2009 DELAWARE COUNTY BUSINESS FUNDING FORUM May 5, 2009 The Anatomy of a Tax Exempt Financing - PowerPoint PPT Presentation

Loading...

PPT – 2009 DELAWARE COUNTY BUSINESS FUNDING FORUM May 5, 2009 The Anatomy of a Tax Exempt Financing PowerPoint presentation | free to download - id: 20d30-MjhmN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

2009 DELAWARE COUNTY BUSINESS FUNDING FORUM May 5, 2009 The Anatomy of a Tax Exempt Financing

Description:

The Anatomy of a Tax Exempt Financing ... take the form of a typical bank financing. ... Once the financing team and the authority have been identified then a ... – PowerPoint PPT presentation

Number of Views:118
Avg rating:3.0/5.0
Slides: 34
Provided by: delc1
Learn more at: http://www.delcopa.org
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: 2009 DELAWARE COUNTY BUSINESS FUNDING FORUM May 5, 2009 The Anatomy of a Tax Exempt Financing


1
2009 DELAWARE COUNTY BUSINESS FUNDING FORUMMay
5, 2009The Anatomy of a Tax Exempt Financing
  • Valentino F. DiGiorgio III, Esq.
  • Stradley Ronon Stevens Young, LLP
  • 610.640.5804
  • vdigiorgio_at_stradley.com
  • Adam Matlawski, Esq.
  • McNichol, Byrne Matlawski, P.C.
  • 610.565.4322
  • amatlawski_at_mbmlawoffice.com

2
The Anatomy of a Tax Exempt Financing
  • The purpose of this presentation is to provide
    some basics relating to the tax-exempt financing.
    This outline is not an exhaustive outline of the
    legal and tax issues relating to a tax-exempt
    financing, but attempts to highlight some of the
    more basic and important concepts of which a
    potential borrower, lender and their respective
    counsel should be aware.
  • Tax-exempt financings can take place in the form
    of a bonds or notes. The basic premise, however,
    is the same interest paid on the obligation is
    not subject to federal income tax and (depending
    on the state) state income tax.
  • U.S. Treasury Circular 230 Notice We inform you
    that, unless expressly stated otherwise, any U.S.
    federal tax advice contained in this
    communication, including attachments, is not
    intended or written to be used, and cannot be
    used, by any taxpayer for the purpose of avoiding
    any penalties that may be imposed on such
    taxpayer by the Internal Revenue Service. In
    addition, if any such tax advice is used or
    referred to by other parties to promote, market,
    or recommend any transaction or investment, then
    (i) the advice should be construed as written in
    connection with the promotion or marketing by
    others of the transaction(s) or matter(s)
    addressed in this communication and (ii) the
    taxpayer should seek advice based on the
    taxpayer's particular circumstances from an
    independent tax advisor.

3
I. Description of Process
  • Interest Income Exemption
  • The holder of a tax exempt bond or note
    (collectively herein, a bond) is entitled,
    subject to certain requirements, to exclude the
    interest income received thereon from its gross
    income for Federal income tax purposes. Section
    103 of the Internal Revenue Code of 1986, as
    amended (the Code), serves as the source of the
    exemption. In enacting Section 103, Congress
    chose to exclude interest on any state or local
    bond. Such a bond is defined as an obligation
    of any state or political subdivision thereof.

4
I. Description of Process (continued)
  • As such, a bond need not be a bond as common
    nomenclature would indicate but merely be an
    obligation of a political subdivision under a
    written contract whereby the governmental entity
    borrows money that is available for its use and
    that entity must repay the obligation and
    interest thereon pursuant to such contract.
  • In Pennsylvania, state law has enabled the
    creation of certain constituted authorities
    which have been established for the purpose of
    issuing bonds on behalf of a borrower engaging in
    a qualified transaction. These are
  • Industrial development authorities
  • Health authorities and
  • Educational authorities

5
I. Description of Process (continued)
  • Eligibility. Extensive tax analysis must be
    performed to determine whether the proposed
    borrower and its anticipated use of the proceeds
    meet the requirements of the Code pertaining to
    tax exempt transactions. The threshold factor is
    whether the borrowing entity operates for a
    purpose that qualifies for exempt treatment. The
    two most popular forms of issue are for
  • Manufacturing
  • 501(c)(3) charitable entities. - All property
    being financed must be owned by the 501(c)(3)
    entity and
  • Exempt Facility Bonds (e.g. water, sewer
    airports, solid waster, high speed rail).

