Build America Bonds and
Recovery Zone Bonds
presented by
John F. Lushis, Jr.
and
John J. Eagan
www.thsLaw.com
1611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1805 (fax)
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Background
On February 17, 2009, President Obama signed into law the
“American Recovery and Reinvestment Tax Act of 2009”,
commonly referred to as the “Stimulus Bill” (the “Stimulus
Act”).
The Stimulus Act created two categories of Bonds
1. Build America Bonds
2. Recovery Zone Bonds
a. Recovery Zone Economic Development Bonds
b. Recovery Zone Facility Bonds
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Background
The Build America Bonds are similar to traditional tax-exempt bonds
with one critical distinction. Rather than bearing a tax-exempt rate, the
Bonds bear interest at a taxable rate but carry special tax credits and
federal subsidies for either the bond issuer or the bondholder.
The Recovery Zone Economic Development Bonds bear a taxable rate,
with a tax payment to the issuer. The Recovery Zone Facility Bonds are
tax exempt.
There is a $15 billion nationwide allocation for Build America Bonds, a
$10 billion allocation for Recovery Zone Economic Development Bonds
and a $15 billion allocation for Recovery Zone Facility Bonds.
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Build America Bonds ‘BABs’
• BABs offer governmental entities a new source of funds for projects
such as public buildings, courthouses, schools, roads, transportation
infrastructure, water and sewer projects and energy projects.
• Eligible issuers are state and local governments.
• The purpose of BABs is to reduce the cost of borrowing for state and
local government issuers.
• BABs can be issued in place of traditional governmental bonds but
may be issued only for those purposes for which governmental
bonds may be issued under existing law. BABs cannot be used for
private activities or for 501(c)(3) purposes.
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Build America Bonds ‘BABs’
• The Stimulus Act provides that until a state legislature provides
otherwise, interest and credits attributable to BABs are treated as
exempt from federal income tax for purposes of state income tax.
• BABs must be issued prior to January 1, 2011.
• No volume cap allocation.
• BABs are subject to the arbitrage rules in Section 148 of the Internal
Revenue Code.
• There are two types of BABs:
1. Tax Credit BABs
2. Direct Payment BABs
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Tax Credit BABs
• Bondholders receive a non-refundable federal tax credit in the
amount of 35%of the interest paid on the Bonds.
• The credit applies to taxable year of interest payment but may be
carried forward.
• Credit counts as taxable income.
• Can be used to finance new capital expenditures AND funding of
prior issues, current and advance refunding, and cash flow
borrowings.
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Direct Payment BABs
• The issuer of the bonds receives a direct payment from the federal
government in the amount of 35% of the interest paid to the
bondholders in lieu of the tax credit to the bondholder.
• The payment is made by the U.S. Department of Treasury directly to
the issuer or to the paying agent, contemporaneously with interest
payment date.
• Only available for new money bond issues where 100% of the
available project proceeds are used for capital expenditures.
“Available project proceeds” are the bond proceeds less reasonably
required reserve funds and the costs of issuance (not to exceed 2%).
• Payment Procedures-- issuers must submit IRS Form 8038-CP, Return
for Credit Payments to Issuers of Qualified Bonds, to the IRS to request a
payment of the credit. Payment will be made within approximately
45 days of filing the form.
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BAB Examples
• Issuer decides to issue Tax Credit BABs paying 6% interest. The
bondholder will receive a tax credit of 2.1% (35% x 6%) for an
effective yield of 8.1%
• Issuer decides to issue Direct Payment BABs paying 8%. The issuer
receives a direct payment of 2.8% (35% x 8%), resulting in a net
effective payment by the issuer of 5.2%.
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Recovery Zone Bonds
There are two types of Recovery Zone Bonds:
1.
2.
Recovery Zone Economic Development Bonds
Recovery Zone Facility Bonds
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Recovery Zone Economic
Development Bonds (RZEDBs)
• Used for “Qualified Economic Development Purposes”, which
include public
projects and programs (including capital
expenditures, expenditures for job training and educational
programs) in “recovery zones”; bond proceeds cannot be used for
private activity or 501(c)(3) purposes.
• A recovery zone is an area designated by counties/large
municipalities (cities with a population of 100,000 or more) as
having:
1.
2.
3.
4.
5.
Significant poverty
Significant unemployment
Significant home-foreclosure rates
Significant general distress
Any area that has been designated as an empowerment zone
or a renewal community
6. Any area affected by military closure or realignment.
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Recovery Zone Economic
Development Bonds (RZEDBs)
• Bonds are direct payment bonds – the payment is made to the issuer
and is 45% of the interest paid to bondholders.
• Can be issued by all cities with a population of over 100,000 and all
counties.
• Federal Davis-Bacon prevailing wage rules apply.
• Bonds must be issued prior to January 1, 2011.
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Recovery Zone Economic
Development Bonds (RZEDBs)
The Stimulus Act earmarked $10 billion nationwide allocated among
the States in proportion to their relative job losses; sub-allocations have
been made within the States to counties and to large cities based on
relative job losses.
