Projects Eligible for Tax-Exempt Financing
Under current federal tax law, specific projects eligible for tax-exempt financing include manufacturing facilities; airports, docks and wharves; mass commuting facilities; certain facilities for furnishing water, sewage and solid waste disposal; qualified residential projects; local district heating and cooling facilities; facilities furnishing electricity or gas on a local basis; high-speed inter-city rail facilities and certain hazardous waste disposal facilities.
The use of tax-exempt bonds for manufacturing continues to be subject to restrictions as to the size of the financing, what may be purchased with the bond proceeds and the amount of issuance costs that may be paid from bond proceeds.
Under Kansas law, taxable bonds may be issued for agricultural, commercial, hospital, industrial, natural resources, recreational development and manufacturing.
Customized Lease Agreement
Under a typical IRB issued by a city or county, a company enters into a lease of the facility from the bond issuer (the Kansas city or county where the financed facility is located). The rental payments are used to pay the principal and interest to the bondholders. When all bonds have been paid, the company may exercise an option to purchase the project for a nominal price, such as $100. The bonds are not general obligations of the issuer, payable from taxation; rather, they are sold on the strength of the company’s ability to pay principal and interest when due.
The basic security agreement for bondholders is a net-net-net lease. The lease is a company’s unconditional obligation to pay the bonds and interest through specified payments throughout the term of the lease. Because the financing is a lease/purchase, the company can take advantage of applicable depreciation guidelines, receive available tax credits and deduct interest payments as a business expense. The bond issuer does not exercise control over any aspect of the building’s construction or the company’s operations. During the term of the bond issue and within specified limits, a company may make structural changes to the building, replace equipment and machinery and even sell portions of the land no longer needed for future expansion.
Most bonds are structured to be repaid over 10 to 15 years. Principal repayment terms are flexible and can be structured to meet your company’s specific cash flow needs. Availability of bond financing will depend entirely on the creditworthiness of your company, as determined by the prospective purchaser of the bonds.
Property and Sales Tax Exemption
Whether your property is financed through tax-exempt or taxable IRBs, Kansas law (K.S.A. 79-201a) permits exemptions for your project from ad valorem (real and personal) property taxation for up to 10 years, commencing with the year after the year the bonds are issued. Cities and counties often require that all or a portion of the abated taxes be made available to local taxing jurisdictions in the form of payments in lieu of taxes.
However, nearly every IRB issuer will provide property tax abatements to your company as an additional incentive to locate in the community. Unlike real property and real property improvements, business personal property acquired after July 1, 2006, is not subject to ad valorem personal property tax. Statute K.S.A. 79-3606 exempts the cost of building material and labor, as well as fixed items of machinery and equipment, from state and local sales taxes.
Simple Application Process
Most issuers use a simplified form to apply for IRBs. In some cases, it doubles as the form used to apply for property tax abatements.
Getting Your Bonds Issued
The bond issuance process can take as little as 60 days and generally follows these steps:
- Select a bond attorney, an underwriter or other bond purchaser and secure an option to purchase a building site.
- Apply to the city or county or Kansas Development Finance Authority for an IRB issue.
- The governing body adopts a resolution of its intent to issue bonds for the company.
- For a project qualifying for tax-exempt bonds, the issuer notifies the Kansas Department of Commerce of its adoption of the resolution of intent and files its application for private activity bond allocation.
- Negotiate the terms and conditions of the bonds and the financing with a bond underwriter or other bond purchaser (such as a commercial bank) and prepare any required bond-offering document.
- If an ad valorem tax exemption is offered by the issuer, the local school districts and city or county government are notified as applicable.
- The issuer holds a public hearing concerning the bond issue and the granting of a property exemption, if applicable.
- A bond attorney drafts the lease agreement, the indenture of trust, the bond ordinance and the company’s guarantee agreement.
- The governing body adopts the bond ordinance.
- An IRB notice is filed with the Kansas Board of Tax Appeals (BOTA) at least seven days prior to issuance of the bonds.
- The basic documents are executed (signed) by the issuer and the company.
- The bond closing is held and funds are paid by the underwriter or the purchaser against the delivery of the bonds.
- Proceeds are deposited into an account maintained by the trustee to be spent on the project as directed by the company.
- The bond attorney notifies BOTA within 15 days of issuance that the bond issue has been closed.
A bond issue can provide a manufacturing company with up to $1 million of tax-exempt bonds for a qualifying project, regardless of project size.
A maximum of $10 million of tax-exempt IRBs can be issued for a manufacturing project, as long as a company’s total capital expenditures at the project location do not exceed $20 million for a period of three years before and after the bond issue, including the amount of the bonds issued. If the $20 million limit is exceeded during the total six-year time frame, either by issuing more than $10 million in bonds or by exceeding the $20 million capital expenditures limitation, the tax-exempt status is forfeited and the company must redeem the bonds at a premium.
Despite the size restrictions on tax-exempt IRB-financed projects, advantages may still accrue to projects requiring in excess of $10 million. For example, a $15 million project could combine a $10 million tax-exempt bond issue with a $5 million taxable bond issue.
The federal government has placed an annual limit on the amount of tax-exempt IRBs that each state can issue. This limitation is called a “volume cap.” An allocation of volume cap must be obtained for bonds for most privately owned, qualifying facilities. In Kansas, volume cap is allocated by the Secretary of Commerce. Bonds for government-owned solid waste disposal facilities, airports, docks or wharves are not subject to the state volume cap.
A company may not have more than $40 million of tax-exempt IRBs outstanding, nationwide, at any one time. For this purpose, a company is defined as that entity that ultimately benefits from the tax-exempt bonds.