This memorandum provides a summary of tax-exempt Private Activity Bond (formerly known as Industrial Development Bond) financing available under the Internal Revenue Code of 1986, as amended (the “I.R.C.”), including financing for manufacturing facilities, Section 501(c)(3) non-profit organizations, certain “exempt facilities,” and Enterprise Zones. This letter also discusses “Taxable Bond” funding and other incentives for industrial site, which have emerged as a viable alternative to the more restrictive Private Activity Bond scheme. This memorandum contains information on “manufacturing small issues,” “Section 501(c)(3) organizations,” “exempt facilities,” and “Taxable Bonds.” Bond financing for 501(c)(3) organizations, schools, hospitals, and government facilities is highly specialized, and we have distinct Overviews available upon request. The information provided may be relevant in deciding whether Bond financing or other incentives will be available in certain circumstances, how the transaction will be organized and carried out, what benefits will be accessible, and what restrictions will be imposed. However, Bond Counsel should be consulted early in the process to help determine whether a project qualifies and to ensure that all legal criteria are completed.
BOND FINANCING
What is Bond Financing and How Does It Work? Bond financing is provided by a local government agency, usually a development authority or development company (the “developer”), in the form of loans, leases, or installment sales “The Issuer”). State legislation on bonds differ, although they are available in the majority of jurisdictions. The interest rate is low because the Issuer’s bonds are eligible to pay tax-free interest to investors under the Internal Revenue Code, and the lower interest rate is passed on to the User. The money collected from the Bonds is either returned to the Issuer or used to acquire facilities that the Issuer would lease or sell to the User. Variable and fixed interest rates, prepayment, and long and short maturities are just a few of the terms that can be used to structure bonds.
What Are the Benefits of Bond Financing? Interest on a qualified Private Activity Bond is exempt from federal income taxation (although is subject to alternative minimum tax in the case of Bonds for Section 501(c)(3) organizations) and, in most cases, income taxation in the state where the Bonds are issued. The fundamental benefit of Private Activity Bond financing is that, because of the tax exemption, normal borrowing rates are significantly lower than traditional borrowing rates. A Taxable Bond does not meet the criteria for a federally tax-exempt Private Activity Bond, but it normally pays interest that is tax-free in the state of issue and may provide other benefits. Ad valorem and sales tax exemptions may be used through Private Activity Bond or Taxable Bond funding in some localities. Look into it “Taxable Bonds and Other Incentives” is the title of this section. SEC and blue sky registration are frequently waived for Private Activity Bonds. Finally, public participation in the funding can generate significant community interest in and support for the initiative being financed (the project) “Project.”
Bonds are repaid in a variety of ways. Bond financing is often secured exclusively by the User’s credit and any credit enhancements provided by the User, as well as assets or other security pledged by the User for this reason. Users frequently use bank letters of credit or other types of credit “credit enhancement” such as bond insurance to support Bonds issued for their facilities is a good example. Because investors assess and rely on the credit enhancer’s financial strength rather than the User’s, credit enhancement ensures that the Bonds may be easily sold and achieve the lowest interest rates. However, in order to get this sort of financing, the User’s credit, financial situation, and operating history must satisfy the credit enhancer.
Who is it that buys the bonds? Bonds can be sold publicly or privately. Banks may choose to purchase Bonds, while I.R.S. laws result in higher rates for bank-held Private Activity Bonds (with the exception of some Section 501(c)(3) Bonds) (see below) “Hereinafter referred to as “Bond Placement”). Bonds are sometimes sold to individuals as well as institutional investors and mutual funds. Bond placement and underwriting services are available from a variety of banks and investment bankers (see below) “Procedural Steps Bond Placement” (hence referred to as “Procedural Steps Bond Placement”).
The following are the contents of this Memorandum. The remainder of this memorandum will cover who can issue Private Activity Bonds and for what purposes, the limitations and requirements imposed by state and federal law on Private Activity Bond financing, typical structures for such transactions, the steps required to complete them, Taxable Bond financing, tax and other incentives, and the role of Bond Counsel.