6
I. Description of Process (continued)
  • Selection of an Authority. Although 501(c)(3)
    organizations are non-profit and are generally
    exempt from paying taxes, they cannot issue
    tax-exempt bonds on their own. In order to secure
    the federal and state tax exemption, the bonds
    must be issued through a "conduit" authority
    (e.g. state agency, county or city)
    (Authority), with individual state law
    determining which of these entities are permitted
    by statute to serve in this capacity. The issuing
    Authority, in turn, enters into a loan
    agreement with the 501(c)(3) borrower setting
    out the terms for debt repayment. The Authority
    will also ensure that the financing is consistent
    with their policies, pass appropriate
    resolutions, hold the necessary public hearings,
    and generally oversee the pricing (i.e. sale)
    of the bonds.
  • In order for a bank to be able to deduct
    interest allocable to a private placement
    financing, the note or bond being issued must be
    a qualified tax-exempt obligation as defined in
    Section 265(b)(3) of the Code. In order to meet
    this requirement, the Authority can issue not
    more than 10,000,000 of such debt in any given
    calendar year.

7
I. Description of Process (continued)
  • Sizing - Use of Proceeds. Proceeds must be used
    for limited purposes and only a limited
    percentage of the proceeds may be used for soft
    costs associated with the financing. Soft costs
    such as Authority, bank and bond counsel fees may
    be paid from the proceeds so long as such costs
    do not exceed 2 of the total proceeds. In
    charitable entity financings, all of the proceeds
    must be used for nonsectarian purposes.
  • Declaration of Official Intent. In order for a
    Borrower to reimburse itself for costs that it
    incurs in advance of the date of the debt
    offering, it must enact a Declaration of Official
    Intent that complies with the requirements of the
    Code. Typically, a Declaration of Official
    Intent is adopted in the same manner as a board
    resolution. In general, a Declaration of Official
    Intent must have the following attributes

8
I. Description of Process (continued)
  • it must be in reasonable form
  • it must contain a declaration of intent to
    reimburse costs incurred with regard to certain
    expenditures, as well as a general functional
    description of the property to which the
    reimbursement relates
  • it must indicate the reasonably necessary maximum
    principal amount of debt to be issued for
    reimbursement and
  • as of the date of declaration, the borrower must
    reasonably expect to reimburse the expenditures
    with the proceeds of a tax-exempt borrowing.
  • The Declaration of Official Intent must be
    adopted not later than 60 days after the date of
    payment of the original expenditure. There is a
    special exception set forth in the Code for
    certain preliminary expenditures. Such
    expenditures can include architectural,
    engineering, surveying, soil testing, and similar
    costs that are incurred prior to the commencement
    of construction or rehabilitation of a project.
    While such expenditures can be incurred without
    regard to when the Declaration of Official Intent
    is adopted, they cannot exceed 20 of the
    ultimate debt issuance.

9
I. Description of Process (continued)
  • Public Bond Issues versus Private Placement. The
    borrowing must elect between either a publicly
    offered bond or a privately placed note. Publicly
    offered bonds involve a larger financing team and
    increased costs but often yield significant
    interest rate advantages. Privately placed notes
    usually take the form of a typical bank
    financing. While privately placed note
    transactions typically involve a lower cost of
    issuance, the interest rates are generally higher
    than those obtained in publicly offered bond
    transactions.
  • Public bond issues may also require a rating
    from a rating agency, such as Moodys or Standard
    Poors. Also, depending on its creditworthiness,
    the borrower may have to obtain credit
    enhancement such as a letter of credit or bond
    insurance backing up the repayment of the bonds.

10
I. Description of Process (continued)
11
I. Description of Process (continued)
  • Single Application for Assistance. Once the
    financing team and the authority have been
    identified then a Pennsylvania Department of
    Community and Economic Development (DCED)
    Single Application for Assistance must be
    prepared by the borrower for submission to the
    Authority. The Authoritys counsel and borrowers
    counsel will provide the borrower with assistance
    in completing the application.
  • TEFRA Hearing. The Authority then conducts what
    is known as a TEFRA hearing. This is a public
    hearing in which the financing is discussed and
    pursuant to which the public has an opportunity
    to comment. This hearing, held before the
    Authority officers, must be held not more than 14
    days after notice is given in a newspaper of
    general publication for the jurisdiction ion
    which the project is located and in which the
    authority is located. At this hearing the
    Authority officially authorizes its sponsorship
    of the financing project and its role as the
    conduit borrower.

