Aimed at addressing gaps in economic development needs
NORTH BAY -- Tax exempt bonds and loans are increasing as an alternative way for industrial, manufacturing and nonprofit construction projects to get financing.
In such a deal, bonds are issued by a governmental entity to obtain tax-exempt status and proceeds are loaned to the borrower to fund the project. The issuer acts as a conduit to the tax-exempt marketplace.
Bond proceeds can be used to fund the acquisition and development of capital assets.
[caption id="attachment_31646" align="alignright" width="154" caption="Simon Inman"][/caption]
“Essentially, it is a bank loan with a lot of paper,” said Simon Inman, an attorney with Carle Mackie Power and Ross in Santa Rosa. Mr. Inman has been on the legal side of eight of these transactions. He said as far as the borrower goes, just like a traditional loan, they have to qualify.
“The economics of the transaction are not different. You have to be credit worthy and you have to be able to finance the debt,” he said.
Qualified projects funded by a tax exempt bond will result in lower interest rates.
“We are talking about the savings of two or three hundred basis points,” said Mr. Inman.
Once a project has been identified as qualifying for the tax exempt bond, a municipality has to back the project by lending its tax exempt status to it.
Done by a county, the state or city, or joint powers of authority, the municipality, by putting their stamp of approval on the project, is allowing for a project to be funded that might otherwise not be.
“This is another tool to help with job creation and business retention,” said Ben Stone, director of the Sonoma County Economic Development Board.
He said industrial projects getting funded may be the difference in keeping them in the area.
Mr. Stone said that the county is contacted either by someone who is working with the company to find a municipality or a company itself wanting to find out if it is worth it.
“It will lower the cost but it takes a lot of due diligence to see if it is worth it,” he said.
When the bond goes out to the capital markets, the bond buyer is taking the risk, the county or state is not on the hook for the money if the borrower were to default on the loan.
The California Association for Local Economic Development established the California Enterprise Development Authority, a joint powers authority to address gaps in economic development financing. The authority issues industrial development bonds for small to medium sized California manufacturers and 501(c) 3 bonds to non-profit organizations. Both bonds provide low cost financing for acquisition, construction and expansion.
Two projects in the North Bay that were financed this way are the Alvarado Street Bakery’s facility in Petaluma and Sonoma Academy.
Alvarado Street Bakery used $8.5 million in tax exempt bonds for the acquisition of land, building and equipment. The total project cost was $11.5 million.
Alvarado Street Bakery, a wholesale bakery specializing in organic whole grain breads and baked goods, had outgrown its space and was seeking to expand into larger industrial space. It projected there would be the creation of 20 new jobs to staff the new plant to meet customer demand. The bakery purchased 68,000 square feet of industrial space.
[caption id="attachment_31648" align="alignleft" width="317" caption="Sonoma Academy was financed with 501(c) 3 bonds for non-profit organizations and Alvarado Street Bakery’s facility in Petaluma was financed with industrial development bonds set up for small to medium sized California manufacturers. "][/caption]
Sonoma Academy had a total bond issuance of $33 million.
“It is not an unusual way for schools like ours to be funded like this,” said Dorice Hogle, the chief financial officer of the school. “When we were getting ready to build we looked at all sorts of funding. One of the big reasons we chose tax exempt bonds is the interest rate.”
She said it was a lot of work.
“It was huge. You have to have a bond attorney you have to have an approved issuer and a municipal agency. But it was worth it.”
Dan Bronfman is the president of Growth Capital Associates. He arranges for the issuance of the bonds, and works with the local municipalities, economic development professionals, business advisers and the business owner and management team.
“This kind of financing was put together to promote investing on the manufacturing sector,” he said.
“There are more upfront costs,” he said. “You have to have a bond lawyer, the bond issuer gets a fee.”
But other than that, it is pretty much the same as getting financing through a more traditional route, he said.
“There is nothing extra. Sometimes people think that if they do tax exempt financing, they have to share information with the government. Nothing. They just have to make their payments.”
The cost savings can be significant, he said. With projects starting in the $2 million to $3 million dollar range, and going up, several percentage points in interest is a lot of savings.
“I have never once had a borrower come to me and say ‘Wow I wish we hadn’t done that,’” said Mr. Inman.