TYPES OF PROJECTS FINANCEABLE
Facilities for manufacturing and processing “Property and facilities utilized in the manufacturing, production, or processing of personal property, as well as on-site related and auxiliary office and other space, may be issued as “small issue” Private Activity Bonds (no more than 25 percent of Bond proceeds may be applied to ancillary uses). At least 70% of the revenues from “Small Issue Bonds” must be used to finance property that is directly used in the manufacture, production, or processing of personal property (referred to as “core manufacturing assets”). Property used in the storage or movement of raw materials and inventory, for example, is not considered a key industrial asset, but it is typically functionally tied to the process. To avoid exceeding the 25% limit on financed assets that are not core manufacturing assets, I.R.S. rules sometimes require companies that want to use bonds for manufacturing facilities to exclude some of those portions of their total capital projects from the financing “Ancillary” is the only word that comes to mind. Property investments in functions such as storage, manufacturing offices, packaging, and shipping that are functionally related to the manufacture of goods on site and are subordinate (in the sense that the portion of the investment that these functions represent is smaller than the portion of the investment that these functions represent) are treated as subordinate “ancillary” costs are subject to a 25% limit.
Non-Profit Organizations with a 501(c)(3) status.
Private Activity Bonds can be used to fund non-profit organizations that fall under Section 501(c)(3), such as schools, charities, and certain healthcare facilities.
Private Activity Bonds for Section 501(c)(3) groups that are tax-exempt can be designated as “qualifying” for full tax benefits when purchased by banks.
“Facilities that are “exempt.”
Certain multifamily rental housing projects, solid waste disposal facilities, hazardous waste facilities, water furnishing facilities, sewage facilities, certain local electric energy facilities, certain local heating or cooling facilities, airport and mass transportation facilities, public educational facilities, green building and sustainable design projects, and certain freight transportation projects may all be eligible for Private Activity Bonds.
Airports, docks, wharves, and mass-transit facilities all fall under this category, but they must be owned by a government entity, even if they are leased to private enterprises.
Projects for Redevelopment.
An Issuer may issue tax-exempt qualified redevelopment bonds in accordance with a redevelopment plan for the acquisition, clearing, and refurbishment of real property in certain areas classified as blighted for resale at market value to private parties.
The bonds must be secured primarily by general-purpose taxes, such as increases in property taxes due to increases in valuation as a result of the redevelopment plan’s implementation.
These ties could be in the form of “Tax-increment finance, such as “tax allocation bonds.”
Restriction on Used Buildings and Equipment
Used buildings (and equipment for the building purchased with the building) and other structures may be financed if sufficient qualifying rehabilitation is to be done-15 percent for buildings (and such integrated equipment) and 100 percent for other structures, with the exception of Bonds for Section 501(c)(3) organizations and Qualified Enterprise Zone Businesses.
Uses that are not permitted. Although federal law allows up to 5% of the revenues from Private Activity Bonds to be used for non-capital or non-qualifying costs, state law may be more restrictive. Bond revenues are counted against this 5% if they are used to cover issuance costs. A Private Activity Bond may not be used to fund an airplane, a private luxury box, certain healthclub facilities, a gaming facility, or a liquor store.
Using Taxable Bonds in a More Diverse Way
Taxable Bonds can be issued for any project that has been approved by the state legislature.
Taxable Bonds can be used for a wide range of manufacturing and non-manufacturing projects, including warehousing, distribution, office, research and development, utility, service, retail, commercial, and healthcare buildings, though state rules vary greatly.
BOND ISSUERS
Principle of Public Purpose Only if a public objective is fulfilled, such as increased employment opportunities, the promotion of commerce or industry, or the advancement of the general welfare, may an Issuer issue Bonds for a Project. State laws dictate certain criteria.
State law applies.
Governmental authorities must issue Private Activity Bonds.
Almost every state allows bond financing, and the sorts of Issuers and Projects that can be funded differ.
Preliminary studies, direct Project costs, attorneys’ fees, financing and issuance charges, interest paid during construction, and certain reserve monies are frequently included in financeable costs.
Several of the Issuers and Projects that can be financed in Georgia are described here for illustration purposes.
Authorities in charge of development.
