RECOVERY ZONE BONDS The American Recovery and Reinvestment Act of - - PDF document

RECOVERY ZONE BONDS The American Recovery and Reinvestment Act of 2009 (the “ARRA”) created two new categories of bonds which can be used to finance a wide range of projects, including real estate developments and public infrastructure: A. RECOVERY ZONE FACILITY BONDS (“RZFBs”), and B. RECOVERY ZONE ECONOMIC DEVELOPMENT BONDS (“RZEDBs”), a category of Build America Bonds. USE OF RZFBs and RZEDBs To support the active conduct of a qualifying business, including most real estate development projects, it is possible in 2009 and 2010 for a County or Large Municipality,

• r any entity empowered to issue bonds on its behalf, to issue one or both (1) RZFBs to

finance the capital costs of privately owned or utilized business facilities and a wide range

• f real estate development projects within a Recovery Zone; and (2) RZEDBs to finance,

for example, public infrastructure (water, sewer, roads, traffic lights, etc.) within a Recovery Zone.

• A “Recovery Zone” (“RZ”) means:

(1) any area designated by the bond issuer as having significant poverty, unemployment, sale of home foreclosures, or general distress; (2) any area designated by the issuer as economically distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; or (3) any area which is a federal Empowerment Zone or Renewal Community.

• In Public Notice 2009-50 (the “Public Notice”) the Internal Revenue

Service (the “IRS”) stated that any State, County or Large Municipality may make designations of RZs, “in any reasonable manner as it shall determine in good faith in its discretion.” The Public Notice is available by going to www.irs.gov, then clicking on the “Tax Exempt Bond

Community” bar at the top right of the page, and then clicking on “Notice 2009-50 (Recovery Zone Bond Volume Cap Allocations).”

• The RZFBs and RZEDBs must be issued on or before December 31, 2010.
• The nationwide limits are:

RZFBs $15 Billion RZEDBs $10 Billion

• Georgia’s RZFBs allocation is $533,677,000. Georgia’s allocation for

RZEDBs is $355,785,000. The IRS allocation list was published June 12. The Georgia list is attached.

• Eligible Issuers of RZ Bonds include states, political subdivisions such as

Counties and Large Municipalities, and entities empowered to issue bonds

• n behalf of any such governments, such as Development Authorities ( the

“Authorities”). BACKGROUND State and local governments can issue either governmental bonds or private activity

• bonds. Governmental bonds are issued by governments to finance governmental functions

(public purposes) and are repaid with governmental funds. State and local governments can also serve as financing conduits by providing financing to private, nongovernmental borrowers (“Private Activity Bonds”). Generally the interest received by bondholders of governmental bonds is excluded from gross income for federal income tax purposes. The federal government thereby provides an indirect subsidy to state and local governments. The interest exclusion is also available to holders of some limited categories of Private Activity Bonds referred to as “Qualified Private Activity Bonds.” Small Issue ($10 million limit) Industrial Development Bonds are a familiar example. The ARRA creates two additional methods of federally subsidized financing for economic development: RZFBs and RZEDBs. WHAT ARE THE ADVANTAGES OF RZFBs? RZFBs are treated as Exempt Facility Bonds. The interest on Exempt Facility Bonds is excluded from gross income for federal income tax purposes. Exempt Facility Bonds can be utilized to finance certain types of privately owned facilities. For example, Counties and Large Municipalities or their Authorities could issue tax exempt bonds and loan the bond proceeds to privately owned companies for “Recovery Zone Property.” RZFBs could substantially reduce the costs of financing for certain privately owned facilities.

FOR WHAT CAN RZFBs BE USED? RZFBs can be used to finance Recovery Zone Property. Recovery Zone Property means depreciable property (for example, land, building, equipment), including property expensed under Internal Revenue Code Section 179, if: (1) the property was constructed, reconstructed, or acquired by purchase by the taxpayer after the designation of the RZ took effect; (2) the original use of the property within the RZ commences with the taxpayer; (3) substantially all the property is in a RZ; and (4) the property is used in the active conduct of a “Qualified Business” by the taxpayer in the RZ. Property which is substantially renovated by a taxpayer meets requirements (1) and (2)

• above. Property is treated as substantially renovated by a taxpayer if, during any 24-month

period (the “Period”) beginning after the designation of the RZ took effect, additions to the basis

• f the property in the hands of the taxpayer exceed the adjusted basis of the property at the

beginning of the Period in the hands of the taxpayer. Used property in a RZ does not qualify as Recovery Zone Property; but used property purchased outside a RZ may quality as Recovery Zone Property if its original use within the RZ commences with the taxpayer. A “Qualified Business” is any trade or business other than (a) rental residential property or (b): (1) a golf course (2) a country club (3) a massage parlor (4) a hot tub facility (5) a sun tan facility (6) a race track (7) a gambling facility, or (8) any store the principal business of which is the sale of alcoholic beverages for consumption off premises (a liquor store). RZFBs can be used for a wide range of projects including, for example, office buildings, distribution centers, manufacturing facilities, retail developments, industrial and business parks, call centers, and research and development facilities. RZFBs have a number of advantages over Qualified Small Issue Bonds (sometimes referred to as “Industrial Development Bonds”), including:

