Current Topics in Tax-Exempt FinanceTax-Exempt Products Overview: Just the Facts

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MassDevelopment

• Quasi-public finance and development authority for Massachusetts

• Serving nonprofits, businesses, and municipalities • Primary tools for nonprofits:

• Loans, grants and guarantees• New Market Tax Credits• Tax-exempt bonds

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Who Can Borrow Tax-Exempt?

• Governmental entities: states, cities, towns, school districts, authorities for water, highway public transportation, etc.

Nonprofits are not governmental entities

…enter the conduit issuer

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What is a Conduit Issuer? MassDevelopment’s Role

• A conduit is a governmental entity which issues tax-exempt bonds and then lends the proceeds to a nonprofit organization

• Most conduits such as MassDevelopment are:– “Instrumentalities of the state” with the right to issue debt on

a tax-exempt basis and loan proceeds to nonprofits– Truly “conduit” entities – no legal obligation to repay debt– Educational resource to borrowers

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Who can borrow?

• MassDevelopment can issue tax-exempt debt on behalf of the following nonprofits:– Hospitals, health centers, nursing homes, CCRCs,

HMOs– Higher education– Cultural institutions– Research institutions– Human service providers– Charter schools– Private/independent schools

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Finance Programs

• Tax-exempt Bonds– Fixed or variable rate– Public offering or direct placement

• Cultural Facilities Fund• Commercial Paper and Pool Loan Programs• Direct Loans and Guarantees

– Community Service 501(c)3 Loan Fund– Green Loan Program

• Equipment leases• New Markets Tax Credits

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What can be financed?

• Finance new capital project

• Reimburse for prior capital expenditures

• Finance routine capital costs

• Refund existing debt– To reduce debt service– To gain covenant relief

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Bank Direct Purchase

• 60+ banks buy MassDevelopment tax-exempt bonds as direct purchases

• Used in lieu of making taxable loans• Fixed and floating rates• Bank does credit underwriting and sets terms• Lower up–front costs makes financings as

small as $1,000,000 feasible

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Bond Financing Structure

• MassDevelopment acts as a “conduit”, capitalizing loans with proceeds from bond purchases

• Loans are pledged to repay bonds• The bank underwrites, sets terms and manages the

relationship the same as for a loan

Bond Purchaser(Bank)

BorrowerMassDevelopment

MDFA Issues bonds Borrower repays loan

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Enhanced Bank Purchasing

• Banks can deduct interest expense associated with tax- exempt bonds

• Only for bonds issued in 2009 and 2010• Up to 2% of bank assets • only non-bank corporations had this benefit previously• MA banks may still prefer “separate entity” securities

corporations

• Expanded eligibility for “Bank Qualified” bond status• Not subject to disallowance of interest expense• Issuer limit raised to $30,000,000 • For 501(c)3 nonprofits, limit applies to borrower, not conduit

issuer

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Fixed Rate Bonds

• Lock in interest rate until maturity – borrower pays interest and principal according to predetermined amortization schedule, usually 20 to 30 years

• For public sale, an “investment grade” credit rating will provide best price, i.e. lowest interest cost – Underwriter determines interest rates based on market

conditions and investor demand

• For direct placement, fixed rate is negotiated between investor and borrower – Local banks recently active in this market

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Variable Rate Bonds

• Interest rate adjusted periodically (daily, weekly, monthly, yearly, etc.)

• Borrower pays principal according to pre-determined amortization schedule

• Principal may be prepaid at any time with 30-day notice to investors; bonds may be converted to fixed rate or other variable rate mode

• Credit enhancement from a highly rated bank will offer best market access for public issue

• Swaps – Synthetic fixed rate

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The Financing Team

• Agency (MassDevelopment) – Issues the bonds and loans the proceeds to the Borrower

• Borrower– Eligible nonprofit institution

• Investment Banker– Helps to structure the transaction and is responsible for selling/underwriting

the bonds• Bond Counsel

– Assures that the bonds are a binding obligation of an institution and are tax-exempt; prepares the various agreements and financing documents

• Agency’s Counsel (often the same as the Bond Counsel)– Assures compliance with statutory requirements

• Financial Advisor to Institution– Institutions may choose to engage a financial advisor

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The Financing Team (cont’d)