12
I. Description of Process (continued)
  • Bond/Note Counsel.
  • The role of bond counsel is to ensure that the
    bonds or note being issued and the use of the
    proceeds thereof comply with the requirements of
    the Code.
  • Bond counsel will deliver an opinion to the
    bondholders or purchasers of the note to the
    effect that interest on the bonds or note is
    exempt from state and federal income taxes.
  • In order to be able to give this opinion, bond
    counsel needs to perform due diligence on the
    borrower to ensure its status as a 501(c)(3)
    entity and that the facility being financed
    complies with the restrictions and limitations of
    the Code.
  • Bond counsel is also the quarterback of the
    deal and is responsible for filing the IRS Form
    8038 relating to the issuance of the bonds or
    note.
  • Bond counsel also frequently serves as borrowers
    counsel as well.

13
I. Description of Process (continued)
  • Submission to DCED. Counsel for the Authority
    then completes the Single Application for
    Assistance by attaching the minutes from the
    TEFRA hearing and various other approvals that
    are required, including approval from the top
    elected official of the jurisdictions in which
    the project is located and the Authority is
    located. Counsel for the Authority then forwards
    the completed bond application to the DCED for
    approval.
  • Due Diligence. Qualified bond counsel will then
    perform due diligence to ensure that the
    requirements of the Code as they relate to the
    use of the proceeds of the issue, the borrowers
    501(c)(3) status, arbitrage limitations and other
    limitations and requirements. Bond counsel will
    typically send the borrower a tax questionnaire
    and ask for various documents to be reviewed.
  • Closing. Once approval from the DCED is obtained,
    the transaction can close. The way a privately
    placed note financing technically works is that
    the Authority issues a note which is then
    purchased by the bank. Publicly offered bonds
    are sold directly to investors, usually large
    institutional investment companies. The Authority
    then uses the proceeds of bonds or the note to
    loan funds to the actual borrowing entity. As
    such, an obligation of the Authority has been
    created that qualifies for the interest exemption.

14
II. IRS Code Limitation and Requirements
  • Ownership Requirement. All property to be
    financed must be owned by Section 501(c)(3)
    organization.
  • Use Requirement.
  • At least 95 of the net proceeds must be use only
    by 501(c)(3) organizations engaged in exempt
    activities.
  • Use of property equals use of proceeds. Multiple
    uses of the same property must be allocated. To
    the extent there is use of the property that is
    an unrelated trade or business such use must be
    quantified and cannot exceed the 5 bad money
    limit discussed below.
  • Cost of issuance count against the five percent
    (5) bad money limitation.

15
II. IRS Code Limitation and Requirements
(continued)
  • Use by Section 501(c)(3) organization engaged in
    a unrelated trade or business is not a good
    use, so it counts toward the 5 bad money
    limitation together with other private use.
  • An activity will be characterized as an
    unrelated trade or business if it is
  • (i) a trade or business
  • (ii) regularly carried on
  • (iii) there is no substantial cause or
    relationship to further in the organizations
    exempt purposes.
  • Activities that are excluded from the definition
    of unrelated trade or business include
  • (i) activities conducted primarily for the
    convenience of the organizations members,
    students, patients, officers or employees (e.g.,
    hospital gift shop, cafeteria, campus
    bookstore)
  • (ii) activities in which substantially all of
    the work is performed for the organization
    without compensation
  • (iii) the selling of merchandise,
    substantially all of which has been received by
    the organization as gifts or contributions.

16
II. IRS Code Limitation and Requirements
(continued)
  • Common unrelated trade or business activities
  • (i) hospital lab work or pharmacy sales to
    persons who are not patients or employees of a
    hospitals
  • (ii) Section 501(c)(3) organization provides
    administrative or other support services to
    unrelated Section 501(c)(3) organizations
  • (iii) rental of museum or school facilities
    after hours for private events
  • (iv) certain gift shop activities that are not
    related to exempt purposes and do not qualify for
    the convenience exception set forth by the IRS.
  • (v) operation of a parking lot open to the
    public or open during the hours in which the
    exempt organization is closed.

17
II. IRS Code Limitation and Requirements
(continued)
  • Joint ventures may also raise private use issues.
  • Common types of use include leases (both lessee
    and lessor are users) management contracts, other
    service agreements and cooperative research
    agreements.
  • IRS regulations provide various safe harbors for
    service and other management contracts and
    research agreements.

