Financing still a roadblock for stimulus projects

Financing still a roadblock for stimulus projects

By Jeremy Stoltz
News Editor

The American Recovery and Reinvestment Act of 2009 includes numerous tax relief options for businesses and municipalities, and while financing is still a challenge, SBA loans can help mitigate those obstacles.

A panel of experts, presented by Choose DuPage at the Wyndham Hotel in Lisle, explained the many facets of the stimulus package and ways that taxpayers, cities and businesses can take advantage of its programs.

Of the $789 billion in the recovery act, 35 percent is allocated to tax relief in myriad forms, said Kevin Powers, executive with the tax consulting group of Crowe Horwath LLP.

A new tax credit program called Build America Bonds allows municipalities that would issue an otherwise tax-exempt bond to elect to treat that bond as having taxable interest. Investors receive a nonrefundable tax credit in the amount of 35 percent of the interest payable by the issuer.

Municipalities can elect to forego the credit to the investor and instead receive a cash payment from the federal government equal to the credit that would otherwise be offered to the investor.

The Work Opportunity Tax Credit provides an incentive for employers to hire individuals from certain disadvantaged groups. The New Markets Tax Credit allows investors to receive a tax credit over a seven-year period equal to 39 percent of capital invested in low-income communities.

Qualified Zone Academy Bonds can be used to finance renovation, equipment purchases and curriculum development for certain public schools in distressed areas. Investors receive a tax credit in lieu of interest payments.

Similarly, Qualified School Construction Bonds can be used for constructing, rehabilitation or repairing public school facilities or for acquiring land on which a public school facility will be constructed.

Two types of tax incentive programs, statutory and discretionary, are aimed at creating jobs. Discretionary incentives are used to entice relocation or expansion of a targeted business, like those in the high tech and manufacturing industries.

“A lot of them are aimed at larger investments that are creating a significant amount of jobs,” Powers said.

James M. Snyder, partners at Ice Miller LLP, said that business picked up substantially as soon as the stimulus act was passed.

“People are very intrigued by this,” he said.

Many of the tax-exempt bonds in the bill are to be used for public infrastructure and to promote economic development for certain types of projects, said Snyder.

“Those projects have been largely limited,” he said. “Congress said, ‘Nobody is spending a lot of money and we need to help get some projects built.’ So they basically relaxed the rules and made it easier to get a tax-exempt bond.”

Recovery Zone Facility Bonds are a new category of tax-exempt private activity bonds which are created for use in areas designated by counties and large municipalities as recovery zones.

Areas defined as a recovery zone have one or more of the following:
•   Significant poverty.
•   Significant unemployment.
•   Significant home-foreclosure rates.
•   Any area for which a designation as an empowerment zone or renewal community is in effect.
•   Economically distressed areas by reason of military closure or realignments.
•   Significant general distress.

“Is anybody not generally distressed in some capacity?” Snyder said.

The stimulus act calls for a $15 billion allocation of these tax-exempt bonds—for use in building or renovating warehouses, office complexes, hotels and most other commercial projects—which the IRS will issue to each state based on decreases of “individuals employed” in 2008.

“This stuff will be happening very soon,” said Snyder. “One estimate I see has Illinois getting just an enormous amount.”

Nicholas Knorr, vice president of capital markets for Harris Bank, warned that while the recovery act may stimulate interest in projects, financing will still be hard to come by.

“I find myself being the voice of sobriety about some of the challenges that borrowers are going to face,” he said.

The bond market is in great shape, but most borrowers are going to need to have their credit enhanced to make the financing work, which will be very challenging over the next year and a half.

“The ability to get credit enhancements from a bank for these issues has sharply curtailed, in terms of availability and cost,” said Knorr.

Raymond Graves, vice president of SomerCor 504, Inc., which facilitates lending for the Small Business Administration (SBA), said that dropping fees associated with SBA 504 loans should help generate more government-backed lending.

The $730 million allocated to the SBA will most likely run out by December of 2009, if not sooner, said Graves.

“I think there will be a lot of us that would like to take advantage of this financing as soon as possible,” he said. “That’ll be a nice problem to have. If the money runs out, then we’ve been successful getting small businesses to borrow and banks to lend.”

New loans for “hardship” cases, known as America’s Recovery Capital (ARC) loans, should help businesses that are struggling by getting help from banks to make interest-free loan payments with the option to defer payment for 12 months. Banks would then be paid back over a five-year period.

“We have to see if banks are really interested in this,” said Graves. “Getting a bank to offer a no-interest loan, even if it’s 100 percent backed by the SBA, is a tough sell. We’ll see whether it’s successful.”

Posted on Tuesday, June 30, 2009 (Archive on Tuesday, July 07, 2009)
Posted by jstoltz Contributed by jstoltz

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