If you are a manufacturer, bank, or economic-development organization (EDO), you need to know about Section 144 of the IRS Tax code: https://www.irs.gov/Tax-Exempt-Bonds/Section-144-Small-Issue-Bond-Defined-10000000-Limit-Manufacturing-Facility. This government-sponsored program is meant to help stimulate public and private investment from abroad and here locally. Manufacturers, assisted living, multi-unit, waste management, and other for-profit entities can take advantage of this […]
If you are a manufacturer, bank, or economic-development organization (EDO), you need to know about Section 144 of the IRS Tax code: https://www.irs.gov/Tax-Exempt-Bonds/Section-144-Small-Issue-Bond-Defined-10000000-Limit-Manufacturing-Facility. This government-sponsored program is meant to help stimulate public and private investment from abroad and here locally. Manufacturers, assisted living, multi-unit, waste management, and other for-profit entities can take advantage of this tax-exempt financing.
Tax-exempt financing for manufacturers
Tax-exempt financing for manufacturers under Section 144 of the Internal Revenue Code can save borrowers nearly 35 percent on a loan through a bank. Tax-exempt financing is a broad term that also includes tax-exempt loans made by a bank or private lender to a private enterprise to finance the costs of capital projects. Tax-exempt financing is used for the purpose of investing in new facilities, production lines, machinery and equipment, and technological advancements that help bolster productivity and profit. When utilizing this program, a bank does not have to pay taxes to the federal government and in turn, can pass these savings on to the borrower, with an average savings of 35 percent.
Tax-exempt financing may be used to fund the following assets:
Land: Includes acquisition, site preparation, improvements, infrastructure development (e.g., water, sewer, & rail), and environmental testing.
Building: Includes acquisition, construction, rehabilitation, engineering, architectural, legal, and other related costs
Soft Costs: Includes legal, architectural, engineering, surveying, test boring, title insurance, appraisals, accounting, and financing costs for the project.
Equipment: Includes acquisition, delivery, and installation.
Company acquisition: The acquisition of a manufacturing company structured as an asset purchase can be financed with tax-exempt debt.
Helping foreign and domestic manufacturers expand and invest: Low-cost capital access remains the primary strength of tax-exempt financing. Across the United States, there are billions of dollars available every year for manufacturers to use to fund. However, most EDOs and banks are not aware of this unique way to help manufacturers get a lower rate.
Loan structure
Any loan structure can be used to accommodate a tax-exempt loan including a lease structure. Interest earned by the bank is exempt from federal and state income taxes. The bank, in turn, passes on a lower interest rate — typically, about 35 percent to 40 percent lower — to the borrower. This can translate into significant savings over the life of the loan.
Who’s helping manufacturers
That’s the dilemma? No one is. Most capital-market bankers know about tax-exempt financing but aren’t talking to manufacturers about it. Why? Because capital-market bankers like larger loans ($30 million to $300 million), and by law, a tax-exempt loan to a manufacturer cannot exceed $10 million. On the other hand, most commercial lenders are very interested in loans of
$10 million or less. Unfortunately, most commercial lenders are not aware that they can even offer a manufacturer a tax-exempt loan. The result is no one, neither the capital-market bankers nor the commercial lenders, is telling the manufacturers about the opportunities available with tax-exempt financing.
Why not an IDB?
Some of you may be asking, why not use an industrial development bond (IDB) to fund the debt? Bond-market transactions are actually more complicated and more costly than tax-exempt bank loans (TEBL). In a bond offering you have to pay:
- An underwriter
- A trustee
- A remarketing agent
- A letter-of-credit bank (annual fee)
- Upfront fees
The letter of credit cost alone can run 1.5 percent to 2 percent annually. That’s the same as a lender offering an interest rate 1.5 percent to 2 percent higher than their competitors.
In a TEBL, you do not need an underwriter, a trustee, a remarketing agent, or a letter of credit bank. TEBLs are not as complicated as a bond deal since a TEBL is simply a commercial loan with a tax-exempt interest rate.
The math of a tax-exempt bank loan
On a traditional commercial loan, a bank charges, say, 4 percent interest on that loan. On a $1 million loan for one year, the bank earns $40,000 in interest (of course a regular loan would amortize over a much longer period, like 25 years). If it’s paying 35 percent in taxes, from that $40,000 it pays $14,000 in taxes and keeps $26,000.
With a TEBL, the bank doesn’t pay any income taxes on the interest it receives, so as long as it can still make that $26,000, the bank is just as happy. The manufacturer is much happier as it’s saving a lot of money. The interest rate the bank needs to charge on that $1 million to make $26,000 is, of course, 2.6 percent.
And remember, that’s only for a single year — which would never be the case with a manufacturing loan like this. Over a typical 25-year loan period, a manufacturer that borrows $10 million is looking at roughly $2.7 million in savings.
Mark Lesselroth is the principal of Brenner Business Development. Contact him at mark@brennerbd.com