10- Tax-Exempt Products Overview: Just the Facts- Benny Wong


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An overview of the tax-exempt financing products offered by MassDevelopment, presented by Benny Wong, MassDevelopment. Part of Current Topics in Tax-Exempt Finance 10/29/2010

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10- Tax-Exempt Products Overview: Just the Facts- Benny Wong

  1. 1. Current Topics in Tax-Exempt Finance Tax-Exempt Products Overview: Just the Facts
  2. 2. 2 MassDevelopment • Quasi-public finance and development authority for Massachusetts • Serving nonprofits, businesses, and municipalities • Primary tools for nonprofits: • Loans, grants and guarantees • New Market Tax Credits • Tax-exempt bonds
  3. 3. 3 Who Can Borrow Tax-Exempt? • Governmental entities: states, cities, towns, school districts, authorities for water, highway public transportation, etc. Nonprofits are not governmental entities …enter the conduit issuer
  4. 4. 4 What is a Conduit Issuer? MassDevelopment’s Role • A conduit is a governmental entity which issues tax- exempt bonds and then lends the proceeds to a nonprofit organization • Most conduits such as MassDevelopment are: – “Instrumentalities of the state” with the right to issue debt on a tax-exempt basis and loan proceeds to nonprofits – Truly “conduit” entities – no legal obligation to repay debt – Educational resource to borrowers
  5. 5. 5 Who can borrow? • MassDevelopment can issue tax-exempt debt on behalf of the following nonprofits: – Hospitals, health centers, nursing homes, CCRCs, HMOs – Higher education – Cultural institutions – Research institutions – Human service providers – Charter schools – Private/independent schools
  6. 6. 6 6 Finance Programs • Tax-exempt Bonds – Fixed or variable rate – Public offering or direct placement • Cultural Facilities Fund • Commercial Paper and Pool Loan Programs • Direct Loans and Guarantees – Community Service 501(c)3 Loan Fund – Green Loan Program • Equipment leases • New Markets Tax Credits
  7. 7. 7 What can be financed? • Finance new capital project • Reimburse for prior capital expenditures • Finance routine capital costs • Refund existing debt – To reduce debt service – To gain covenant relief
  8. 8. 8 Bank Direct Purchase • 60+ banks buy MassDevelopment tax-exempt bonds as direct purchases • Used in lieu of making taxable loans • Fixed and floating rates • Bank does credit underwriting and sets terms • Lower up–front costs makes financings as small as $1,000,000 feasible
  9. 9. 9 Bond Financing Structure • MassDevelopment acts as a “conduit”, capitalizing loans with proceeds from bond purchases • Loans are pledged to repay bonds • The bank underwrites, sets terms and manages the relationship the same as for a loan Bond Purchaser (Bank) BorrowerMassDevelopment MDFA Issues bonds Borrower repays loan
  10. 10. 10 Enhanced Bank Purchasing • Banks can deduct interest expense associated with tax- exempt bonds • Only for bonds issued in 2009 and 2010 • Up to 2% of bank assets • only non-bank corporations had this benefit previously • MA banks may still prefer “separate entity” securities corporations • Expanded eligibility for “Bank Qualified” bond status • Not subject to disallowance of interest expense • Issuer limit raised to $30,000,000 • For 501(c)3 nonprofits, limit applies to borrower, not conduit issuer
  11. 11. 11 Fixed Rate Bonds • Lock in interest rate until maturity – borrower pays interest and principal according to predetermined amortization schedule, usually 20 to 30 years • For public sale, an “investment grade” credit rating will provide best price, i.e. lowest interest cost – Underwriter determines interest rates based on market conditions and investor demand • For direct placement, fixed rate is negotiated between investor and borrower – Local banks recently active in this market
  12. 12. 12 Variable Rate Bonds • Interest rate adjusted periodically (daily, weekly, monthly, yearly, etc.) • Borrower pays principal according to pre-determined amortization schedule • Principal may be prepaid at any time with 30-day notice to investors; bonds may be converted to fixed rate or other variable rate mode • Credit enhancement from a highly rated bank will offer best market access for public issue • Swaps – Synthetic fixed rate
  13. 13. 13 The Financing Team • Agency (MassDevelopment) – Issues the bonds and loans the proceeds to the Borrower • Borrower – Eligible nonprofit institution • Investment Banker – Helps to structure the transaction and is responsible for selling/underwriting the bonds • Bond Counsel – Assures that the bonds are a binding obligation of an institution and are tax- exempt; prepares the various agreements and financing documents • Agency’s Counsel (often the same as the Bond Counsel) – Assures compliance with statutory requirements • Financial Advisor to Institution – Institutions may choose to engage a financial advisor
