Industrial Revenue Bonds In Florida

ELIGIBILITY

A private activity bond must be "qualified" to be tax exempt, and the qualification rules are restrictive. Two key groups that are eligible for private activity bonds are small manufacturers and 501(c)(3) non-profit corporations. Manufacturers are not automatically qualified for tax-exempt finance, for they also must fall within several other restrictive standards that require an evaluation of the project and the capital assets being financed. FINAL ELIGIBILITY UNDER IRS RULES WILL BE DETERMINED BY BOND COUNSEL.

Highlights:

·  Refinance is generally prohibited, unless official action by the bond issuer is taken at the time that the original financing occurs. Some refunding of maturing tax exempt debt is permitted.

·  95% of the proceeds of the bonds must be used to finance core manufacturing assets. Significant excess land or excess materials storage area; expansion space; large administrative office areas beyond the manufacturing need; distribution and similar needs, are all examples of needs that when included in the bond financing may violate the tax exempt standards.

·  No more than 5% of the bond proceeds can be used for bond issuance and related costs (there is a 2% limitation on issuance costs with the balance available for credit enhancements costs).

·  There is a total $10 million restriction (including the project being financed) for capital expenditures, whether pursuant to a financing or through direct expenditures, in the same city, township or incorporated municipality for a six year period starting three years before the proposed issue date of the bonds and three years after (based upon projected capital expenses) the proposed issue date of the bonds.

·  There is a $40 million limitation per borrower and related party on capital expenditures, whether pursuant to a financing or through direct expenditure, anywhere in the U.S. or its territories.

·  If borrower is financing acquisition of existing building and capital assets, 15% of acquisition cost must be spent to rehabilitate the assets.

·  Transactions must be arms length. Related parties, ownership structure and beneficiaries of the financing must be disclosed and will be analyzed in eligibility underwriting by bond counsel.

 

FIXED OR VARIABLE RATES?

Industrial Revenue Bonds are usually sold into the capital markets by a placement agent. Most major banks have a capital markets subsidiary that is eager for this placement business. Bonds can be fixed or variable rate, but fixed rate bonds have limited investor interest and usually require an expensive rating process that most likely will result in a rating that is "less than investment grade" which further results in a much higher coupon and a reduction in the interest cost benefit for tax exempt finance. A variable rate structure is preferable and offers the borrower the lowest available rates while preserving the borrower's option to obtain a fixed rate obligation through a synthetic, money market transaction such as a "swap" or "cap."

Enterprise Bonds and most industrial revenue bond products issued in Florida are variable rate and fall under the moniker "Lower Floaters," but the more proper name is "Variable Rate Demand Obligations (VRDO). VRDO's carry a low interest rate that is set by supply and demand in the market place, but the rate is usual significantly below LIBOR (London Inter-bank Offering Rate) which is a base rate for many loans. VRDO rates are usually about 60% of LIBOR because of two key factors, -- tax exempt interest, and liquidity.