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Recent Developments in Project Financing under the American Recovery and Reinvestment Act of 2009

Real Estate Update Michael J. Ostermeyer, Jeff Peelen

The American Recovery and Reinvestment Act of 2009 ("ARRA"), enacted on February 17, offers new opportunities for public entities to issue bonds that may be used to finance new real estate development. Three ARRA bond programs should be of particular interest to real estate developers: (1) Build America Bonds, (2) Recovery Zone Economic Development Bonds and (3) Recovery Zone Facility Bonds. The first two of these programs are intended to create new incentives for states and local governments to issue bonds for public capital expenditures and for the construction of public facilities (including publicly owned but privately operated facilities such as hotels); the third vehicle may be used to fund private development.

Build America Bonds (Public Projects)

  • Use. Build America Bonds may be used to finance projects that could be funded with the proceeds of traditional governmental-purpose bonds - which is to say, public development projects and infrastructure improvements. Interest on Build America Bonds is taxable to bondholders, but the federal government lowers the lending cost (and thereby increases the likelihood that the bonds will be marketable) by allowing the issuer to choose either a direct federal payment (to the bond issuer) equal to 35% of the interest payments ("Direct Payment") or a federal tax credit (to the bond holder) equal to 35% of the interest payable by the issuer ("Tax Credit"). The Direct Payment program is limited to capital expenditures, whereas the Tax Credit program may also be used for other project purposes.
  • Timing. Build America Bonds may be issued in 2009 and in 2010.
  • Allocation. Build America Bonds may be issued without any limitation as to amount and without allocation restrictions.
  • Recent Development. On April 3, 2009, the IRS issued interim guidance regarding the procedures to issue Build America Bonds. Although the IRS guidance contemplates further regulations, governmental authorities may now begin issuing both types of Build America Bonds.

Recovery Zone Bonds

ARRA creates two new classes of bonds for certain projects in newly defined "Recovery Zones:" Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds. The first of the two new classes, Recovery Zone Economic Development Bonds ("RZEDBs"), must be used to finance public projects and cannot be issued as private activity bonds. Recovery Zone Facility Bonds, by comparison, are essentially a new category of the tax-exempt private activity bonds known as "exempt facility" bonds.

  • Use for Public Projects. As noted above, RZEDBs must be used to finance public projects. Indeed, the RZEDB program is essentially a subset of the Direct Payment iteration of the Build America Bonds program. Interest on these bonds is taxable to bondholders, but issuers will receive a direct payment from the U.S. Treasury equal to 45% of the interest payable under the bonds.

    All available project proceeds, excluding amounts in a reasonable reserve fund, must be used for a "qualified economic development purpose." A qualified economic development purpose is defined as one that promotes development or other economic activity in a Recovery Zone - including capital expenditures paid or incurred with respect to property located in a Recovery Zone, expenditures for public infrastructure and construction of public facilities located in a Recovery Zone, and expenditures for job training and educational programs.

    RZEDBs are subject to prevailing-wage standards under the Davis-Bacon Act.

  • Use for Private Projects. By comparison, Recovery Zone Facility Bonds may, as befits exempt facility bonds, be used to finance both privately owned projects and publicly owned projects that are managed or leased in a way that gives rise to a private use. The bonds may be issued on both a conduit and a non-conduit basis.

    At least 95% of the net proceeds of a Recovery Zone Facility Bond must be used for "recovery zone property." Recovery zone property is any depreciable property: that was constructed, reconstructed, renovated, or acquired by a taxpayer after the date the pertinent Recovery Zone was designated; the original use of which is by the benefitted business; the use of which is substantially all within the Recovery Zone; and that is used in the active conduct of a qualified business. (Qualified businesses include any trade or business except residential rental property, liquor stores, golf courses, country clubs, massage parlors, hot tub facilities, tanning facilities, and gambling facilities.) Land acquisition costs are not financeable.

  • Timing. Both RZEDBs and Recovery Zone Facility Bonds may be issued in 2009 and in 2010.
  • Recovery Zone Defined. A local government must designate one or more "Recovery Zone" areas. To qualify as a Recovery Zone, an area must have a significant poverty, unemployment or home foreclosure rate or be in general distress; must be 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 must be designated as an empowerment zone or renewal community.
  • Allocation. $10 billion is allocated nationally to RZEDBs and $15 billion to Recovery Zone Facility Bonds. Generally, such allocations will be made among the states in the proportion that each state's 2008 employment decline bears to the aggregate 2008 employment decline in all states. States must then apportion allocated amounts to counties and "large municipalities" (defined as any municipality with a population over 100,000) based on their respective shares of employment decline. Each state is guaranteed at least 0.9% of the total national issuance authority.
  • Recent Developments. Although IRS has not yet issued guidance regarding the designation of Recovery Zones or specifying state-by-state allocation amounts, an April 3, 2009 notice addressing the Build America Bonds program states that the Service plans to issue separate guidance on these matters.

Next Steps

While the Recovery Zone Facility Bonds program offers direct opportunities for private real estate development, the Build America Bonds program and the RZEDB programs also have the potential to catalyze projects that involve private real estate development. We plan to send another update when the IRS issues further guidance regarding the Recovery Zone programs.

In the meantime, you should review the matrix of information that summarizes these and other ARRA bond programs, which can be accessed here.

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For additional information regarding these and other real estate development financing options, please contact . . .

Michael J. Ostermeyer
Real Estate Practice Group
414-277-5521 /

Jeffrey D. Peelen
Public Finance Practice Group
414-277-5773 /

Ann K. Comer
Tax-Assisted Development Team
414-277-5509 /