18
II. IRS Code Limitation and Requirements
(continued)
  • Financings by Religious Organizations. The
    issuance of tax exempt bonds or notes for the
    benefit of a school or community center sponsored
    by or affiliated with the religious organization
    raises issues under the Establishment Clause of
    the United States Constitution and similar
    provisions in state constitutions. Recent
    decisions of the United States Supreme Court have
    given bond counsel an increasing level of comfort
    in connect with the issuance of tax exempt
    obligations to finance religious affiliated
    schools and other projects. As a result, in
    recent years, an increasing number of secondary
    and primary schools with religious affiliations
    have looked at tax exempt bonds to finance their
    capital projects.
  • Limitation on Maturity of Obligation. The note or
    bond will not qualify for tax exemption if the
    average maturity of the obligation exceeds 120
    of the average reasonably expected economic
    useful life of the facilitys financed with bond
    proceeds. Economic useful life based upon IRS
    depreciations schedules.

19
II. IRS Code Limitation and Requirements
(continued)
  • Prohibition on Use of Proceeds. The proceeds of
    the note portion of the proceeds of the bond or
    note may be used to provide an airplane, sky box,
    other private luxury box, health club facility,
    gambling facility or liquor store.
  • Arbitrage Concerns - Spending Requirements.
  • Basically, arbitrage occurs when the interest
    earned by the borrower upon the bond proceeds
    prior to project use exceeds the interest rate
    paid by the borrower upon such debt. The Code
    sets forth several safe harbors that allow the
    bond proceeds to be spent over time without
    becoming subject to arbitrage rebate. Any such
    excess earnings must be paid over to the Internal
    Revenue Service unless a safe harbor exists.
    There are three rebate exceptions set forth in
    the Code, a 6 month exception, an 18 month
    exception and a 2 year exception

20
II. IRS Code Limitation and Requirements
(continued)
  • 6 Month Rebate Exception. Under the 6 month
    rebate exception, if all of the gross proceeds of
    the issue have been properly expended within 6
    months of the issue date, the rebate rules are
    inapplicable. In qualified 501(c)(3) bond
    issuances, the 6 month spending period can be
    extended for an additional 6 months if the
    unspent gross proceeds at the end of the initial
    term do not exceed 5 of the issue price.
  • 18 Month Rebate Exception. Under the 18 month
    rebate exception, at least 15 of the gross
    proceeds must be spent within 6 months of the
    date of issuance, at least 60 within 12 months
    and 100 within 18 months. Under the 18 month
    rule a reasonable retainage, an amount not to
    exceed 5 of available construction proceeds, may
    be retained for up to another year on account of
    construction disputes and the completion of
    outstanding items.

21
II. IRS Code Limitation and Requirements
(continued)
  • Two Year Rebate Exception. If a Borrower
    anticipates using a majority of the bond proceeds
    for construction projects, it may also elect to
    apply the Codes 2 year rebate exception. This
    exception is only available to bond issuances at
    least 75 of the available construction proceeds
    of which will be used for construction
    expenditures. Construction expenditures are those
    expenditures that may be capitalized as part of
    the basis of real property and can include items
    such as rehabilitation costs, wiring, parking
    areas, plumbing and HVAC systems.
  • Under the 2 year rule
  • 10 of the bond proceeds must be spent within
  • the first 6 months
  • 45 within one year
  • 75 within 18 months and
  • 100 within 2 years.

22
II. IRS Code Limitation and Requirements
(continued)
  • Once again, a reasonable retainage provision, for
    a sum not to exceed 5 of the available
    construction proceeds, is available for an
    additional 12 month period.
  • If the Borrower does not anticipate meeting the
    deadlines of the 2 year rule it can elect, prior
    to the date of issuance, to pay a penalty equal
    to 1 ½ times the amount of available
    construction proceeds that were required to be
    spent, but were not, at the close of each 6 month
    period. If the Borrower elects this penalty prior
    to the date of issuance, it will not be required
    to pay rebate as required by the Code. If the
    spending requirements at each 6 month period are
    met, the penalty is not imposed.
  • There are also exceptions for bona fide debts
    service reserve funds created pursuant to the
    indenture or other loan document.
  • Failure to comply with one of the rebate
    limitations above will result in the borrower
    having to rebate to the IRS any excess earnings
    earned on the proceeds of the bonds. If the
    borrower fails to do so at the times set forth in
    the Code, the bonds could be declared taxable.

