Many manufacturing enterprises are able to finance their purchase or construction of new facilities at tax-exempt interest rates. This financing method, done through a public authority, organized for this purpose, but with the borrower's customary banking relationships, will significantly lower borrowing costs. The tax-exempt interest rate will generally be at approximately 70% of the interest rate the lender would otherwise charge. The facilities being financed must be for manufacturing, subject to limitations on the amount of loan proceeds which can be allocated to other services and facilities related to but not directly part of the manufacturing process. New manufacturing equipment can also be financed, and in some cases used equipment can be included. In instances where only a portion of a project qualifies for tax-exempt financing, the entire project can be financed with a mix of conventional and tax-exempt financing to achieve a lower blended interest rate.
The process begins with the completion of an Application to the Pennsylvania Department of Community and Economic Development, and the submission of that Application to an industrial development authority, usually through that authority's solicitor. Often, representatives of the manufacturer will be asked to attend the public meeting at which the project and financing is approved to more fully explain the project.
The financing can often be provided out of your usual banking relationship, assuming that lender has an appetite for tax-exempt financing. All financings terms, financial covenants and collateral and security requirements are negotiated directly by the borrower with the bank. Generally, while the project is being reviewed by that Department, bank approval is obtained and loan documentation is being prepared and reviewed so that when Departmental approval is received the loan can close and funding can occur. The entire process takes usually 75 to 90 days.
Although tax-exempt financing is permitted for projects of any size up to $10,000,000, because these financings are initially fee intensive (the authority will usually charge a fee, as will its solicitor, note or bond counsel and counsel who represents the lender), the benefit of tax-exempt financing given the additional initial fees over conventional financings begins with a project size of approximately $1,000,000. The fees can generally be included as part of the financed amount. The maximum loan per-mitted for a manufacturing project under Federal tax law is $10,000,000.
It is important that you do not begin a project, including the purchase of equipment or the commencement of construction, which you intend to finance on a tax-exempt basis prior to the approval of the project and its financing by an authority. In addtion, you should engage qualified counsel as you begin to plan your financing.
Houston Harbaugh can assist you as you plan your project and its financing, and is qualified to render the opinion of note counsel your bank will require. To see if your proposed financing qualifies for tax-exempt interest rates, to begin this process, and to see your way through this highly regulated area, contact Jim Webster.