Development Authorities, which are established by statute in every Georgia city and county and are active in many, can issue Private Activity Bonds to fund the purchase, construction, renovation, expansion, improvement, or modification of plants, factories, mills, sewage and solid waste facilities, as well as machinery, equipment, or any other property that an industrial concern might want to acquire or lease in connection with the operation of such a facility within its jurisdiction.
Warehouses, office buildings, industrial parks, nursing homes, and research and development facilities are among the facilities for which Development Authorities may issue Taxable Bonds.
A Development Authority may not fund a facility unless it would increase or maintain permanent jobs in the jurisdiction.
Georgia has also established a number of regional development authorities.
Authorities in charge of downtown development.
Any incorporated municipality in Georgia can create a Downtown Development Authority.
Any Project that a Downtown Development Authority decides would promote the public purposes for which it was established may be funded.
Downtown Development Authorities, on the other hand, can only fund projects in designated downtown development districts.
Other Governmental Agencies
Housing Authorities, Resource Recovery Development Authorities, Solid Waste Management Authorities, and Hospital Authorities all exist in each county and can issue bonds.
Furthermore, special authorities with the authority to issue bonds have been established in nearly two-thirds of Georgia’s counties as a result of a constitutional amendment.
In each case, the relevant legislation must be consulted.
SIZE LIMITATIONS
General. Bonds that are taxable can be issued in any size. Small Issue Manufacturing Projects, Enterprise Zone Projects, and other financings for Section 501(c)(3) organizations are all subject to size restrictions imposed by federal law. There are no size restrictions on financing for tax-exempt qualified residential rental properties, sewage or solid waste disposal facilities, water furnishing facilities, local electric energy and gas furnishing facilities, hazardous waste facilities, local heating and cooling facilities, transportation facilities, and qualified redevelopment projects.
Bonds with a face value of $1,000,000 each.
A $1,000,000 or a Capital Expenditure Limitation applies to Small Issue Private Activity Bond Projects.
Private Activity Bonds of up to $1,000,000 can be issued to fund a share of any Project, regardless of size, in any city or county.
Any outstanding Small Issue Private Activity Bonds previously used for that Project or for certain other facilities in the same political jurisdiction as that Project will be cancelled “To determine compliance with the $1,000,000 limitation, a “Principal User” of that Project (or a “Related Person” to such a “Principal User”) will be added to the proposed Private Activity Bond.
The words “Principal User” and “Related Person” are defined further down.
Small Issue Bonds of up to $10,000,000 are available.
At the Issuer’s discretion, the $1,000,000 bond limit can be increased to $10,000,000.
The amount of permissible capital expenditures throughout a limitation period in the same jurisdiction is limited to $20,000,000 (the Bonds themselves cannot exceed $10,000,000) “Larger projects can now qualify because of the CEL (Capital Expenditure Limitation).
To assess if a company is in compliance with the Capital Expenditure Limitation, add the sum of the Private Activity Bond issues listed in the preceding paragraph “Capital Expenditures” that have been or will be paid or incurred within three years of the issuance of a Private Activity Bond (and paid otherwise than out of the proceeds of such Bond issues).
If the Capital Expenditure Limitation is exceeded at any point, the Private Activity Bond becomes taxable.
Capital Expenditure is a term used to describe the amount of money spent on something.
“Any expenditure that may be capitalized under any treatment under the Internal Revenue Code is referred to as “capital expenditures.”
Capital Expenditures made by any person with respect to the Project, or with respect to any facility in the same county or incorporated municipality of which any Principal User of the Project (or a Related Person) is a Principal User, must be taken into account for the Capital Expenditure Limitation.
(Capital expenditures and Private Activity Bond offerings in both jurisdictions must be included in some cases if contiguous or integrated facilities are located in neighbouring jurisdictions.)
The Most Important Users.
The User and every lessee, sublessee, or other person who has the right (contingent or otherwise) to occupy ten percent or more of the Project, as determined by the lesser of noncommon use space or gross rent for any year, are considered Principal Users.
The ten percent yearly rent test involves a number of issues, including tax reimbursements, other escalation costs, and common area maintenance payments all of which should be considered as rent as well as contingent rents.