1. can be used to finance almost any business facility or real estate development, 2. no $10,000,000 per project limitation on the principal amount of the bonds, 3. no $20,000,000 per project capital expenditures limit, and 4. not subject to the normal annual State by State numerical limitation on Private Activity Bonds issued in that year (overall volume cap). Financing a project with RZFBs will not cause that project to be subject to the prevailing wage requirements of the Davis-Bacon Act. WHAT IS THE ADVANTAGE OF RZEDBs? The County or Large Municipality, or its Authority, issuer of RZEDBs can elect to: A. Issue the bonds as Tax Exempt Bonds. The interest income received by the bondholder is excluded from the bondholder’s gross income for federal income tax purposes, B. Issue the bonds as Build America Bonds (Tax Credit). The issuer does not pay interest to the bondholder. The bondholder receives a 35% nonrefundable tax credit against federal income taxes; but must include the amount of the credit in his gross income for federal income tax purposes, C. Issue the bonds as Build America Bonds (Direct Payment). The bondholder receives taxable interest and no tax credit. The state or local government irrevocably elects to receive a direct cash payment from the U.S. Treasury of 35%

• f the interest payable on the bonds on each interest payment date, or

D. Issue the bonds as RZEDBs (Direct Payment). The same rules as those for Build America Bonds (Direct Payment) apply, except the direct payment from the U.S. Treasury to the issuer is 45% of the interest payable on the RZEDBs. RZEDBs should reduce the costs of financing and appeal to a broader pool of investors, especially those investors who have no current need or use for federal income tax credits or income excluded from gross income. The market for taxable bonds is much larger than the market for tax exempt bonds. FOR WHAT CAN RZEDBs BE USED? RZEDBs can be used for any “Qualified Economic Development Purpose,” which means expenditures by a County or Large Municipality, or its Authority, for the purpose of promoting development or other economic activity in a RZ, including the following: (1) capital expenditures paid or incurred with respect to property located in the RZ;

(2) expenditures for public infrastructure and construction of public facilities; and (3) expenditures for job training and educational programs. RZEDBs can be used for a wide variety of public projects, such as water and waste water treatment plants, roads, rail sidings, water towers, industrial parks, and storm water systems. RZEDBs can not be used (a) to finance private activities or privately owned facilities, or (b) for refinancing existing debt. The prevailing wage requirements of the Davis-Bacon Act will apply to any project financed with the proceeds of any RZEDB. UTILITY AND GUIDANCE

• Please note that (1) the RZFB or RZEDB amounts allocated and available to a

particular County or Large Municipality may not be significant when compared to the total cost of a particular project and (2) the RZFBs and RZEDBs must be issued on or before December 31, 2010.

• The ARRA does not provide for allocation of RZFBs or RZEDBs to cities that are

not Large Municipalities.

• The ARRA provides that Counties and Large Municipalities may waive any

portion of their allocations (volume cap). The State is authorized to reallocate the waived allocations (volume cap) “in any reasonable manner as it shall determine in good faith in its discretion.”

• The Georgia Department of Community Affairs and the Georgia State Financing

and Investment Commission are responsible for the reallocation of RZFBs and RZEDBs among Georgia’s Counties and Large Municipalities and managing the RZ Bond program. John Gornall is serving as a member of DCA’s advisory committee for RZ Bonds. We will update this memorandum periodically and suggest consideration of RZFBs and RZEDBs for appropriate projects. Given the wide scope of private activity projects which can be financed with RZFBs and the currently available fixed rates of around 4%, we expect a rush of developers to lobby Counties and Large Municipalities for some portion of their allocation.

If you have any questions about the matters discussed in this memorandum, please contact John Gornall, Andrew Schutt or any member of the Arnall Golden Gregory Economic Development Team: John Gornall Phone: 404.873.8650 E-mail: john.gornall@agg.com Andrew Schutt Phone: 404.873.8778 E-mail: andrew.schutt@agg.com

This bulletin was prepared by the law firm of Arnall Golden Gregory LLP. It presents information on legal matters of general interest in summary form. This document should not be construed as legal advice or

• pinion on specific matters.

