Recovery Zone Bonds
In North Carolina
Sponsored by:
NC Department of State Treasurer
NC Association of County Commissioners
NC League of Municipalities
October 22, 2009
Presented by:
Vance Holloman
North Carolina Local Government Commission
Stewart Dickinson
North Carolina Department of Commerce
Mary Nash Rusher
Hunton & Williams LLP
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Overview
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General Rules
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Recovery Zone Designations
Recovery Zone Economic Development Bonds
Recovery Zone Facility Bonds
Allocation in North Carolina
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Process for issuing Recovery Zone Bonds
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Initial allocation
Waiver and deemed waiver
Reallocation
Recovery Zone Economic Development Bonds
Recovery Zone Facility Bonds
Question & Answer
Recovery Zone Bonds
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Two Types:
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Recovery Zone Economic Development Bond (“RZEDBs”) (Internal
Revenue Code § 1400U-2)
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Recovery Zone Facility Bonds (“RZFBs”) (Internal Revenue Code §
1400U-3)
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Finances governmental purposes in a recovery zone
Form of Build America Bond – 45% credit to issuer
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Private activity bond – a kind of exempt facility bond
Finances a private use in a recovery zone
Allows private sector to borrow at tax exempt rate
Typically the local Industrial Facilities And Pollution Control Financing Authority
is the issuer
For multi-jurisdictional projects, the North Carolina Capital Facilities Finance
Agency may also be the issuer
Can be used for governmental projects that have too much private use
Designation of Recovery Zone
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Designation of Recovery Zone:
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A recovery zone is any area designated by the issuer as having
“significant poverty, unemployment, rate of home foreclosures or
general distress”
Issuer has broad discretion to designate a zone “in any reasonable
manner as it shall determine in good faith in its discretion” (IRS Notice
2009-50)
Designation of entire county is permitted
Issuer should adopt a resolution designating recovery zone; resolution
should recite factors that support the designation
Recovery Zone Economic Development
Bonds
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Recovery Zone Economic Development Bonds (“RZEDBs”)
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RZEDBs are a subset of Build America Bonds (“BAB”)
The amount of the refundable credit is 45% of the amount of interest
payable on the interest payment date
The issuer must irrevocably elect for the obligation to be a recovery zone
bond
Very specific reporting requirements for the 8038G
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Construction found in IRS Notice 2009-26 (found at www.irs.gov)
Line 18 must read “Recovery Zone Economic Development Bond (Payment
Option)
Additional information must be attached
Form 8038CP must be filed 45-90 days before each fixed rate interest
payment date to receive credit on the related interest payment date
Recovery Zone Economic Development
Bonds (cont’d)
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Qualifications for RZEDBs
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100% of available project proceeds or APP (i.e. sales proceeds less
an amount not to exceed 2% costs of issuance), net of any amounts
placed in a reasonably required reserve fund, must be used for
qualified economic development purposes
“Qualified economic development purposes” are described as
“expenditures for purposes of promoting development or other
economic activity in a recovery zone” and include
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capital expenditures paid or incurred with respect to property in the zone,
and
expenditures for public infrastructure and construction of public facilities
Recovery Zone Economic Development
Bonds (cont’d)
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Thus, RZEDBs can be used to finance nearly any capital
expenditures that promote economic development or economic
activity in the recovery zone
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Infrastructure (roads, water and sewer, electric transmission)
Schools
Public buildings
Industrial parks
Recovery Zone Economic Development
Bonds (cont’d)
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Other Characteristics and requirements of RZEDBs:
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Interest is taxable to the holder
Bond obligation must be issued by December 31, 2010
General Tax Exempt bond rules (including arbitrage and rebate) under
Section 103 of IRS Code apply
Issuer must have a reasonable expectation that it will spend Available
Project Proceeds within three years
Yield for arbitrage purposes is reduced by the credit
No refundings allowed; can reimburse for expenditures paid after the
effective date of ARRA (2/17/09) and originally financed with short-term
temporary financing
Davis-Bacon DOES apply
Recovery Zone Facility Bonds
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RZFBs are a new category of “exempt facility bonds” under IRC § 142
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95% or more of the net proceeds must be used for “recovery zone
property”
“Recovery Zone Property” is depreciable property that is located and first
used in the active conduct of a “qualified business” in a “recovery zone”
Property must be constructed, reconstructed, renovated or acquired by
the borrower after the date the recovery zone was designated
Important: A used building can only be acquired with RZFB proceeds if
the borrower spends money on renovation, rehabilitation, improvement
and expansion that doubles the basis of the building with 24 months after
