If your company and your project meet certain criteria, the money you borrow to pay for your new manufacturing facilities could come with a reduced rate of interest. As part of federal and state policies to promote the expansion of manufacturing facilities and related employment, tax-exempt rates are made available to qualifying projects. Formerly known as industrial development bonds, "qualified small-issue bonds" can provide your company with a significant reduction in the cost of money to pay for certain improvements or new facilities.
Who is eligible to borrow?
Just about anyone in need of funding for a qualified manufacturing facility. Corporations, partnerships, individuals and other business entities can apply for tax-exempt financing under the qualified small-issue program.
However, two significant limitations exist:
1. A company seeking this type of tax-exempt financing cannot have more than $40 million of tax-exempt debt outstanding at any time, including the financing under consideration. In determining whether this $40 million threshold has been met, tax-exempt debt of all affiliates of the borrower anywhere in the United States or its territories is counted toward the total.
2. The applicant, together with all affiliates of the applicant, cannot incur more than $10 million of capital costs in the municipality where the project is located during the six-year period that starts three years prior to the date of the borrowing and ends three years after the closing.
Current project costs, as well as those previously financed with tax-exempt debt, are included in the determination of whether the borrower has met this threshold. Only costs incurred for facilities located within the geographic boundaries of the same municipality are counted.
What can be financed?
A borrower who meets the total debt and capital expenditure limitations discussed above can use proceeds of tax-exempt debt to pay for:
Land, including costs of acquisition, site preparation, environmental testing, etc. In most situations, not more than 25 percent of the total borrowing may be used to acquire land.
Buildings, including costs of acquisition, construction, rehabilitation, engineering and architectural services. If acquiring a building, at least 15 percent of the acquisition costs must be used to pay for qualified rehabilitation expenditures.
New equipment, including costs of acquisition, delivery and installation. Used equipment may be eligible if it is contained within a facility being acquired with proceeds of the qualified small issue.
Financing costs. Up to 2 percent of the total tax-exempt financing can be used to pay for costs of the transaction.
What's the catch?
In its efforts to ensure that the benefits of tax-exempt financings are not made too widely available, the federal government has placed a "cap" on the total amount of tax-exempt qualified small-issue bonds that can be issued in any calendar year. This cap is imposed on a state-by-state basis, and in Pennsylvania, as in many other states, the total amount available to be allocated to projects across the state is frequently inadequate to meet total demand.
A company with an eligible project must apply, through a local or state industrial development authority, for receipt of "volume cap allocation," i.e., a portion of the state's limited bonding authority. Generally, projects that apply earlier in the calendar year have a better chance of obtaining allocation.
Volume cap allocation is administered by the Pennsylvania Department of Economic and Community Development, which also provides general assistance in determining eligibility and must ultimately approve each project.
The maximum amount that can be borrowed is $10 million. The Commonwealth also requires that a borrower certify that, within three years of the borrowing, the new project must have created or retained one full-time permanent job for each $50,000 borrowed. The term of the debt cannot be more than 120 percent of the depreciable life of the assets being financed. Simply put, your can't borrow money long term to pay for an asset with a short useful life.
How it works
Tax-exempt financings can be structured in a wide variety of ways. One constant, however, is the need to borrow through an industrial development authority. These authorities exist throughout the state and serve as "conduits" for the debt. In other words, although the authority serves as issuer, all of the obligations related to the debt are between the company/borrower and the bank or buyer that funds the debt.
Indeed, qualified small-issue bonds for manufacturing facilities can provide up to $10 million at interest rates below those found in the conventional, taxable market. Companies in search of capital that don't explore this option may be missing an opportunity for significant savings.
Sara Davis Buss is a director at Houston Harbaugh P.C., Attorneys at Law, a Pittsburgh-based law firm. Buss can be reached by e-mail at firstname.lastname@example.org.
If you have read local newspapers or listened to talk radio recently, you may have seen or heard about something called TIF, or tax increment financing.
Like many government-sponsored programs, TIF financing is frequently misunderstood and mischaracterized. The current, sometimes heated debate over the wisdom of employing TIF as an economic development tool is framed around a classic political issue: What role, if any, should the public sector play in promoting private development?
On one end of the spectrum are the free-market theorists who believe that government should do nothing to assist or hinder the private sector. On the other end are those who believe that the government is responsible for promoting and enabling economic development.
Any reasoned debate must start with the facts.
A TIF by definition
Tax increment financing is a financing device that uses incremental increases in property, sales or other tax collections within a specified area to finance capital improvements in hopes of drawing businesses and residents to a community. A TIF district, with specifically identified boundaries, is created within an area in need of redevelopment.
A redevelopment or industrial development authority then issues debt, in the form of bonds or notes, and uses the proceeds to pay for redevelopment costs. The TIF debt is secured by a pledge of anticipated increases in tax revenues, or tax increment. Taxing bodies are asked to give up the right to collect all or some of the increases attributable to the financed development for a limited period. When the TIF bonds are paid off, all subsequent tax revenue belongs to the taxing bodies.
Pennsylvanias Tax Increment Financing Act was adopted July 11, 1990 and amended Dec. 16, 1992. The acts stated purpose is to prevent, arrest and alleviate blighted, decayed and substandard areas in municipalities, to increase the tax base and to improve the general economy of the commonwealth and to provide an additional and alternative means to finance public facilities and residential, commercial and industrial development and revitalization.
What they finance
The TIF Act broadly defines projects to include undertakings and activities for the elimination and prevention of blight, including property acquisition, clearance, redevelopment, rehabilitation or conservation. Eligible project costs include costs of public works or improvements, or residential, commercial or industrial development or revitalization within a TIF district. Prior to the 1992 amendments, the act limited financing to public projects. Now, development for private use and ownership is expressly permitted.
The TIF Act permits a municipality or redevelopment authority to develop a TIF plan and proposal. The municipality with jurisdiction over the area where the TIF District is to be located (which can be a county) designates and identifies the districts boundaries. The governing body that creates the district must hold public hearings and adopt a resolution or ordinance which, among other things, finds that the district is a blighted area and the project to be undertaken is necessary to eliminate such conditions of blight.
How theyre created
The process of creating a TIF district includes opportunities for public input on a number of levels. Each taxing body involved has the ability to opt out of the TIF plan, or to participate in part. A district can have a maximum life of 20 years.
Once the district has been created, the local assessor is directed to identify the specific parcels of property within the district on the tax roles. On the date of creation, a base-assessed value is determined. As development occurs, increases in tax revenue over the base-assessed value may be captured for allocation to principal and interest on TIF debt, or may be used to pay project costs as they are incurred.
The payments that may be pledged to support TIF financing include ad valorem real property taxes, payments in lieu of taxes made by governmental or nonprofit entities, sales taxes, and tax revenue derived from gross receipts or gross or net income realized from business conducted in a TIF district.
Indeed, tax increment financing can be a tool that promotes vitality, creates jobs, adds activity to local economies and improves distressed areas.
To learn more about TIF funding, contact your local government or legal professional who concentrates in public/private financing matters.
Sara Davis Buss is an attorney at law firm Houston Harbaugh, P.C. Reach her by e-mail at email@example.com or by phone at (412) 288-2229.