Recovery Zone Bonds Offer Opportunities for County Projects and Private Industry

The American Recovery and Reinvestment Act of 2009 (“ARRA”) created a new category of bonds called Recovery Zone Bonds. There are two types of Recovery Zone Bonds: Recovery Zone Economic Development Bonds (“Economic Development Bonds”), and Recovery Zone Facility Bonds (“Facility Bonds”). The federal government will allocate each type of Recovery Zone Bonds among the states in proportion to each state’s decrease in employment in 2008 compared to the national decrease. On June 12, 2009 the United States Department of Treasury issued the allocations for 2009 and 2010. The chart at the end of this article shows the allocations to New Jersey counties.

Both types of bonds may be issued for projects in areas designated as recovery zones. State and local issuers may designate as recovery zones those areas that have significant poverty, unemployment, home foreclosure, or general distress, or any area experiencing economic distress due to military base closings under the Defense Base Closing and Realignment Act of 1990. In addition, a state or local issuer may designate any area that has been previously designated as an empowerment zone or renewal community.

Economic Development Bonds are taxable bonds for which the federal government provides state and local issuers a subsidy payment of 45% of the interest on the bonds. With the subsidy, the interest expense will usually be less than a tax-exempt bond. They are a type of Build America bonds, which were also created by ARRA for governmental issuers, and have become more prevalent in the marketplace.

Economic Development Bonds may be issued to finance both capital and working capital expenditures that promote development, including public infrastructure and construction of public facilities, or job training and educational programs in a recovery zone. Economic Development Bonds cannot be issued to refund other bonds, and must be issued by January 1, 2011. Finally, even though Economic Development Bonds are taxable bonds, they generally must satisfy the requirements for tax-exempt issuances, such as the arbitrage and rebate rules.

Facility Bonds are a new type of tax-exempt private activity bond. They enable state and local issuers to provide tax-exempt financing for projects that historically were ineligible for tax-exempt financing, such as distribution centers, hotels, manufacturing plants, research and office parks, shopping centers, and warehouses. Facility Bonds may be issued for any depreciable property that is built or acquired after the date of designation as a recovery zone. There is no prohibition on the acquisition of existing property. The taxpayer’s original use of the property must occur in the recovery zone, and substantially all of the taxpayer’s use of the property must be in the conduct of a qualified business. Qualified business means any trade or business, other than residential rental facilities, country clubs, golf courses, massage parlors, racetrack and gambling facilities, and any store the principal business of which is the sale of alcoholic beverages for consumption off-premises. Volume cap from the governing state agency is not required. Finally, the bonds must be issued by January 1, 2011.

State and local governments, and their authorities and agencies, will be the issuers for both Economic Development Bonds and Facility Bonds. For Facility Bonds, issuers will usually structure the issue as a conduit loan to the private business that undertakes the project.

The chart below shows the allocation to New Jersey counties: