What is Private Activity Bond Financing?
"Private activity bonds are an attractive source of financial assistance to economic development projects in Michigan. They provide profitable firms with capital cost savings stemming from the difference between taxable and tax-exempt interest rates.
Public facilities, which generate a revenue stream, (parking structures, for instance) have traditionally been financed by municipalities through tax-exempt ‘revenue bonds.’ Private activity bonds apply this same tax-exempt finance mechanism to the ‘public purpose’ of economic development. The governmental unit borrows money from private capital markets, secured only by the project’s revenues rather than the government’s full faith and credit. Interest income earned on bonds issued by a governmental entity to finance a project for a private company which has demonstrated a good public purpose is exempt from federal, state, and local income taxes, thereby reducing the cost of capital (including the cost of letters of credit, remarketing fees, etc.).
Who is Eligible?
The Economic Development Corporation of Lenawee County (EDCLC) issues private activity bonds on behalf of the borrower and lends the bond proceeds to the borrower. These loans can be made for manufacturing projects, not-for-profit corporation projects and solid or hazardous waste disposal facilities.
For manufacturing projects, 95% of the bond proceeds must be used to acquire land, building and equipment directly related to the manufacturing process. Warehouse space and other ‘non-core’ items are ineligible unless they are directly related to the manufacturing process, and then are limited to 25% of the project. At least 70% of bond proceeds must be spent on ‘core manufacturing’ costs. If you acquire existing facilities, a minimum of 15% of the bond proceeds must be used to renovate the facility. Used equipment is generally ineligible. Loans for such purposes as working capital or inventory are not permitted.
The maximum size of bonds is limited to:
1. $1 million free of any restrictions on capital expenditures; or,
2. $10 million subject to the condition that the company’s total capital expenditures in the locality over the period of three years before and three years after the date of issuance do not exceed $20 million.
Contact Tim Robinson at 517-265-5141 or tim@lenaweenow.org for more information about Private Activity Bonds.