Manufacturing Company Case Study by Bricker & Eckler parnters David Rogers (left), Chair of the Bricker & Eckler Investment & Structured Finance Group and William T. Conard (right)

Tax Exempt Bond Financing Assists Expansion for Manufacturing Company

Recently, a manufacturing company secured several purchase contracts for its product that surpassed the production capabilities of its current location. The company investigated potential locations, settling on an existing facility that could be adapted to its needs. The acquisition, installation, equipping and refurbishment of the facility was projected to be approximately $4 million. The company had never faced a single capital outlay of such a size. The bulk of the cost had to be made up from the proceeds of a borrowing, however, the company desired to lower the interest cost associated with the borrowing.

Bricker & Eckler's Solution

Bricker & Eckler attorneys were able to assist the manufacturing company with the implementation of a financing technique that saved thousands of dollars in interest cost. The Internal Revenue Code permits political subdivisions (counties, cities) to issue special, conduit obligations generally referred to as industrial development bonds, or "IDBs" to make loans to businesses engaged in manufacturing. The borrowing entity agrees to pay all the debt service on the IDBs, which, when properly structured, bear interest that can be excluded from gross income, i.e., tax-exempt. Because bondholders can receive interest payments on the IDBs similar to the after tax yield on taxable securities, such bondholders are willing to accept a lower rate of interest because no taxes are payable with respect to such interest.

Bricker & Eckler attorneys are familiar with the numerous limitations and restrictions on the use of the proceeds of IDBs, as well as several approvals and procedural steps that must be completed in order to qualify for this type of financing. Essentially, 95 percent of the proceeds must be used for the acquisition of land or depreciable property, and at least 75 percent of the proceeds must be used for "core manufacturing" i.e., a process resulting in a change in condition of tangible personal property. Additionally, the dollar amount of the IDBs, plus certain capital expenditures made during a period beginning three years before and ending three years after the issuance of the IDBs, cannot exceed $10 million in principal amount.

In the current situation, the manufacturing company retained Bricker & Eckler to act as bond counsel early in the process, thus preserving the eligibility for financing of substantially all types of expenditures by the company. Bricker & Eckler was also able to coordinate with the state of Ohio, as well as the county and community improvement corporation governing the project, to obtain the necessary approvals and authorizations to permit the prompt issuance of the IDBs.

At the conclusion of the process, the company was able to acquire and finance the project at interest rates under two percent per year on a variable rate basis. Employment at the new location was also increased to service the demand for the products of the company.

For more information, contact William T. Conard at 614.227.2351 or wconard@bricker.com or David A. Rogers at 614.227.2367 or drogers@bricker.com.