In addition, even though he does not have a right to occupy, a person may qualify as a Principal User of the Project if he accepts a significant amount of the goods or services produced at the Project as part of a contractual obligation.
A project can have more than one Principal User.
Included are capital expenditures.
Other Private Activity Bonds (and related Capital Expenditures) issued at substantially the same time pursuant to a common plan of financing for the same Principal User or a Related Person, regardless of where the Project is located, may be included in the $1,000,000 or Capital Expenditure computation.
Furthermore, regardless of whether the Principal Users are related, other Private Activity Bonds (and related Capital Expenditures) that are used, in whole or in part, for other portions of the same building or strip of offices, warehouses, et cetera using substantial common facilities must generally be included in the $1,000,000 or $20,000,000 computation.
Expenses for the lease are not included.
Leasing equipment is one way to keep the cost of a Small Issue Project down.
Expenses incurred for a “True” leases of equipment from a non-affiliated third party engaged in the leasing business do not count as Capital Expenditures.
After the three-year limitation period has expired, you can exercise your purchase options for leased equipment.
Request a copy of our memorandum “For Capital Expenditure Purposes, the Requirements of a True Lease.”
Limitation of $40,000,000.
A Small Issue Private Activity Bond may not exceed $40,000,000 for a three-year test period when combined with other Private Activity Bonds (whether or not Small Issues) allocable to facilities of Principal Users of the Project (and Related Persons), wherever located.
When a Private Activity Bond is used to fund a Project with many owners, the Private Activity Bond is divided among them pro rata based on ownership.
When a Private Activity Bond is used to fund a Project with several users, the Private Activity Bond is divided up by use.
ARBITRAGE
Restriction on Arbitrage If bonds are regarded to be worthless, they are not eligible for tax exemption “bond arbitrage.” Arbitration regulations are complicated, so we’ll just give you a quick rundown. If more than the lesser of 5% or $100,000 in bond proceeds is reasonably expected to be utilized, or to replace funds used, directly or indirectly to acquire higher yielding investments, the bonds are arbitrage bonds. Bond revenues can include cash pledged to pay Bonds, sinking funds, or other sources from which Bonds are expected to be repaid. The notion of “The term “investments” is broad, encompassing almost any contract or object that may be assigned a rate of return. Exceptions are granted for the temporary investment of revenues, such as the temporary placement of funds in a genuinely fide debt payment fund or a fund for proceeds awaiting use. Three years is the temporary time for investing proceeds until their use in the acquisition or building of property. Investment yield restrictions do not apply to amounts in a reasonably required reserve or replacement fund, as long as the reserve or replacement fund does not exceed 10% of the issuance proceeds.
Rebate for Arbitrage
Even if Bonds follow the above-mentioned arbitrage criteria, arbitrage earnings in excess of the Bonds’ yield must be rebated to the federal government on a regular basis.
The rebate requirements demand that computations and filings be done on a regular basis.
There are certain exceptions to the rebate requirement, such as “18-month” and “6-month” exemptions.
The User’s capacity to comply with the applicable exemption may have an impact on when the Bond issue is closed.
Exemption for 18 months.
If all gross revenues (excluding those placed in a reasonably required reserve fund) are expended in accordance with the following schedule, the rebate obligation is waived: Within 6 months, at least 15%; within 12 months, at least 60%; and within 18 months, at least 100% (with an exception for reasonable retainage spent within 30 months).
Exemption for six months.
If all gross proceeds (excluding those held in a reasonably required reserve fund) are spent within six months, the rebate obligation is waived.
OTHER LIMITATIONS
Length of Financing for Private Activity Bonds. Federal law limits the average maturity of a Private Activity Bond issue to 120 percent of the Project’s average reasonably foreseeable economic life. The average economic life must be weighed by taking into consideration the costs of the Project’s various components. The economic life is calculated from the date a Private Activity Bond is issued or the date the facilities are put into service, whichever comes first. Midpoint lives for personal property under the former ADR system and guideline lives for buildings under Revenue Procedure 62-21 may be used as safe harbors when determining economic lives. In general, land is not taken into account while calculating the average.
Method of Cost Recovery that has been specified.
