Tax-Exempt Bond Program Provides Small, Medium Businesses with Low Interest Capital

By Jay Hipps, Hacienda Network Staff Writer

One of the challenges that may face a growing business is a lack of capital. Thanks to the tax-exempt Industrial Development Bond (IDB) program, however, small and medium sized manufacturers can access the same low interest, long-term capital markets that are enjoyed by larger companies.

The program, which is authorized by the federal government, overseen by the state, and administered locally by the East Bay Economic Development Alliance (East Bay EDA), enables businesses to purchase larger facilities and additional equipment, thereby increasing their growth rate and creating more jobs.

There are a number of specific guidelines that must be followed to obtain IDB financing in addition to requirements on how the bonds can be used. Each project cannot exceed $20 million (up to $10 million of that is tax-exempt; the balance is a taxable bond), including all capital expenditures within the project city, three years before and after the sale, with a maximum of $40 million in multiple cities. There is a cost effective minimum of at least $2 million for all IDBs. Only manufacturing businesses and uses are eligible, although the borrowers may be corporations, partnerships, sole proprietors, or LLCs (for tax benefits).

While IDBs cannot be used for working capital or refinancing, permissible uses of the funds from the bonds include purchasing land; constructing, renovating or purchasing buildings; and purchasing new or renovated equipment used by the manufacturing business. The last requirement can be subject to interpretation - for example, a software company purchasing millions in new computers may be able to categorize that purchase as "manufacturing equipment."

Businesses applying for IDBs must also meet bank lending requirements, which typically means at least two years of profitability, existing cash flow sufficient to service the IDB debt, and equity of at least 25 percent for land and buildings and 10 percent on equipment.

In addition to the tax exempt nature of the bonds, the IDB program offers a number of additional benefits. Interest rates on the bonds are substantially lower than market rate loans. IDBs used to purchase land or buildings or construct a building are sold with a weekly variable interest rate that has averaged just 0.34 percent since January 2009, with a current APR of 1.84 percent. These bonds have up to 35 year terms with no prepayment penalty. IDBs used to purchase new or refurbished equipment may be sold directly to a private purchaser such as a leasing company, at a fixed interest rate - currently around 3 percent - with a 7 to 10 year repayment period. It is also important to note that phased projects, such as facility construction, have a window of four years to draw down the funds.

For further details or to determine if your project is eligible to apply for IDBs, contact Luis Aguilar of the East Bay EDA by calling (510) 272-3889 or via email at luis@eastbayeda.org. Additional information is also available at the East Bay EDA web site at www.eastbayeda.org.

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