GEORGIA RECOVERY ZONE BOND ALLOCATIONS Economic Development Recovery Zone Facility Residual Recovery Zone Economic Development Bond Recovery Zone Facility Bond Georgia 355,785,000 533,677,000 Athens-Clarke County (consolidated) City, GA 1,086,000 1,629,000 Atlanta City, GA 22,776,000 34,163,000 Augusta-Richmond County (consolidated) City, GA 2,418,000 3,627,000 Columbus (consolidated) City, GA 2,090,000 3,135,000 Savannah City, GA 2,205,000 3,307,000 Baker County, GA 63,000 94,000 Baldwin County, GA 402,000 603,000 Barrow County, GA 3,304,000 4,957,000 Bartow County, GA 4,440,000 6,660,000 Ben Hill County, GA 536,000 804,000 Berrien County, GA 823,000 1,235,000 Bleckley County, GA 358,000 538,000 Brantley County, GA 271,000 406,000 Bryan County, GA 572,000 858,000 Burke County, GA 260,000 390,000 Butts County, GA 982,000 1,473,000 Camden County, GA 905,000 1,358,000 Carroll County, GA 5,162,000 7,743,000 Catoosa County, GA 1,915,000 2,872,000 Charlton County, GA 309,000 464,000 Chatham County, GA Residual 2,374,000 3,562,000 Chattahoochee County, GA 41,000 62,000 Chattooga, County, GA 670,000 1,005,000 Cherokee County, GA 10,767,000 16,150,000 Clay County, GA 183,000 275,000 Clayton County, GA 13,078,000 19,617,000 Cobb County, GA 37,197,000 55,796,000 Columbia County, GA 1,633,000 2,450,000 Coweta County, GA 5,838,000 8,756,000 Crisp County, GA 1,105,000 1,658,000 Dade County, GA 451,000 677,000 Dawson County, GA 1,089,000 1,633,000 DeKalb County, GA Residual 36,349,000 54,524,000 Dodge County, GA 1,198,000 1,797,000 Dooly County, GA 372,000 558,000 Dougherty County, GA 1,567,000 2,351,000 Douglas County, GA 6,292,000 9,437,000 Effingham County, GA 982,000 1,473,000

Residual Recovery Zone Economic Development Bond Recovery Zone Facility Bond Elbert County, GA 1,100,000 1,649,000 Emanuel County, GA 1,349,000 2,023,000 Fannin County, GA 399,000 599,000 Fayette County, GA 5,244,000 7,866,000 Floyd County, GA 8,269,000 12,404,000 Forsyth County, GA 8,302,000 12,453,000 Franklin County, GA 684,000 1,026,000 Fulton County, GA Residual 26,441,000 39,662,000 Gilmer County, GA 840,000 1,260,000 Glascock County, GA 19,000 29,000 Glynn County, GA 1,472,000 2,208,000 Gordon County, GA 1,814,000 2,720,000 Grady County, GA 708,000 1,063,000 Gwinnett County, GA 41,186,000 61,778,000 Hall County, GA 6,842,000 10,262,000 Hancock County, GA 63,000 94,000 Haralson County, GA 1,250,000 1,875,000 Harris County, GA 399,000 599,000 Hart County, CA 1,329,000 1,994,000 Heard County, GA 473,000 710,000 Henry County, GA 9,440,000 14,160,000 Houston County, GA 1,384,000 2,076,000 Irwin County, GA 293,000 439,000 Jasper County, GA 624,000 936,000 Jeff Davis County, GA 224,000 336,000 Jefferson County, GA 233,000 349,000 Jenkins County, GA 1,513,000 2,269,000 Johnson County, GA 238,000 357,000 Lamar County, GA 766,000 1,149,000 Laurens County, GA 1,461,000 2,191,000 Lee County, GA 673,000 1,009,000 Lumpkin County, GA 832,000 1,247,000 McDuffie County, GA 282,000 423,000 McIntosh County, GA 191,000 287,000 Madison, County, GA 268,000 402,000 Marion County, GA 82,000 123,000 Meriwether County, GA 919,000 1,379,000 Murray County, GA 3,835,000 5,753,000 Newton County, GA 4,478,000 6,717,000 Oconee County, GA 309,000 464,000 Oglethorpe County, GA 129,000 193,000 Paulding County, GA 6,448,000 9,671,000 Pickens County, GA 1,485,000 2,228,000

Residual Recovery Zone Economic Development Bond Recovery Zone Facility Bond Pierce County, GA 290,000 435,000 Pike County, GA 788,000 1,182,000 Polk County, GA 1,302,000 1,953,000 Putnam County, GA 922,000 1,383,000 Quitman County, GA 71,000 107,000 Rabun County, GA 391,000 587,000 Rockdale County, GA 3,906,000 5,859,000 Screven County, GA 159,000 238,000 Spalding County, GA 2,716,000 4,074,000 Stephens County, GA 178,000 267,000 Talbot County, GA 27,000 41,000 Telfair County, GA 2,418,000 3,627,000 Terrell County, GA 167,000 250,000 Thomas County, GA 2,883,000 4,325,000 Tift County, GA 755,000 1,132,000 Towns County, GA 397,000 595,000 Troup County, GA 2,298,000 3,447,000 Tumer County, GA 211,000 316,000 Union County, GA 1,234,000 1,851,000 Upson County, GA 290,000 435,000 Walker County, GA 1,773,000 2,659,000 Walton County, GA 3,994,000 5,991,000 Ware County, GA 506,000 759,000 Warren County, GA 57,000 86,000 Washington County, GA 678,000 1,018,000 Wayne County, GA 665,000 997,000 Wheeler County, GA 290,000 435,000 White County, GA 1,124,000 1,686,000 Whitfield County, GA 8,562,000 12,843,000 Worth County, GA 380,000 570,000