  14. 14. 14 The Financing Team (cont’d) • Underwriter’s Counsel – Provides legal advice to the Investment Banker as to the issuance and structure of the bonds and full disclosure of risks • Borrower’s Counsel – Assists the Institution in preparing full disclosure (“Appendix A”) and in the review of financing documents • Trustee – Represents and protects the interests of bondholders • Trustee’s Counsel – Reviews financing documents to assure the trustee’s ability to perform its functions (In a direct placement, the Underwriter & Underwriter’s Counsel are replaced by the Purchaser & Purchaser’s Counsel)
  15. 15. 15 Cultural Facilities Fund • Since 2007, $37MM investment in 224 capital projects for nonprofit institutions that attract visitors to and create jobs in Mass. • Run in partnership with Mass. Cultural Council EcoTarium in Worcester
  16. 16. 16 Charter School Loan Guarantee Fund • Loan guarantees for charter schools in Massachusetts • Funds may be used for acquiring, constructing or renovating both owned and leased charter schools • For facilities to be owned – Guarantee can cover up to the lesser of 50% of the first mortgage loan or $3MM – Up to 100% loan to value • For facilities to be leased – Guarantee can cover up to the lesser of $1MM or 90% of the cost of the improvements • Up-front Annual Fee
  17. 17. 17 TechDollars • 501(c)(3) nonprofit organizations with annual revenues $5MM or less • Funds may be used for 100% of the cost of purchases of new or used telecommunications and information technology equipment and related installation costs • Loans of $25,000-$250,000 • Flexible financing terms and competitive interest rates
  18. 18. 18 Community Service 501(c)3 Loan Fund • 501(c)(3) nonprofit social, youth or family service provider with annual operating budget of less than $5MM • Funds may be used for owned or leased facilities to repair, renovate, construct or acquire real property • Loans of $100,000-$500,000 • Flexible financing terms and competitive interest rates
  19. 19. 19 New Markets Tax Credits • Tax credit subsidizes private investments in low- income census tracts • Credits can create equity in real estate projects and can combine with tax-exempt bonds • Annual competition by U.S. Department of Treasury • ARRA created additional $3 billion capacity • Total $5 billion awarded in October 2009 • MassDevelopment is an allocator of NMTC and received $55MM for use in MA in October 2009
  20. 20. 20 Commercial Paper & Pool Loans • MassDevelopment issues bonds for multiple borrowers, instead of a single borrower • Security for the bonds is a bank letter of credit negotiated by MassDevelopment – Currently active programs have credit enhancement from Bank of America, TD Bank, Citizens Bank, JPMorgan/Chase, AIB • Loans are made from the proceeds of these bonds • Transaction costs are shared among borrowers • Loan size is typically $3-$10MM • Variable interest rate on loans • Recycling • Access to loans depends on – Borrower’s creditworthiness as determined by the credit provider (letter of credit bank) – Availability of funds
  21. 21. 21 Commercial Paper & Pool Loan Advantages • Low up-front costs – Economies of scale achieved through pooling spreads fixed costs of issuance among several borrowers • Flexibility – Amortization is customized to match useful life of assets financed • Ease of Borrowing – Standardized legal documents facilitate process • Quick Turn-Around Time – Loans can be closed in as little as 6-8 weeks • Great financing mechanism for smaller amounts (generally $3-10MM)
  22. 22. 22 Value Lease Program • Tax-exempt financing for equipment and related renovations or energy conservation projects • Similar to installment loan: fixed rate, fixed payments • Security generally limited to first lien on equipment financed • Leases can be negotiated or competitively bid • Term matches life of equipment (practical maximum is 10-12 years) • Minimum recommended transaction size is $500,000 • Simple and streamlined process; simple application; standardized documents; low closing costs • Significant savings of 2-3% over commercial lease • $242MM in leases from 2007 to date, with rates ranging from 2.65% to 4.95%, for terms of 5 to 15 years
  23. 23. 23 Green Loan Program • Purpose is to help nonprofits leverage programs and initiatives of the state and public utilities by providing funding for energy efficiency projects – making up the difference between project costs and subsidies or rebates • Project must qualify for a utility-sponsored Energy Efficiency program; solar energy projects must qualify for MA or federally sponsored economic incentives • Amount: $50K-$500K (net of any project-related rebates or subsidies) • Fixed, below-market interest rates • Term up to 7 years
  24. 24. 24 Questions?