Under the Alternate Depreciation System, the cost recovery (depreciation) deduction for property funded with a Private Activity Bond (other than qualifying residential rental property) must be calculated using the straight-line approach.
Prohibition on Federal Guarantees.
If the payment of principal or interest is directly or indirectly guaranteed in whole or in part by the United States or any of its agencies or instrumentalities, Private Activity Bonds are not eligible for tax exemption.
If 5% or more of the revenues are utilized to make federally guaranteed loans or invest in federally insured deposits or accounts, the bonds will be treated as guaranteed by the federal government.
Exceptions are granted to allow proceeds to be invested in US Treasury liabilities, as well as investments of bona fide debt service funds, reasonably required reserve funds, and funds to store proceeds before they are used.
Costs of Issuance
A maximum of 2% of the revenues of a Private Activity Bond may be used to cover expenditures related with the bond’s issuance.
Any costs that are not covered by the budget can be covered by other means.
A shift in usage.
A shift in the use of a facility financed with a Private Activity Bond to a use for which such a Bond could not have been issued could result in the User losing their interest deduction and the Bond being taxable, among other things.
INDUCEMENT
Resolutions to induce inducing inducing inducing inducing inducing Obtaining an inducement resolution and agreement from the Issuer, also known as a declaration of official intent (the “Inducement”), is usually the first stage in a Bond transaction. An Issuer’s agreement in principle to issue Bonds for a proposed Project is referred to as this. An inducement should be received as early as possible in the planning process. According to the public purpose concept, an Inducement should be considered when deciding where the Project should be located. As a result, before the User enters into binding contracts regarding the location or building of a Project, an Inducement should be obtained. Bonds, on the other hand, may be used to finance costs if an Inducement or other qualifying declaration of official intent to finance is made no later than 60 days after the costs have been spent and the Bonds are issued no later than eighteen months after the Project is ready to be put into service.
Costs that can be financed.
Under Federal law, charges incurred prior to an Inducement (with the exception of some preliminary costs such as surveys and planning) are not “qualified costs.”
Federal law mandates that 95% of the proceeds of a Private Activity Bond, including any income generated from the investment of Private Activity Bond proceeds, be used for land and depreciable property costs that qualify due to a prior Inducement.
When purchasing Project components from a Related Person, a specific inquiry must be conducted to ensure that the costs qualify. Furthermore, anyone who used 5% or more of a facility (a “Substantial User”) in the five years before to the Private Activity Bond issue and gets paid 5% or more of the proceeds from the Private Activity Bond is generally not allowed to be a Substantial User in the five years after the issuance. For these reasons, “Related Person” has the same meaning as “partner” and “partnership,” as well as every shareholder and his “Subchapter S” corporation.
Expiration.
An inducement can have an expiration date or not.
In any case, a Private Activity Bond must be issued within three years of the official intent and eighteen months of the date a Project is acquired or placed in service, whichever comes first.
FORM OF TRANSACTION
General. Because a Bond transaction involves the employment of an Issuer as a middleman, it differs from a traditional financing transaction. The precise form to be utilized is determined by the parties’ interests as well as local requirements. The Issuer sells the Bond and uses the profits to fund the Project in any transaction. Loans, leases, and installment sales are the three most typical types of transactions.
Loans.
By statute, an Issuer may be allowed to loan Bond proceeds to a User for use on a Project.
When this form is employed, the User enters into a loan agreement with the Issuer and typically provides a note as proof of the loan.
The loan agreement and note will be assigned as security for the Bond by the Issuer.
In such a transaction, the User is the owner of the Project.
This is the most basic and widely used configuration.
Leases.
The majority of Issuers can, and some must, own the financed Project and lease it to the User.
When this form is employed, the Project site is usually ceded to the Issuer, and the Project is built or acquired in the Issuer’s name using the Bond proceeds.
The Project is then leased to the User, who agrees to pay rents that will be used to pay down the Bond’s principal and interest.
As security for the Bond, the Issuer assigns its lease rights.
When the Bond is paid, the User often purchases the Project at a low cost.
Ad valorem and/or sales taxes can be avoided in some jurisdictions by using the lease form of the transaction.
Look into it “See “Ad Valorem Tax Breaks” for more information.
