Skip to main content

The Journal Gazette

  • Michelle Davies | The Journal Gazette Jason Burnett, psychological technician, sets up for a skill session to help patients work through stress in the newly renovated Cooper Room at Park Center.

Wednesday, March 16, 2016 11:33 am

Tax-exempt bonds boost growth

Dave Gong The Journal Gazette

When it came time to renovate
its facility at 1909 Carew St., Park
Center had a couple of options —
seek traditional fi nancing or apply
for a tax exempt economic development
revenue bond.

"Ultimately, this is going to help
us expand the number of staff we
have and the number of services we
can provide to the community," said
Paul Wilson, CEO of Park Center, which caters to clients with mental
health needs. "We’ll have a minimum
expansion of 25 additional
staff to provide services to the community."


To pay for those updates, Park
Center secured a lower loan interest
rate through an economic development
revenue bond — the first the
city of Fort Wayne has issued in six
years. While Park Center’s benefits
from a tax exempt bond include a
lower interest rate for its $3.6 million
project — about 2 percent lower than traditional financing — and
a longer repayment term, many
companies and nonprofits are opting
for traditional financing through
a bank.


For several years, interest rates
for traditional financing options
have stayed low, meaning tax exempt
bonds haven’t attracted small
manufacturing businesses or nonprofits. However, should interest
rates begin to rise, some companies
might find tax exempt bonds more
attractive.

"It may pique the interest of some companies, especially
if they’re doing a large project,"
said Elissa McGauley,
an economic development
specialist for the city of Fort
Wayne.

Now, as some economy
watchers anticipate an increase
in benchmark interest
rates from the Federal Reserve,
Barrett & McNagny,
the city’s bond counsel, has
started to see a small uptick
in queries. More organizations
are asking about tax
exempt financing, said Zach
Klutz, a partner at Barrett &
McNagny in the public finance and corporate practice
group.

From a for-profit standpoint,
Klutz said economic
development revenue bonds
were meant for small manufacturers,
not large corporations,
although nonprofit
501(c)(3) organizations are
also eligible for tax exempt
bonds. Once the bond is issued
by a city or county, the
funds are loaned to the borrower
from a bank. Because
the interest being paid on
that loan is tax exempt, the
borrowing entity is able to
get better interest rates and a
longer loan term.

"When you have a combination
of interest rates rising,
or predicted to rise, as
well as an economy that is
beginning to grow in terms
of manufacturing and production,
you’re going to
have more small manufacturers
looking to see if tax
exempt financing works for
them," Klutz said. 

Because the city doesn’t
financially contribute to a
tax exempt bond, taxpayers
aren’t on the hook for loan
repayments — that responsibility
falls entirely on the
borrower. The bond also has
no effect on the city’s credit
rating.

"It’s essentially conduit
funding — we’re using the city’s tax exempt status as
a governmental agency to
back up the bonds," McGauley
said. "Because we’re
tax exempt, (applicants) can
get a longer term, as well as
a lower interest rate."

The current Federal Reserve
benchmark interest
rate is 0.25 percent, though
the central bank could begin
to raise rates as early
as June of this year for the
fi rst time since the Great
Recession. Atlanta Federal
Reserve President Dennis
Lockhart told Reuters
News Service on Friday that
he expects the Fed to raise
rates during its June, July or
September policy meetings,
barring severe economic
downturn.

On March 10, the Fort
Wayne City Council, acting
on a recommendation from
the city’s Economic Development
Commission, approved
issuing Park Center
a tax exempt bond, which
went to pay for updates to
the organization’s mental
health facility, including
new rooms and equipment.

"We looked at all kinds
of different options and this
seemed to be an option that
made sense, based on the
other costs involved in the
other directions," he said.

One reason the city hasn’t
issued more than five economic
development revenue bonds in the past decade is
because interest rates for
traditional financing have
been relatively low in recent
years, McGauley said. Coupled
with a less involved
application process for traditional
financing, organizations
have simply been
choosing not to seek a bond
from the city.


Klutz said there’s typically
higher upfront costs
to borrowers who seek tax
exempt bond financing over
traditional financing from
a bank. The city or county
has to retain bond counsel,
and the borrower needs to
involve its attorneys as well,
he said.

"Typically the borrower
entity pays for all of those
fees, and so it can be somewhat
expensive upfront, but
the savings is over the life of
the loan with a much lower
interest rate," he said.

Additionally, Klutz said
there are a lot of restrictions
in place by the IRS and tax
code that would preclude a
large company from seeking
a tax exempt bond.

"The tax code doesn’t
allow large corporations to
take advantage of tax exempt
financing, and there
are restrictions on what you
can spend the bond proceeds
on," he said. "Those restrictions
haven’t changed in the
last 20 years ... so manufacturers are starting to outgrow
those limitations."

There’s also a fairly narrow
range in terms of the
cost of a project that can be
supported by a tax exempt
revenue bond. McGauley
said typically those projects
come in at about $3 million
or $4 million at the low end
— though bonds are sometimes
issued for less — and
the bond issuance is capped
at $10 million.

"It doesn’t make sense to
get involved in a project for
less than $3 to $4 million,"
she said. "The state has a
smaller program, a small
bond program for issuance
of below $3 million."

Should any local business
opt to seek a revenue bond
from the city, it first needs
to complete an application
detailing the project, McGauley
said. If the applicant
qualifies under IRS standards
for a tax exempt bond,
the city’s economic development
division reviews the
application, putting special
focus on the number of jobs
created and retained by the
project, as well as how the
bond funds will be used.

Klutz said the borrower’s
capital expenditures three
years prior to the bond application
are also analyzed,
as are expected expenditures
for three years after the bond
is issued. If those both sets
of expenditures total more
than $20 million, the borrower
is ineligible for a tax
exempt bond.

While in recent years
nonprofit agencies have expressed
more interest in tax
exempt bonds than for-profit
manufacturing businesses,
Klutz said as the economy
begins to improve, interest
from small manufacturers is
starting to increase. 

"Companies are now
willing to spend money on
equipment and expansions,"
he said. "The economy just
didn’t support that type of
growth and expansion."

dgong@jg.net