Q Our manufacturing company is moving to a 50,000-square-foot site near Los Angeles International Airport and we need to borrow $4 million dollars for the plant and equipment purchase. Would an Industrial Development Bond (IDB) make sense for us, and what are the biggest problems associated with obtaining one?
A IDBs are the lowest-cost and most flexible financing alternative for smaller companies planning to expand. They offer an alternative to the Small Business Administration’s 7(a) and 504 financing, and are the only form of municipal financing made available to qualified private companies. Their biggest advantage is that the tax-exempt character of interest payments to IDB investors results in below-market money for a business. In l995, the overall average interest rate was 5.6 percent.
The qualification tests are as follows:
– The plant being purchased or constructed must be used for manufacturing purposes.
– Funds must be used to buy land, buildings and/or new equipment not used as working capital or accounts receivable financing.
– Financing is between $1 million to $10 million.
– Applicants must demonstrate that the project will have social benefits within California meaning it will create jobs.
– The borrower must be able to obtain a letter of credit for the amount of the IDB financing.
That last requirement is the hang-up for most small businesses. Commercial banks are usually unwilling, or unable, to issue letters of credit that may extend over 20 to 30 years with annual renewal provisions. Bank regulators frown on this type of “contingent liability,” and borrowers may find it difficult to get their bank of account to participate. Annual letter-of-credit renewal fees can run as high as 2 percent. There are banks in Southern California that issue letters of credit in connection with IDBs Wells Fargo, California United and Comerica are three of them. But changing banks may not be possible when you have an escrow to close.
Another difficult issue is the allocation of tax-exempt authority among municipalities in California. The entire allocation for l997 is exhausted. Projects looking for construction and permanent financing are lining up now for l998’s allocation and need to be ready when the window for submission opens. Under certain circumstances, taxable bridge financing can be used during an interim period.
There are up-front costs due at closing for IDBs, as much as 4 percent of the bond proceeds. Some costs may be included in the proceeds and others must be paid by the borrower out of pocket. The city of Los Angeles has designed a subordinated loan program designed to help defray these costs as well as fill other project financing needs. Call Reyn Blight with the Los Angeles Industrial Development Authority at (213) 485-2952 for further details.
After defining eligibility and nailing down project costs at a specific site, a business is ready to obtain an “inducement resolution” from the local IDB Authority. The date of that submission is critical in determining which “soft costs” are eligible for bond proceeds. Bond proceeds cannot finance project costs incurred more than 60 days prior to the inducement resolution. There are literally hundreds of service providers to guide you through this process and the selection of a knowledgeable investment advisor can be helpful at this juncture.