Sales made in installments.
It’s not uncommon to use an installment selling transaction.
The Issuer takes title to the Project in this transaction, which is analogous to a lease transaction. Rather than leasing the Project, the User engages into an installment sale agreement, agreeing to pay purchase price payments equivalent to the Bond’s debt service. The User may receive title to the Project immediately or after payment of the Bond.
Control of the project by the user.
The User is typically entitled to depreciation, is responsible for insurance, taxes, and maintenance, has design and construction freedom, and may be treated as the Project under any arrangement, loan, lease, or sale “For all intents and purposes, you are the “owner.”
The User has substantially the same influence over the Project as under traditional finance for the life of the financing.
Covenants and security devices that are common in traditional construction, commercial, or corporate loans can also be included in a Bond transaction.
Bonds are eligible for credit.
In most cases, neither the Issuer, the local government, nor the state provides any credit for the Bonds, regardless of the transaction’s structure.
The bondholders look to the User’s underlying commitment, as well as any guaranties, mortgages, security instruments, insurance, letters of credit, or other cash or credit improvements that the User may give to pay the Bond.
Some countries, however, have legal authority to enable Bond funding with a restricted tax commitment.
When making such agreements, Bond Counsel should be engaged.
PROCEDURAL STEPS
Placement of Bonds. After obtaining an inducement and Bond Counsel determining that the transaction can be structured as a Bond Project, the User would typically place the Bonds through an investment banker or underwriter. Bonds can be placed privately, for example, with an investor group or a financial institution, or sold publicly through a mutual fund. The Internal Revenue Service has taken away banks’ and other financial institutions’ ability to deduct the interest costs of money borrowed to buy or hold tax-exempt Private Activity Bonds, which were formerly deductible to the tune of 80%. As a result, interest rates on Private Activity Bonds are now higher at such institutions. Only certain $10,000,000 or less governmental issuance and Section 501(c)(3) organization Bonds are exempt from this treatment. When a bond fund or a public sale is used, disclosure documents are usually prepared. A trustee may be appointed for the issuance depending on the nature and number of bonds. If a Substantial User of a Project holds a Private Activity Bond, the interest will not be tax-free.
Documentation required by law.
The terms and provisions of the Bond, as well as the supporting paperwork, must be negotiated and agreed upon once the form of Bond sale has been selected.
The majority of the transaction’s documentation will be prepared by Bond Counsel.
If funds are available, the acquisition and development of the Project could begin during this time if an inducement has been achieved.
Hearing on “TEFRA.”
A public “TEFRA” hearing must be held at least 14 days after publication of a notice informing the community of a proposed Private Activity Bond, as well as the nature and location of the Project.
Following the public hearing, the Private Activity Bond must be approved by both the Issuer and an appropriate elected official or legislative body with authority over the Project.
Other Procedures and Validation
Prior to the issuance of a Bond, many states need additional procedural requirements.
Most Bonds in Georgia, for example, must be judicially validated in a case in which the State, the Issuer, and the User all participate.
This proceeding will require the publication of a new public notice.
The closing date is influenced by both TEFRA and state procedures.
Every Private Activity Bond (other than for a Section 501(c)(3) organization) must be issued within the applicable state’s total Private Activity Bond volume limits, and further procedural steps are required to secure an allotment of the state’s quota.
Depending on the state, one may have to compete for a state or a local pool allotment.
Procedure for Allocation in Georgia.
A statewide pool has been established in Georgia, and applications are reviewed on a regular basis.
The “Economic Development Share,” which is distributed over four years, is available on a first-come, first-served basis for any Private Activity Bond that meets the requirement of creating or retaining at least one job every $125,000 in Bond proceeds.
A copy of the Inducement, proof of publication of the TEFRA hearing and the TEFRA approval, an opinion of legal counsel, and a commitment letter from a Bond purchaser, placement agent, or underwriter, along with an application and application fee, are required to apply for an allocation.
Specialized projects necessitate the use of extra materials.
After receiving an allocation, a Private Activity Bond must be sold within a particular time frame.
Report on Information.
An information report detailing the Private Activity Bond, the Issuer, the User, and the Project must be filed with the Internal Revenue Service in conjunction with the transaction’s closure.
