MISCONCEPTIONS ABOUT Tax Exempt Financing For Manufacturing

MISCONCEPTIONSABOUT

Tax Exempt FinancingFor Manufacturing

Things to remember:• Interest Rates are about 35% lower• Do not have to create any Jobs• Don’t have to pay prevailing wages• Don’t need a letter of Credit from a Bank• Borrow from $500,000 to $10,000,000• Offered to Manufacturing Companies• Funds must be used for Capital Assets• Can refinance an existing Tax Exempt loan into a

new Tax Exempt loan

Economics of Tax Exempt• Pretzel Company expands plant and warehouse capacity and

add new equipment. Real Estate portion is $7 million and equipment is $1.5 million. Savings $2,171,386

Conventional Tax exempt Monthly Total Total Monthly Total Total Rate Payment Payments Interest Rate Payment Payments Interest

Mortgage 5.00% 40,921 12,276,390 5,276,390 3.25% 34,112 10,233,642 3,233,642 Equipment 5.00% 15,910 1,909,180 409,180 3.25% 14,657 1,758,942 258,942Total 56,831 14,185,570 5,685,570 48,769 11,992,584 3,492,584

Cost Cost1 point mortgage 70,000 1 point mortgage 70,000

» 1 point equipment 15,000Legal 8,500 Legal 15,700 78,500 100,100

Authority Counsel 6,500 and BCIDA 8,500Total Fees 115,100

* 36,600 higher costs for tax exempt

Typical Manufacturer Expansion• PIDA rate 2.25 MELF rates 2.75• Up to $2 million Up to $5 million• 1 job for $35,000 1 job for $50,000• Penalties Penalties• PIDA and MELF are competitive

• TAX EXEMPT rate 2.50 and 3.50• Up to $10 million• No jobs No Penalties• Example $10 million project

$10 Million• $6 million real estate and $4 million M & E• Typical package• PIDA $1 million and MELF $2 million• Balance of $7 million usually conventional

bank financing @ 4.5%– $5 million @ 4.5 amortized over 25 years is $3,337,486 in

interest– $2 million @ 4.5 amortized over 10 years is – $487,322– Loss Opportunity Cost of not using Tax Exempt Financing is $1,456,421 @ a rate of 2.93%

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Local SponsorsNumber of Projects* by County

Erie

CrawfordWarren McKean Potter

MercerVenango

Lawrence

BeaverButler

Allegheny

WestmorelandWashington

Greene Fayette Somerset

Armstrong

Indiana

JeffersonClarion

Forest

Bedford

Fulton

Cambria Blair

Clearfield

Elk Cameron

Centre

Clinton

Tioga

Lycoming

Bradford

Mifflin

Huntingdon

JuniataPerry

Franklin Adams

Cumberland

Snyder

Union

Sullivan

SusquehannaWayne

WyomingLackawanna

Luzerne

ColumbiaMontour

Northumberland

Schuylkill

Pike

Monroe

CarbonNorthampton

Lehigh

BerksDauphinLebanon

YorkLancaster

Chester

Montgomery

Bucks

DelawarePhiladelphia

*Not including exempt facility stand-alone projects.

3+

10-20

1-9

0

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TERMINOLOGY YOU MIGHT HEAR

Manufacturing BondsIndustrial Development Bonds (IDB)Small Issue BondsPrivate Activity BondsPEDFA Bonds

Composite Pool: •Up to $10 million•All projects are backed with a letter of credit from a bank•Process is standardized and on a set schedule•Variable interest rate•Pools fund in April, August and December Stand-Alone: •Projects up to $10 million•Each project has its own structure and timetable

User of Tax Exempt Financing• Manufacturers• First time farmers• Hospitals and healthcare institutions• Universities and colleges• Charter & independent schools• Charitable organizations• Airports, docks and wharves• Low-moderate income residential projects• Public Private Partnerships

Tax-Exempt Financing for Manufacturing Companies

• Manufacturing Companies - Defined under federal law as "the manufacturing or production of tangible property (including processing resulting in a change in condition of such property).

Is curing cheese manufacturing?ISSUE:• Whether the Facility, used for the purpose of

curing cheese, is a manufacturing facility under § 144(a)(12)(C) of the Internal Revenue Code.

