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Recovery zone bonds offer unique opportunities

By Jeffrey J. Femrite

In this challenging credit environment, recovery zone bonds offer businesses a cost-effective way to finance qualified projects or programs in distressed communities.

But what are the different types of bonds, and how do they work?

When President Barack Obama signed the American Recovery and Reinvestment Act into law in February, the legislation created a new category of tax-credit governmental bonds called Build America Bonds, authorized the issuance of Recovery Zone Economic Development Bonds as Build America Bonds, and authorized the issuance of tax-exempt Recovery Zone Facility Bonds. These bonds can be a boon to struggling construction companies at a time when financing is not so easy to come by.

Build America Bonds

Build America Bonds are intended to open the taxable bond markets to governments, potentially providing another avenue for bond issuances to governments having difficulty placing debt in the tax-exempt market. These bonds must be issued in 2009 or 2010. The issuer can either claim a direct payment in an amount equal to 35 percent of the interest payable under the bonds or let the bond holder receive a tax credit equal to 35 percent of the interest payable under the bonds.

Recovery Zone Economic Development Bonds

ARRA provides for the issuance of $10 billion of Recovery Zone Economic Development Bonds. These bonds are Build America Bonds issued to finance qualified economic development activities in recovery zones, which are defined as areas with significant poverty, unemployment, general distress or home foreclosures; areas designated as empowerment zones or renewal communities; and areas designated as economically distressed because of the closure or realignment of a military installation.

Bond proceeds from Recovery Zone Economic Development Bonds can be used for capital expenditures, costs for public infrastructure and public facilities, and for job training and educational programs.

By designating Build America Bonds as Recovery Zone Economic Development Bonds, the issuer receives a direct payment equal to 45 percent of interest payable, rather than the 35 percent available for Build America Bonds.

Each state receives an allocation of Recovery Zone Economic Development Bonds based on its employment losses from December 2007 through December 2008, but no state will receive less than 0.9 percent of the total allocation. Each state is then required to redistribute the allocation among counties and large municipalities using a similar “employment loss” calculation.

Recovery Zone Facility Bonds

ARRA also provides for the issuance of $15 billion of Recovery Zone Facility Bonds, a new category of tax-exempt qualified private-activity bonds. Ninety-five percent of the proceeds from these bonds must be used to finance recovery zone property, which is defined as depreciable property in areas having significant poverty, unemployment, home foreclosures or general distress.

Eligible businesses can be any trade or business except rental of residential property, the operation of private or commercial golf courses, country clubs, massage parlors, hot tub facilities, tanning facilities, racetracks or other gambling operations, or any store at which the principal business is the sale of alcoholic beverages for consumption off premises.

Each state will receive an allocation of Recovery Zone Facility Bonds using an allocation calculation similar to the calculation used for Recovery Zone Economic Development Bonds.

When used correctly, recovery zone bonds can provide businesses with much-needed financing and can be used to improve communities and provide opportunities for distressed neighborhoods.

Jeffrey J. Femrite is a shareholder and member of Godfrey & Kahn’s Real Estate and Economic Recovery Practice Groups.

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