the zone is designated
“Recovery Zone” for RZFBs is the same as the recovery zone for
RZEDBs
Recovery Zone Facility Bonds (cont’d)
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“Qualified Business” means any trade or business other than:
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Example:
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Residential rental property or
Facilities described in IRC § 144(c)(6)(b) (i.e., commercial golf course, country
club, massage parlor, hot tub, suntan, racetrack, gambling facility, or business that
sells alcoholic beverages for off-premises consumption)
Shopping centers or other retail
Manufacturing
Distribution or warehouse facilities
Hotels
Restaurants
Office buildings
The issuer is a county’s Industrial Facilities and Pollution Control Financing
Authority under NCGS § 159C (N.C. Session Law 2009-140)
Allocation
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ARRA established a limited allocation for Recovery Zone Bonds across
the country ($10 billion for RZEDBs, $15 billion for RZFBs), to be
allocated to the states, and then to large cities and counties within the
states based on loss of employment between December 2007 and
December 2008
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Initial Allocation by the U.S. Department of Treasury to states/large
municipalities/counties found in IRS Notice 2009-50
Found at www.irs.gov
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Click on “Tax Exempt Bond Community” tab
Click on “IRS Releases Guidance on ARRA Bond Provisions”
Click on “Notice 2009-50 (Recovery Zone Bond Volume Cap Allocations)” and
on the words within that paragraph that say “Click here to access these
suballocations”—that will lead to the state by state list of city and county
allocations
Allocations – North Carolina law
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NCGS 143-433.6, as amended by Session Law 2009-140, provides that
the North Carolina Tax Reform Allocation Committee (also known as the
Volume Cap Committee) will be responsible for reallocation
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North Carolina Department of Commerce (“Commerce”) is the administrative
arm of the Volume Cap Committee
If initial allocation is not used by a large municipality or county that received
it, the allocation may only be reallocated by the State through the Volume
Cap Committee
A county can designate a city or town within the county to use the
allocation without going back to the State, but cannot “transfer” the
allocation to a governmental unit outside the county
Total Allocation in North Carolina
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RZEDs Allocation
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North Carolina received an allocation of $418,154,000
RZFBs Allocation
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Total allocation: North Carolina received $617,231,000
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U.S. Treasury then made suballocations of that amount to large
municipalities (Cary, Charlotte, Fayetteville, Greensboro, High Point,
Raleigh, Winston-Salem) and to counties based on the ratio of
employment losses compared to the state’s losses
Total Allocation in North Carolina (cont’d)
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Commerce has introduced rules to be added to the North Carolina
Administrative Code in Section 04 NCAC 01H .0400-.0404
Rules require counties and large municipalities to designate projects to be
financed with recovery zone bonds by December 15, 2009 or allocation will
be “deemed waived” for reallocation by the State
County or large municipality can waive allocation and request the State to
reallocate it to a project in another governmental unit
Issuers should file a copy of IRS Form 8038/8038G as applicable with
Commerce
Forms for verifying use of allocation, waiver of allocation and requesting
reallocation will be available at www.nccommerce.com under Business
Services – Financial Incentives
Process to Keep or Waive Allocation
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Process for all RZ Bonds
1. Adopt a resolution designating recovery zone
2. Identify projects for RZEDB and/or RZFB financing
3. Adopt a resolution designating the project(s) to use applicable amount
of recovery zone allocation
4. If issuer wishes to waive its allocation and request that it be
reallocated to a project in another jurisdiction, adopt a resolution
identifying the project
5. Either issue obligation before 12/15/09 or file forms with Commerce
before 12/15/09 identifying project(s), waiving some or all of allocation,
and, if applicable, identifying projects for waived allocations
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If bonds are not issued and no form is received
on or before 12/15/2009 Allocation will be
deemed waived for reallocation by the State
Process for Reallocation
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The Volume Cap Committee will consider requests for reallocation on
an ongoing basis
In making reallocation decisions, the Committee will consider the
following criteria (as stated in the rule):
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Whether the unit is in competition with another state for project benefits such as
jobs and tax base
Whether the availability of the reallocation is a crucial part of attracting a new
company or keeping an existing company in place
Whether the requested reallocation will benefit a project for which a county or
municipality is already issuing Recovery Zone Bonds
Whether the requested reallocation will benefit a project that was designated by a
county or large municipality in connection with a waiver of its original allocation
The ability of the local government or company benefiting from the Recovery Zone
Bond to obtain financing and close the issue in a timely manner, including
demonstration of a commitment from a bank or other financial institution to
purchase or underwrite the Recovery Zone Bonds.
