Typical bank construction loan rates are now at, or near, the prime rate of 8.5 percent, but manufacturers such as Interplex Nascal in California, and others across the county, are financing new facilities at interest rates of about 3.8 percent.
What’s their secret?
Actually, it’s not a secret, although at times it appears to be. It's a financing vehicle that is too often overlooked, or unknown, to a surprising number of companies and developers. For those who know and understand its value, and its source, the savings are substantial. It’s a financing alternative available in most areas of the country that can reduce new project financing costs by hundreds of thousands, if not millions, of dollars each year.
This often overlooked alternative source of financing is low interest bonds, issued by regional and local industrial development or economic development agencies. When utilized by manufacturers, bond financing provides considerable savings over traditional bank financing available for the construction or expansion of plant and equipment.
Industrial development agencies are public benefit corporations, which by virtue of state and federal laws have the authority to issue and sell tax-exempt and taxable bonds. Under the rules, manufacturing companies and not-for-profit organizations can enjoy tax-exempt bond financing. The interest rate on tax-exempt bonds is often half the interest rate of conventional commercial bank loans.
Interplex Nascal Inc., for example, just completed financing for a new 37,000 sq.ft. factory for the production of sophisticated, tight tolerance, precision metal parts, in Tustin, California. The facility was financed with a $5 million, 30-year, variable rate, tax-exempt bond issued by the California Statewide Communities Development Authority. The low cost bonds – the opening interest rate on the $5 million bonds was 3.8 percent, significantly below today’s bank financing costs - is expected to save Interplex hundreds of thousands of dollars in acquisition, construction and equipment financing costs for the new facility
Neri’s Bakery Products, a family-owned company, is today operating a successful bakery facility in Port Chester, N.Y., financed through a $4,850,000, 30-year, tax-exempt bond issued by the Village of Port Chester Industrial Development Agency.
These, and scores of other manufacturers, have been able to build or expand their facilities through the unique financing instrument of low-interest bonds issued through local and regional economic or industrial development agencies across the country.
This type of financing is available to manufacturing companies for capital projects costing $10 million or less. Any manufacturing company can apply for $1 million in financing for a new facility with a “stand alone” tax-exempt bond.
Currently, manufacturers that are spending up to $10 million in acquisition, construction and equipment costs can apply for a tax-exempt bond issue to cover the entire cost of the new facility. The current $10 million limit is available if the company’s total capital expenditures made within the geographic area covered by the issuer (state, county, or city, etc.) including the funds from the bond issue, do not exceed $10 million over a six year period - which includes the three years prior to the closing date of the bond issue, and three years after.
The maximum allowable amount will be doubled next year, to $20 million for bond issues closing after January 1, 2007. Because of the rather intricate rules of bond financing it is advisable that the borrower consult with expert and experienced counsel for the structuring of the financing, preparation of the bond application and closing of the transaction.
The definition of a manufacturing company, as described in the enabling legislation, sometimes places apparent hurdles in the path towards the needed financing. DOAR Communications Inc. was seeking financing for a new facility on Long Island, in Lynbrook, New York. DOAR is a technology based company that provides advanced electronic communication technology and automated data-based systems for courts, law firms and government agencies.
It designs and installs “smart” courtrooms. It also translates millions of pages of file room legal documents into electronic data that can be quickly and easily retrieved by litigators on their computers.
DOAR approached the Hempstead IDA for financing assistance as a new manufacturing company. But to the local IDA, DOAR did not appear to be a manufacturer. As a producer of electronic data, no products in the traditional sense would be manufactured or shipped from the planned facility. Therefore, why should the company be treated as a manufacturer and receive the benefit of tax-exempt bonds?
Through an innovative interpretation of manufacturing that we presented to the IDA, the agency agreed that consolidation of millions of pages of legal documents onto a handful of CD discs would be considered a manufacturing process. As a result of this decision, the Hempstead IDA agreed to issue $2,850,000 in industrial development revenue bonds for the new technology facility.
Very often, when we meet with a company or organization for the first time to discuss the financing of a project, we find there is little or no knowledge or understanding of the availability of this financing alternative and how bonds can sharply reduce financing costs. This is true even among experienced developers and manufacturers. As in the cases described above, the bond market provides companies with greater access to capital and a longer loan term than otherwise available through conventional financing, with the continuing benefit of lower interest costs over the life of the bond.
Joseph P. Carlucci and Robert C. Schneider are partner and special counsel, respectively, at Cuddy & Feder LLP., a law firm with offices in White Plains, NY, New York City, Fishkill, NY and Norwalk, Conn. They primarily act as borrower, underwriter, and issuer counsel in tax-exempt and taxable bond financing transactions, involving public and privately held companies and non-profit organizations.