• Underwriter’s Counsel– Provides legal advice to the Investment Banker as to the issuance and

structure of the bonds and full disclosure of risks

• Borrower’s Counsel– Assists the Institution in preparing full disclosure (“Appendix A”) and in the

review of financing documents

• Trustee– Represents and protects the interests of bondholders

• Trustee’s Counsel– Reviews financing documents to assure the trustee’s ability to perform its

functions

(In a direct placement, the Underwriter & Underwriter’s Counsel are replaced by the Purchaser & Purchaser’s Counsel)

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Cultural Facilities Fund

• Since 2007, $37MM investment in 224 capital projects for nonprofit institutions that attract visitors to and create jobs in Mass.

• Run in partnership with Mass. Cultural Council

EcoTarium in Worcester

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Charter School Loan Guarantee Fund

• Loan guarantees for charter schools in Massachusetts• Funds may be used for acquiring, constructing or renovating

both owned and leased charter schools• For facilities to be owned

– Guarantee can cover up to the lesser of 50% of the first mortgage loan or $3MM

– Up to 100% loan to value

• For facilities to be leased– Guarantee can cover up to the lesser of $1MM or 90% of the cost of the

improvements

• Up-front Annual Fee

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TechDollars

• 501(c)(3) nonprofit organizations with annual revenues $5MM or less

• Funds may be used for 100% of the cost of purchases of new or used telecommunications and information technology equipment and related installation costs

• Loans of $25,000-$250,000• Flexible financing terms and competitive interest rates

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Community Service 501(c)3 Loan Fund

• 501(c)(3) nonprofit social, youth or family service provider with annual operating budget of less than

$5MM • Funds may be used for owned or leased facilities to

repair, renovate, construct or acquire real property• Loans of $100,000-$500,000• Flexible financing terms and competitive interest rates

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New Markets Tax Credits

• Tax credit subsidizes private investments in low-income census tracts

• Credits can create equity in real estate projects and can combine with tax-exempt bonds

• Annual competition by U.S. Department of Treasury• ARRA created additional $3 billion capacity• Total $5 billion awarded in October 2009• MassDevelopment is an allocator of NMTC and

received $55MM for use in MA in October 2009

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Commercial Paper & Pool Loans

• MassDevelopment issues bonds for multiple borrowers, instead of a single borrower

• Security for the bonds is a bank letter of credit negotiated by MassDevelopment

– Currently active programs have credit enhancement from Bank of America, TD Bank, Citizens Bank, JPMorgan/Chase, AIB

• Loans are made from the proceeds of these bonds• Transaction costs are shared among borrowers• Loan size is typically $3-$10MM• Variable interest rate on loans• Recycling• Access to loans depends on

– Borrower’s creditworthiness as determined by the credit provider (letter of credit bank)

– Availability of funds

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Commercial Paper & Pool Loan Advantages

• Low up-front costs – Economies of scale achieved through pooling spreads fixed costs of issuance among several borrowers

• Flexibility – Amortization is customized to match useful life of assets financed

• Ease of Borrowing – Standardized legal documents facilitate process

• Quick Turn-Around Time – Loans can be closed in as little as 6-8 weeks

• Great financing mechanism for smaller amounts (generally $3-10MM)

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Value Lease Program

• Tax-exempt financing for equipment and related renovations or energy conservation projects

• Similar to installment loan: fixed rate, fixed payments• Security generally limited to first lien on equipment financed• Leases can be negotiated or competitively bid• Term matches life of equipment (practical maximum is 10-12

years)• Minimum recommended transaction size is $500,000• Simple and streamlined process; simple application;

standardized documents; low closing costs• Significant savings of 2-3% over commercial lease• $242MM in leases from 2007 to date, with rates ranging from

2.65% to 4.95%, for terms of 5 to 15 years

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Green Loan Program

• Purpose is to help nonprofits leverage programs and initiatives of the state and public utilities by providing funding for energy efficiency projects – making up the difference between project costs and subsidies or rebates

• Project must qualify for a utility-sponsored Energy Efficiency program; solar energy projects must qualify for MA or federally sponsored economic incentives

• Amount: $50K-$500K (net of any project-related rebates or subsidies)

• Fixed, below-market interest rates• Term up to 7 years

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Questions?