TAXABLE BONDS AND OTHER INCENTIVES
Bonds that are taxable can be used in a variety of ways. Due to the various constraints on the issue of federally tax-exempt Private Activity Bonds detailed above, a User may elect to fund a portion or all of a Project using Bonds that do not qualify for federal tax-exempt interest. In some jurisdictions, such Bonds may be free from income taxation in the state of issuance, and if the Issuer acquires title to the Project, relief from ad valorem taxes may be possible. Most of the procedural and substantive restrictions detailed in this memorandum as they apply to Private Activity Bonds are not relevant to such a Taxable Bond. When parts of a project don’t meet the standards for a Private Activity Bond, a combination of Private Activity Bonds and Taxable Bonds can be used to fund the full project. If a Private Activity Bond is not available for a particular Project (e.g., a non-manufacturing Project or a Project worth more than $10,000,000) or is not offered on fair terms, a Taxable Bond may be a viable alternative.
Abatement of ad valorem taxes.
Through the use of a Bond-lease transaction, any Georgia city can grant partial relief from ad valorem taxes for Projects, and some can provide full exemptions.
Request a copy of our “Ad Valorem Tax Breaks for IDB Lease Transactions” memorandum.
An Issuer would sell a tax-exempt or taxable Bond to finance a facility that it leases to a User, the lease payments would amortize the Bond, and the User would purchase the facility at the conclusion of the lease to acquire such an exemption.
In Georgia, constitutional amendments and acts establishing authorities usually include a provision stating that the authority’s property is exempt from taxation to the same degree as governmental property. These changes and statutes often include a clause stating that the tax exemption does not apply to a lessee of the authority’s property. A clause like this can be found in the general Development Authorities Law, which applies to the most frequent type of Issuer. The value of the leasehold estate must be determined in this scenario, and a suitable tax must be assessed. The leasehold interest will be taxed less than the ownership interest due to the terms and other aspects of the lease. Typically, the tax will begin at a modest level and gradually rise as the value of the buy option rises. The broad exemption from taxation is contained in some special legislation establishing local development authorities, but not the phrase subjecting the leasehold interest to taxation. In such circumstances, the leasehold can be completely tax-free.
Grants are available.
Georgia has a number of grant schemes in place to help with economic growth.
Although certain funds may support private initiatives, the majority of awards are submitted for and awarded to development authorities or other local government organizations.
The development authority may lease the property or facilities financed with grant monies to a private enterprise, which will then purchase the property or facilities when the lease is up.
The Georgia Department of Community Affairs (DCA) administers Community Development Block Grants (CDBG), the Employment Incentive Program (EIP), and the Regional Economic Business Assistance Program (REBA), as well as the OneGeorgia Authority’s Economic Development, Growth and Enterprise Program (EDGE) and Equity Fund Program.
Typically, such subsidies are agreed upon as part of the bond, property tax, and other incentives negotiations with the local development authority or other local economic development agencies.
Other Benefits.
Approximately two-thirds of Georgia municipalities have enacted “Freeport” exemptions from inventory taxes, which range from 20% to 100%. In certain places, the state has established “Enterprise Zones,” “Foreign Trade Zones,” and “Opportunity Zones,” each with significant tax or other benefits. Many communities have created business parks and speculative buildings, and they may help with subsidies, loans, and other services. Market profiles, recruitment, screening, and training are all available. Many Development Authorities and localities have devised innovative finance arrangements that enable them to provide additional, specific incentives to Projects, such as attractive or subsidized development sites, leased buildings, and other services. Georgia’s QuickStart program provides qualifying firms with free, personalized worker training.
BOND COUNSEL
Bond Counsel should be retained if they have knowledge with municipal bond law. Bond Counsel’s role is to organize and document the transaction, as well as to provide an opinion on the Bond’s validity and tax status. Bond Counsel fees are paid by the User from the Bond revenues. Other parties may be represented by Bond Counsel, or the User, the Issuer, and the Bond purchaser or underwriter may be represented independently. Smith, Gambrell & Russell, LLP is a Bond Counsel firm that is included in the “Red Book.”