23
II. IRS Code Limitation and Requirements
(continued)
  • Reimbursement Period Requirements.
  • The Code sets forth limitations on the period of
    time in which costs must be reimbursed. Under
    these requirements, the bonds must be issued not
    later than 18 months after the later of (i) the
    date on which the original expenditure is paid
    or (ii) the date on which the property is placed
    in service or abandoned (not to exceed 3 years
    after the date on which the original expenditure
    is paid).
  • Note, however, that in order to be eligible for
    reimbursement, the expenditure must be capital in
    nature. Also, as with the Declaration of Official
    Intent requirements above, the reimbursement
    period requirements are not triggered by the
    aforementioned preliminary expenditures.

24
II. IRS Code Limitation and Requirements
(continued)
  • Capital Campaigns and Replacement Proceeds.
  • Generally - Charitable or educational
    organizations described in section 501(c)(3) of
    the Code frequently conduct capital giving
    programs for projects that the organization
    ultimately determines to finance with tax-exempt
    bonds.
  • Treatment as Replacement Proceeds Borrower must
    make sure that the funds raised through the
    capital giving program are not treated as
    replacement proceeds of the bonds. Treatment as
    replacement proceeds is undesirable because of
    the arbitrage rules of the Code, which provide
    that replacement proceeds cannot be invested at a
    yield higher than the bond yield without
    jeopardizing the tax-exemption of the bond
    interest.

25
II. IRS Code Limitation and Requirements
(continued)
  • Definition - The definition of replacement
    proceeds states that
  • Amounts are replacement proceeds of an issue if
    the amounts have sufficiently direct nexus to the
    issue or to the governmental purpose of the issue
    to conclude that the amounts would have been used
    for that governmental purpose if the proceeds of
    the issue were not used or to be used for that
    governmental purpose. For this purpose,
    governmental purposes include the expected use of
    amounts for the payment of debt service on a
    particular date. The mere availability or
    preliminary earmarking of amounts for a
    governmental purpose, however, does not in itself
    establish a sufficient nexus to cause those
    amounts to be replacement proceeds. (Treas. Reg.
    Section 1.148-1(c)).

26
II. IRS Code Limitation and Requirements
(continued)
  • Preliminary earmarking - This regulation means
    that a borrower may solicit gifts for a project
    and then use bond financing for the project and
    use the gift funds for other purposes, provided
    the solicitation was not more than a preliminary
    earmarking.
  • Pledged funds - As noted in the regulation, in
    addition to preliminary earmarking, replacement
    proceeds can be treated as present in a situation
    if funds are used or expected to be used to pay
    or secure debt service on bonds. This aspect of
    the regulation would prevent a borrower from
    pledging its endowment to secure a bond issue,
    regardless of whether or not the endowment was
    preliminarily earmarked for the bond project.
    Additionally, if a borrower has an endowment or
    construction fund specifically segregated and
    earmarked for the purposes of the bond project,
    such funds could be considered replacement
    proceeds subject to yield restricted investments.

27
II. IRS Code Limitation and Requirements
(continued)
  • 6. Avoiding arbitrage violation Earmarked
    capital campaign funds and pledged funds must
    either be (i) deposited into debt service fund
    to pay principal and interest or to redeem bonds
    within a 12 month period, or (ii) subject to the
    investment earnings being yield restricted to
    the interest rate on the bonds.
  • To achieve the greatest flexibility,
    organizations are encouraged to solicit
    contributions that support general capital
    improvements, rather than specifically for the
    projects being financed with tax-exempt debt.

28
II. IRS Code Limitation and Requirements
(continued)
  • I. Build American Bonds
  • American Recovery and Reinvestment Act of 2009
    provides for 2 types of taxable bonds that
    provide an alternative to traditional tax-exempt
    bonds with lower net borrowing costs
  • 1. Tax Credit Build America Bonds
  • a) must be issued before January 1, 2011
  • b) must comply with requirements applicable to
    tax-exempt bonds and can finance any
    governmental purpose for which tax-exempt
    governmental bonds (excluding private activity
    bonds under 141) could be issued under 103
  • c) interest is includible in gross income
  • d) tax credits provided to holders of bonds
    holding bonds on one or more interest payment
    dates during taxable year 35 of coupon
    interest payable by issuer and may be carried
    over to future tax years
  • e) issuer must submit Form 8038-G

