• Tax-Exempt Bonds Easier to Use for Manufacturers Due to Changes in Tax Law Permitting Increase in Capital Expenditures
  • September 7, 2006
  • Law Firm: Bricker & Eckler LLP - Columbus Office
  • Today, tax-exempt bonds for manufacturing are easier to use than ever before. State volume cap is more readily available, having been hard to come by in previous years due to high demand. And, not only are tax-exempt bonds easier to use based on increased availability of volume cap, they are more financially beneficial. The interest rate for borrowing on a tax-exempt basis is generally more favorable compared to borrowing on a conventional/taxable basis. And, as interest rates continue to rise, the benefits of tax-exempt manufacturing bonds become even greater for manufacturers.

    In addition, a scheduled change in federal tax law, with respect to the capital expenditure limitation for these types of tax-exempt bonds, will expand the number of manufacturers eligible to take advantage of the favorable interest rates offered by a tax-exempt bond financing. As outlined below, this change in federal tax law is effective for bonds issued after December 31, 2006.

    For tax-exempt bond purposes, a manufacturing facility is a facility (including manufacturing equipment) used in the manufacturing or production of tangible personal property, including the processing resulting in a change in the condition of such property. Manufacturers seeking to finance facilities with tax-exempt bonds should be aware of the restrictions and requirements associated with these bonds, including:

       

    • 95% of the proceeds of the bonds must be applied to costs for land (subject to certain limitations) and depreciable property.

    • Weighted Average Maturity of the bonds may not exceed 120% of the weighted average life of the assets financed with proceeds of the bonds.

    • The principal amount of bonds plus all outstanding bond issues allocable to a particular business cannot exceed $10 million. In calculating the principal amount of the bonds outstanding, the capital expenditures of the borrower (including but not double counting the principal amount of the bonds to finance the particular facility) with respect to facilities located in the same municipality, or the same county if not located in an incorporated municipality, as the financed facility for the three-year period prior to the bond issue and the three-year period subsequent to the issuance date of the bonds must be included.

    • For bonds issued after December 31, 2006, the internal revenue code permits up to $10 million of capital expenditures to be disregarded, in effect increasing from $10 to $20 million, the maximum allowable amount of total capital expenditures by a business in the same municipality or county if not located in an incorporated municipality.

    • Limitations exist with respect to the amount of the proceeds of the bonds, which must be used for "core manufacturing" and the amount of the bond proceeds that may be used for ancillary and related warehouse/office space.

    • A public hearing and state volume cap will be required as part of the issuance of the bonds through the governmental issuer. While volume cap was hard to come by several years ago, in most states there is ample volume cap available now for qualified small issue bonds.

    • In Ohio and certain other states, labor for the construction relating to tax-exempt financed facilities must be paid at "prevailing wage".

    • Existing manufacturing facilities and integrated equipment may be acquired with bond proceeds subject to certain rehabilitation requirements.

     

    While the above requirements must be satisfied, when compared with conventional financing, tax-exempt bond financing is far more advantageous to manufacturers, particularly in today’s economic climate. Manufacturers interested in pursuing tax-exempt bond financing should consult their legal counsel.