Process to Issue RZEDBs
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Process to issue bonds – RZEDBs
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Must be issued in the same form as any other governmental debt
in North Carolina
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General obligation bond
or
Revenue bond
or
160A-20 installment financing
Process to Issue RZEDBs – 160A-20
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For 160A-20’s, follow the usual steps for issuance
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Adopt a resolution authorizing filing of the application with LGC and
making findings
Conference with the LGC re: process and project
Hold public hearing, if required
Send out RFP to banks seeking financing bids
Choose a lender
Adopt resolution approving financing
Execute documents
File 8038G and 8038CP to obtain credit
Process to Issue Recovery Zone Facility
Bonds
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Bonds to finance private entities are issued by the county industrial
facilities and pollution control financing authority (the Authority)
County/Large Municipality designates recovery zone and designates
the Authority as the issuer of the Bonds
Authority adopts inducement or preliminary resolution
Recovery zone facility projects are “special purpose projects” under
N.C.G.S. Ch. 159C; no need for Commerce approval of the project
County holds public hearing and adopts approval in principal
resolution
Process to Issue Recovery Zone Facility
Bonds (cont’d)
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Private company (with assistance from underwriter or placement
agent) arranges for private placement or for letter of credit to support
bonds
Company must be able to qualify for the loan
Application and bond documents submitted to the N.C. Local
Government Commission (LGC)
Authority meets to give final approval to bond documents
LGC meets to approve bond documents
Bonds are sold and funds spent on project
Form 8038 filed with IRS
Letter of Credit Backed Recovery Zone
Facility Bonds – Structure
Typical Structure – Recovery Zone Facility Bond –
$10,000,000 “Low Floater”
Bank
Borrower
Note
Loan
Agreement
Authority
Owns Project
Project
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Assign
Loan
Agreement
and Note
Letter of
Credit
Bond
Trustee
$
$
Construction
Fund
RZFB Bond
Bondholders
$
Process to Issue Recovery Zone Facility
Bonds (cont’d)
Typical Costs – $10 million Letter of Credit backed Bond
Ongoing Interest Cost and Fees
Bond interest rate
Letter of Credit Fee
Remarketing Fee
Trustee Fee
% of Principal
2.60 (10 yr. average)
1.50 (estimated)
.125 (estimate)
.025 (estimate)
4.25% total estimated annual cost
Upfront Fees (Estimates)
Underwriting Fee
Estimated Legal Fees
Authority Counsel
Bond Counsel
Underwriter Counsel
Bank Counsel
Company Counsel
LGC Fee
Rating Agency
Trustee Accountant
Miscellaneous Expenses
$50,000 (.5%)
5,000
35,000
15,000
15,000
15,000
1,000
10,000
2,000
3,000
$151,000*
* Up to 2% of principal amount (in this case $200,000) can be funded from bond proceeds
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Questions?
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NC Department of Commerce
(919) 733-0886
Stewart Dickinson
Mark Poole
Mary Mae Johnson
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Local Government Commission
(919) 807-2350
Vance Holloman
Tim Romocki
Jim Baker
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Mary Nash Rusher
Hunton & Williams LLP
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(919) 899-3066