SUMMARY
This paper is intended to give a high-level understanding of Private Activity Bond financing and other incentives. These devices may offer significant benefits, but they are subject to heavy federal and/or state regulation. This Overview can only touch on a few of the most important problems and should not be construed as a comprehensive discussion of all legal issues. Instead, this Overview gives some background material that might be used to start a conversation with Bond Counsel.
Are all private activity bonds free from taxes?
An issuer can always use funds from other sources to cover these extra issuance costs. Unless the bond is a qualifying bond, the interest on a private activity bond cannot be tax-free.
Is the interest on private activity bonds taxable?
Unless the bond is a qualified private activity bond and meets other standards, some of which also apply to governmental bonds, interest on a private activity bond is taxable. The number of private activity bonds that can be issued is limited by the IRC.
What types of bonds are tax-free?
Municipal bonds issued for a private project are known as private activity bonds (as opposed to a project for the good of the public). Under the regular income tax system, these bonds are tax-free, but they are taxed under the alternative minimum tax system.
Income from private activity bonds, if any, will be reported to you in Box 11 of your 1099-DIV if you invest in municipal bonds through a bond fund.
What is the procedure for repaying private activity bonds?
Approximately $2.9 billion in debt has been issued on behalf of private businesses to 32 entities in over 113 different financings since 1972.
Private activity bonds are issued by the EIERA in collaboration with the Missouri Department of Economic Development (DED) to provide finance for specified Missouri infrastructure. The EIERA issues private activity bonds, which are tax-exempt securities issued on behalf of a private corporation or a not-for-profit organization for qualified environmental, pollution control, or energy initiatives. The entity for which the EIERA issues the bonds is exclusively responsible for repaying the bonds. The EIERA is not responsible for the repayment of the bonds’ principal or interest.
Short-term notes, intermediate or long-term bonds, and fixed or variable rates are all options for financing.
Is AMT applicable to all private activity bonds?
Implications for Taxation The majority of private activity bonds are eligible for the alternative minimum tax (AMT), which is a different way of calculating federal income tax. Except for hospital and non-profit college bonds, all private activity bonds have been subject to AMT since the Tax Reform Act of 1986.
Is the tax-exempt bond premium taxable?
You must amortize the premium if the bond pays tax-free interest. In calculating taxable income, this amortized sum is not deductible. However, using the constant yield technique, you must lower your basis in the bond (including tax-exempt interest ordinarily reportable on Form 1040, line 8b) by the amortization for the year. This is required to lower the bondholder’s tax basis in the tax-free bond in order to establish whether or not there is a capital gain on dispose.
There will be no financial gain or loss connected with the bond if it is held to maturity. If you sell the bond before it matures, the portion of the premium that hasn’t been amortized may result in a capital gain or loss.
Because interest is not taxable, no deduction for premium amortization is usually allowed; however, if the bonds are taxable (out-of-state) bonds, the taxable income can be reduced by the amount of premium amortization.
Subtract the amortization of the bond premiums from your interest income from these bonds.
Schedule B (Form 1040A or 1040), line 1, is where you report the bond’s interest. Put a sum of all interest listed on line 1 under your last entry on line 1. Print “ABP Adjustment” and the total interest you got below this amount. Subtract this amount from the total and write the result on line 2.
Are exempt interest distributions have to be reported?
A payout from a mutual fund that is not subject to federal income tax is known as an exempt-interest dividend. Exempt-interest dividends are frequently connected with municipal bond mutual funds. Although exempt-interest dividends are not taxed at the federal level, they may be subject to state income taxes or the alternative minimum tax (AMT). Dividend income must be reported on a tax return, and mutual funds must disclose it on Form 1099-INT.
What is a taxable alternative minimum income?
An alternative minimum tax (AMT) sets a limit on the amount of tax a filer must pay to the government, regardless of how many deductions or credits they claim. After certain tax preference items are included back into adjusted gross income, the AMT recalculates income tax.
Is bond income taxable?
The majority of bonds are taxed. Only municipal bonds (bonds issued by local and state governments) are generally tax-exempt, and even then, specific regulations may apply. If you redeem a bond before its maturity date, you must pay tax on both interest and capital gains.