•
Allocation to Pennsylvania - $154,008,000
•
Allocation to Allentown - $2,274,000
•
Allocation to Lehigh County - $5,743,000
•
Allocation to Northampton County – $6,929,000
•
By contrast, Michigan was allocated $773,050,000
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Recovery Zone Economic
Development Bonds (RZEDBs)
• Each county or large municipality may waive its allocation to the
State.
• A State may re-allocate volume to any issuer.
• A county may allocate its volume to any issuer e.g., development
authorities, within the county.
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Recovery Zone Facility Bonds
(RZFBs)
• A form of tax exempt “exempt facility” bonds that can be used to
finance depreciable property used in a trade or business in a
recovery zone that:
–
–
–
Was acquired, constructed, reconstructed, or renovated after the
designation of the recovery zone;
The original use of which occurs in the recovery zone; and
Substantially all of the use of the property is in the active conduct
of a “qualified business”. “Qualified business” includes any trade
or business such as office buildings, warehouses and hotels, but
excludes residential facilities and “bad projects” such as golf
courses, massage parlors, gambling facilities.
• 95% or more of the rest of the proceeds must be used for “recovery
zone property”, which is depreciable property that is located and
first used in the active conduct of a “qualified business” in a
recovery zone.
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Recovery Zone Facility Bonds
(RZFBs)
• RZFBs can be issued in place of conventional financing.
• Tax-exempt interest rates are lower than conventional financing
rates.
• As with RZEDBs, RZFBs can be issued by cities with a population of
over 100,000 and all counties must be issued by January 1, 2011.
• Volume cap is not required.
• Federal Davis-Bacon prevailing wage rules do not apply.
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Recovery Zone Facility Bonds
(RZFBs)
The Stimulus Act earmarked $15 billion nationwide on the same basis
as the allocation for RZEFBs.
•
Allocation to Pennsylvania - $231,012,000
•
Allocation to Allentown - $3,411,000
•
Allocation to Lehigh County - $8,615,000
•
Allocation to Northampton County – $10,394,000
•
By contrast, Michigan was allocated $1,159,575,000
•
Allocations can be waived or re-allocated in the same manner as
with RZEDBs
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Establishment of
Recovery Zones
• The County or the large municipality designates a certain area as a
recovery zone.
• Factors to consider:
–
–
Political
Reasons for designation e.g., distress
• County or large municipality selects projects based on factors such
as job creation.
• County or municipality selects the issuer of the Bonds
–
–
–
County or large municipality
IDA or other authority
Local municipality
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Establishment of
Recovery Zones
• Issuer adopts an Inducement Resolution.
• County or large municipality works with Underwriter and Bond
Counsel.
• Closing
• For RZEDB’s, County or large municipality must file IRS Form
8038-CP in order to receive the credit from the Federal Government.
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Case Study
Two years ago, a developer purchased a 40-acre commercial office
complex that had been owned by a corporation that moved its
headquarters to a warmer climate. The complex has substantial road
and utility infrastructure but none of this infrastructure has been
dedicated to public use. The developer has decided to make substantial
renovations to the complex, including lead paint removal, other safety
improvements, and HVAC upgrades, and build an additional facility
or facilities for lease or sale.
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Case Study
Ultimately, the developer desires to dedicate the roads, water and
sewer facilities to the local municipality for public use. The total cost of
the development is $40 million. Although the developer has procured
some preliminary lease commitments, the challenging economic
climate has precluded the procurement of adequate conventional
financing on terms and conditions satisfactory to the developer.
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Case Study
Alternatives available:
1.
The developer can seek to have the area where the project is
located designated as a recovery zone and assuming an
allocation has been made, the County then can issue RZEDBs
to pay for the costs of the roads, water and sewer facilities,
(public facilities). Even if no allocation has been made, the
County can issue Tax Credit BABs or Direct Payment BABs.
2.
If the project is in a designated recovery zone and an
allocation has been made, the commercial development, even
though primarily private, can be financed via the issuance by
the County of RZFBs, with the bond proceeds loaned to the
developer.
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Recovery Zone Facility Bonds
(RZFBs)
BANK
Letter of
Credit
Borrower
Owns
Project
Project
Note
Loan
Agreement
Authority
Assign Loan
Agreement
and Note
RZFB Bond
Bond
Trustee
Bondholders
$
$
$
Construction
Fund
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Conclusion
•
Build America Bonds and Recovery Zone Economic Development
Bonds provide a new source of funds for public projects.
•
Recovery Zone Facility Bonds provide a new source of funds for
private projects.
•
The Bond program has a limited life and issuers need to act
promptly to tap into their allocations.
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Thank You!
presented by
John F. Lushis, Jr.
John J. Eagan
jlushis@thslaw.com
jeagan@nmmlaw.com
www.thsLaw.com
1611 Pond Road Suite 300 Allentown, PA 18104 ● 610-391-1800 ● 610-391-1805 (fax)
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