exempt financing, the company will be required to submit a formal
written application for the issuance of the bonds.
Working in conjunction with a bond attorney of the company's choice and
VSBFA's counsel (Office of the Attorney General), the Inducement Resolution
is prepared.
After at least 14 days published notice, VSBFA holds a public hearing for
public comment on the Project.
VSBFA authorizes the issuance of bonds after the public hearing and adopts
the Inducement Resolution. Ordinarily, bonds must be issued within one year
of approval.
The Inducement Resolution is then signed by the Governor.
Once a financial commitment has been received by the company to back the
bond issue, bond allocation is requested by VSBFA for the project.
If funds are available to be allocated to the project under the state volume
cap, allocation is confirmed in writing, which typically is good for a period
of 90 days or until December 15th of the current calendar year, whichever
first occurs.
The company's bond counsel distributes drafts of bond documents for review
and comment.
Resolutions approving issuance of bonds and the final documents are adopted
by VSBFA and the company.
Bond counsel distributes closing documents for comment.
Bond preclosing and closing.
Typical time period to complete the above steps is 60 to 120 days.
In addition to the requirements discussed above, some of the major legal requirements of tax-exempt industrial development bond financing are as follows:
Manufacturing Facility. The project which the bonds finance must be a facility
used for the manufacturing, production or processing of tangible property.
No more than 25% of the bond proceeds can be applied to ancillary office,
warehouse or other space.
Qualifying Costs. At least 95% of the bond proceeds must be spent on qualifying
costs. Qualifying costs are generally capital expenditures such as land,
building and equipment and other depreciable property (and can also include
capitalized interest during construction).
Land. No more than 25% of the bond proceeds can be used to acquire land.
Acquisition of Existing Manufacturing Facilities. The acquisition of an
existing facility can be financed if at least 15% of the portion of the
bond amount used to purchase the facility is spent on rehabilitation of
the building within a two-year period.
Equipment. Bond proceeds cannot be used to acquire used equipment, except
in those situations when a purchaser is buying the real estate and improvements,
and existing and installed equipment of a manufacturing facility. The 15%
rehabilitation requirement discussed above will apply.
Issuance Costs. No more than 2% of the bond proceeds can be spent on issuance
costs (placement fees, legal fees and other issuance costs).
Maturity. The average maturity of the bonds cannot exceed 120% of the average
economic life of the assets financed.
No Working Capital or Inventory. Bond proceeds cannot be used to finance
working capital or inventory.
$20,000,000 Limitation. The capital expenditures for the project, when added
to the company's capital expenditures in the same jurisdiction as the project
for the three years immediately preceding and three years following the
closing of the financing of the project, cannot exceed $20,000,000.
$40,000,000 Aggregate Limitation. A borrower and certain users may not be
the beneficiary of more than $40,000,000 of certain tax-exempt bonds regardless
of the location of the projects, during a three-year period after the facility
being financed is placed in service.
IDBs may also be used to refinance or "refund" existing IDBs. Some of the requirements and procedures outlined above may not be applicable for IDB refundings.
Also, in the event that a project cannot qualify under the federal requirements, it may be possible and economically advantageous for VSBFA to issue bonds that are state tax-exempt but not federally tax-exempt to finance the project.
Does the project meet the definition of a manufacturing facility under
federal guidelines?
When are VSBFA meetings held to consider requests for resolutions?
Does the state have any remaining amount in its bond allocation limit?
What are the placement options for sale of the bonds? VSBFA offers the Umbrella
Program to reduce upfront and on-going costs involved in marketing the bonds.
Cost estimates are available.
SUMMARY
This is a brief overview of VSBFA industrial development bond financing. VSBFA's staff of finance professionals can provide further assistance in determining the appropriateness of this method of financing for individual projects, and interest rate information for cost comparisons.
For more information on industrial development bond financing, please contact VSBFA at (804) 371-8254.
Three programs are offered by VSBFA to facilitate this method of financing:
Tax-Exempt Industrial Development Bonds: Available for the acquisition,
construction or expansion of manufacturing facilities statewide. Also available
for "exempt" projects, such as solid waste disposal facilities.
Taxable Industrial Development Bonds: Available for non-manufacturing projects
and other projects ineligible for tax-exempt financing.
Click here for a Bond Application.
Click here for a 501 (c)3 Tax Exempt Bond Fact Sheet.
Click here for an Industrial Development Bond Fact Sheet.
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