Private Activity Bonds bridge financing gaps

The leaves are falling and the dust is settling on an economic downturn second only to the Great Depression. Most economists agree that our local, regional, national and global economies are in some stage of recovery. However, a level of uncertainty persists, due in part to mixed economic news that is being molded to feed the political agenda’s of the upcoming mid-term elections.

Although the macro-economic data is mixed, I believe that as commercial real estate practitioners we are privy to a unique insight and the true leading indicators for our economy at the local level. We are afforded an opportunity to work with business owners across many different industries, and can draw our own conclusions based on the collective feedback we get from them.

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Although many companies are still fighting to emerge from the recession – as many landlords can attest – it is my perception that there is a large contingency doing very well, reporting strong sales/performance, and cautiously addressing expansion needs.

No matter how great the desire and need to grow, companies still contend with a slow thaw of the credit markets, and the need to improve balance sheets. For these companies, public/private partnerships can be an invaluable asset. More specifically, Private Activity Bonds are often discussed, but just as often not well understood.

What they are

Private Activity Bonds are funded by the U.S. Congress, with an annual state volume limit. Individual municipalities are allocated a percentage of that state volume based upon their population.  For example, the city of Fort Collins’ allocation of PAB funds in 2010 is just over $6 million.

When qualified “users” apply for Private Activity Bond financing, they work with the city to coordinate the issuance/sale of those bonds through a federal process.

The interest earned by holders of these bonds is typically exempt from federal income taxes.

The IRS classifies state and local bonds in two ways: Governmental Bonds or Private Activity Bonds. Governmental Bonds are dedicated to projects that benefit the general public and commonly used to finance schools, fire stations, water projects, roads, and the like, whereas Private Activity Bonds may be utilized for projects that primarily benefit private entities.

The private activities that can be financed with tax-exempt bonds are called Qualified Private Activities, and are restricted by Congress to projects defined in the federal tax code.

Who can qualify

There are currently 22 eligible activities that qualify for PAB use, ranging from qualified green building and redevelopment projects to qualified manufacturing facilities.

Historically, PABs have not been particularly useful for many communities in Northern Colorado, as our industries have been largely knowledge-based rather than manufacturing-based. The underutilization of PAB’s can be clearly seen in the nearby chart which summarizes PAB use in Fort Collins over the last decade.

Clearly, there have been significantly more dollars available than deployed. This can be partially attributed to the ease and low cost of capital from alternative lending sources during this period, but is largely due to the restrictive list of Qualified Private Activities.

However, Northern Colorado has in particular benefited from several bond-related provisions included in the American Recovery and Reinvestment Act of 2009. ARRA expanded the definition of qualified manufacturing facilities to include the production and creation of intangible property such as copyrights, patents and formulae.

This is important because it creates an opportunity for many of Northern Colorado’s technology/knowledge based companies to utilize PAB financing. Since the redefinition of qualified manufacturing facilities, the city of Fort Collins alone has worked on over $40 million in deals for potential qualified facilities that produce intangible property – compare that to only $10.3 million deployed over the last 10 years.

The new investment amount included a very high profile project for the city, when an inducement resolution was passed to support $10 million in PAB financing for the construction of the Integware corporate headquarters at the Harmony Technology Park in Fort Collins. This move is projected to add 57 additional primary jobs in the software development industry to our community.

Expanded definition sunsets at end of year

The expanded definition of qualified manufacturing facilities under ARRA is set to expire on Dec. 31. There is wide support to extend the provision indefinitely, as well as modify the definition of qualified manufacturing facility to include research and production of ideas that lead to tangible and intangible property.

For Northern Colorado, keeping the expanded definition is vital for the retention of many of our largest employers in the region as well as for attracting new companies. Of particular significance, the Northern Colorado Economic Development Corp. is currently targeting five different industries including renewable energy, semiconductor manufacturing, biosciences, agricultural technology, and software/IT. PABs are a very valuable tool to help recruit these companies in targeted industries to our region, creating jobs, opportunity and innovation.

These creative funding mechanisms are bridging the gap left by traditional financing sources and enabling companies to grow and expand. You can help support the initiative to amend the Qualified Private Activities for PABs by contacting your local U.S. Representative – Betsy Markey for the Fourth Congressional District.

Joshua Guernsey is a principal/partner with Brinkman Partners LLC. He can be contacted at 970-206-4500 or joshua.guernsey@brinkmanpartners.com.