29
II. IRS Code Limitation and Requirements
(continued)
  • II. Direct Payment Build America Bonds
  • a. must be issued before January 1, 2011
  • b. use is more limited than for Tax Credit BABs
    generally can be used for governmental purposes
    for which tax-exempt governmental bonds
    (excluding private activity bonds under 141)
    could be issued under 103 but excess of
    proceeds (after paying up to 2 costs of
    issuance) over amounts in reasonably required
    reserve fund must go to capital expenditures
  • c. refundable tax credit paid to issuer 35 of
    coupon interest payable to bondholders
  • d. issuer must submit Form 8038-G 30 days
    before filing new Form 8038-CP Return for
    Credit Payments to Issuers of Qualified Bonds
    Form 8038-CP must be submitted in timely fashion

30
III. Costs, Interest Rates and Flow of Funds
  • Cost of Issuance. Fees and expenses are greater
    than those customarily associated with a typical
    two party loan transaction, however, depending on
    the size of the loan, the borrower can often
    recoup these excess fees in interest savings over
    the first few years of the loan. Costs will vary
    based on the complexity and size of the
    transactions and will be more for public bond
    issues than the private placements. Costs range
    as follows
  • IDA fee Application fee plus ¼ to ½ of one
    percent of the loan amount plus annual monitoring
    fees
  • IDA Counsel fee 4,000 to 10,000
  • Bond Counsel fee 7,500 to 15,000 for (note
    issue) and 25,000 to 75,000 for bond issue
  • Bank Counsel fee (private placements) 7,000 to
    15,000
  • Underwriter counsel fees (public offerings)
    15,000 to 35,000
  • Borrower counsel fees 10,000 to 30,000
  • Underwriter fees (public offering)
  • Credit enhancement costs (public offerings)
  • Other normal costs such as title insurance,
    appraisals, environmental, etc.

31
III. Costs, Interest Rates and Flow of Funds
  • Interest Rates. Interest rates in tax exempt
    financing transactions can vary depending upon
    whether borrower elects to make a public bond
    offering or proceeds with a private placement of
    a note, typically with a bank. In either of such
    transactions, borrowers are normally able to
    elect between a variable or floating interest
    rate or a fixed rate. If a borrower elects a
    floating rate, it may have the option, subject to
    certain limitations, to enter into a swap
    agreement in order to hedge its interest rate
    risk.

32
III. Costs, Interest Rates and Flow of Funds
  • As with any borrowing, the interest rate
    available to a borrower is largely dependent upon
    its credit worthiness. In privately placed
    transactions, the borrowers credit worthiness is
    underwritten directly by a bank which, in
    addition to being desirous of increasing its loan
    portfolio, may also have customer relationship
    considerations when it makes its determination to
    extend credit to a borrower and the interest rate
    that such debt will bear. In publicly offered
    bond transactions, in order to achieve a sale of
    the bonds, a borrower must obtain a credit rating
    from either Standard Poors, Fitch or Moodys.
    Typically, this credit analysis must yield an
    investment grade rating in order to achieve a
    successful sale of the bonds. This credit rating
    will also have a direct correlation to the
    interest rate that investors will be willing to
    accept for the corresponding credit risk. Many
    borrowers find it advantageous in publicly
    offered bond transactions to obtain credit
    enhancement in the form of bond insurance or a
    irrevocable standby letter of credit issued by a
    banking institution. Each of these financial
    products allow the ultimate investors to look
    beyond the credit worthiness of the actual
    borrower (a credit rating of the borrower is
    often not even obtained) but rather base its
    investing decision upon the credit rating of the
    credit enhancement provider. Most borrowers find
    that the reduction in interest rates achieved
    through the purchase of credit enhancement
    financial products justify the related cost.

33
IV. Advantages
  • The primary advantage of tax exempt financing
    transactions is the reduced interest rates that a
    borrower can enjoy. As noted above, this
    advantage does, however, come at a fairly
    significant cost in terms of the cost of
    issuance. Privately placed transactions are
    typically less expensive than the publicly
    offered bond transactions. As such, it has been
    our experience that borrowers typically will not
    enter into a tax exempt financing transaction
    unless they are borrowing more than 1,000,000.
    At level, they will prefer a private placement
    transaction over a public bond offering.
    Typically, a publicly offered bond transaction
    involves an issuance of more than 5,000,000 of
    debt.
About PowerShow.com