Tax_Exempt Industrial Development Bonds


MAJOR STEPS
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 IDB 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 pre-closing and closing.

Typical time period to complete the above steps is 60 to 120 days.

Federal Requirements
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. If bond proceeds are used to acquire used equipment, 100% of the cost must be spent on rehabilitation of the equipment within a two-year period.

  • 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.

  • $10,000,000 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 $10,000,000.

  • $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.

Other Types of Tax-Exempt Financing
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.

Some Important Questions

  • 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.
Click here for an IDB application.

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