CONCLUSION:• The Facility is a manufacturing facility under §

144(a)(12)(C)

Is vegetable processing manufacturing?ISSUE:• Whether certain operations of a vegetable processing

facility, which include the cleaning, cooking, freezing, and packaging of freshly harvested vegetables, constitute manufacturing within the meaning of I.R.C. § 144(a)(12)(C).

CONCLUSIONS:• Based on the information provided, the facility’s

operations of cleaning, cooking, freezing, and packaging vegetables appear to be a process that results in a change in the condition of tangible property that would meet the definition of manufacturing under I.R.C. § 144(a)(12)(C).

IRS “Bad Projects”• Fish Production Facility (fish farm)• Reverse Vending Machines (machines

placed in supermarkets to collect and crush aluminum cans)

• Mining and Rock crushing process

What are the Eligible Uses of the Funds?

• 95% or more of the net proceeds of the bonds must be used for the acquisition, construction, reconstruction or improvement of land or depreciable property used in a manufacturing facility.

• Land - Includes acquisition, site preparation and improvements, infrastructure development (i.e. water, sewer & rail) and environmental testing. The cost of land cannot exceed 25% of the total real estate acquisition cost.

What are the Eligible Uses of the Funds?

• Building - Includes acquisition, construction, rehabilitation, engineering, architectural, legal and other related costs

• For a building acquisition, an amount equal to at least 15% of the tax-exempt portion used to acquire the building and any equipment contained within must be used for rehabilitation

• This rehabilitation must be done within 2 years of the funding date

Additional building requirements• Manufacturing building includes facilities which

are “directly related and ancillary to a core manufacturing facility

• Must be located on the same site as the manufacturing facility

• Not more than 25% of the net proceeds of the issue are to be used to provide such facilities.

• Office space must be de minims and related to the day-to-day operations of the manufacturing facility.

Additional building requirements• Purchase of a used building is permitted if the

rehabilitation expenditures equal or exceed 15% of the cost of acquiring the building

• Rehabilitation must be completed no later than 2 years after the date of acquisition or tax exempt loan is closed.

What are the Eligible Uses of the Funds?

• New Equipment - Includes acquisition, delivery and installation– Used equipment may only qualify if contained in a

building being acquired• Most any type of machinery and equipment with

a few exceptions• Used Equipment not allowed except if part of the

original building and substantially rehabilitated

What are the Eligible Uses of the Funds?

• Soft Costs - Includes legal, architectural, engineering, surveying, test boring, title insurance, appraisals, accounting, and financing costs for the project. Limited to 2% of the project amount.

• Refinancing existing tax exempt debt

How much can a manufacturer borrower?

• $500,000 to $10,000,000 • $10,000,000 is the maximum per municipality

were the manufacturer is located. • $40,000,000 maximum including all the

municipalities and all prior issue tax exempt financing outstanding at one time.

• Example

Capital Expenditure Rule• Can not exceed total of $20 million expenditure

for Capital expenditures in the preceding 3 years and the next 3 years including the $10 million tax exempt deal.

Consequence of Violation of Capital Expenditure rule• Bonds become taxable on the date the excess

expenditure is made and not retroactively to the date of issue.

Prohibition of Federal Guarantee• Code Section 149(b) provides that no bond may

be tax-exempt if such bond is federally guaranteed

• For example, no SBA loans

Recent Proposals• 1. Expand the Definition of Manufacturing to Include both Tangible and Intangible

Manufacturing Production for Manufacturing Bonds 2. Eliminate the Restrictions on “Functionally Related and Subordinate Facilities” for Manufacturing Bonds 3. Increase the Maximum Bond Size Limitation from $10M to $30M for Manufacturing Bonds 4. Increase the Capital Expenditure Limitation from $20M to $40M for Manufacturing Bonds 5. Expand and Raise the Limits for Bank Deductibility to $30M for Manufacturing Bonds and 501(c)(3) Bonds 6. Eliminate the Restriction on the Use of Accelerated Depreciation by Manufacturers Using Manufacturing Bonds 7. Expand the 2% De Minimis Rule to Financial Institutions for Manufacturing Bonds and 501(c)(3) Bonds