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Roxanne C. Graham
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Recovery Zone Bonds

Recovery Zone Bonds

Program Ended

The Recovery Zone Bond Program ended on December 31, 2010. Congress did not extend this program in any form (deadline or additional funds). The Final Report on Volume Cap Allocation and Issuance for the State can be found here.

General Information about the RZB Program will remain on this website until further notice.
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Overview

The American Recovery and Reinvestment Act of 2009 (ARRA) created several new categories of bonds to be used by local communities to assist in their economic development. They provide valuable incentives for both public and private projects, but with a very limited timeline.

One type of these bonds is the Recovery Zone Bonds, which is divided into two categories; Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds. Recovery Zone Economic Development Bonds (RZEDB) are a special category of Build America Bonds that are issued for economically distressed areas. Recovery Zone Facility Bonds (RZFB) allow a municipality to finance private business type improvements on a tax-exempt basis that could not otherwise be financed.

ARRA authorized a national volume cap of $10 billion dollars for Recovery Zone Economic Development Bonds and $15 billion dollars for Recovery Zone Facility Bonds. Each state’s volume cap allocation was based on the decline in employment in 2008 as determined by the U.S. Treasury. Each state received a minimum of 0.9% of the national volume cap. All volume cap must be issued by December 31, 2010. This means the volume cap must be issued at a bond closing by the end of this year. This does not mean your project needs to be completed, nor is the full repayment of the bonds required to be made by this date. Prior to scheduling a bond closing all reporting requirements and loan documentation must be addressed. They include, but are not limited to the following:

  • Closing Documents in final form. May include: Loan Agreements, Trust Indentures, Official Statement, Purchase Contract, Tax Agreement, UCC Filings for the project, Bond Insurance Policy and Rating Certification of the Bonds. All legal opinions have been agreed upon.
  • Closing Memorandum prepared.
  • TEFRA Hearing has been held. REQUIRED FOR ALL BOND CLOSINGS.
  • Documentation and Reporting Requirements have been addressed by all parties. May include: Environmental Reports, Tax Questionnaire, Loan Closing documents, etc.

On the day of the closing and after all parties are satisfied that the legal documents have been properly executed, the bond proceeds are given to the applicant.
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Volume Cap Allocation for Utah

Utah’s portion of the national volume cap was $225,000,000; $90,000,000 for Economic Development Bonds and $135,000,000 for Facility Bonds. Suballocations were automatically made by the U.S. Treasury to any city or county within a state with a population of at least 100,000, based on the decline in employment between December 2007, and December 2008. The cities and counties who received volume cap allocations are as follows:

Area    Economic Development Facility
State of Utah $90,000,000 $135,000,000
Provo City   $8,675,000  $13,013,000
Davis County   $8,266,000  $12,398,000
Juab County      $512,000       $768,000
Morgan County      $228,000       $342,000
Utah County (Residual) $19,560,000  $29,340,000
Wasatch County   $4,531,000    $6,797,000
Washington County $41,818,000  $62,727,000
Weber County   $6,410,000    $9,615,000

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Use of Volume CapCities and counties that receive an allocation can use the volume cap themselves or allocate it in any reasonable manner, as they determine. Eligible costs must be for qualified economic development purposes or recovery zone property and relate to any purpose or property that is located within, or attributable to, both the jurisdiction of the issuer of the bonds and the jurisdiction of the entity authorized to allocate volume cap.Cities and counties receiving volume cap allocations are empowered with the following administrative responsibilities:

  • Designate recovery zone areas.
  • Administer its own Recovery Zone Bond Program or participate in the State’s program.
  • Create a public entity to issue the Recovery Zone Bonds.
  • Allocate volume cap to any city or town within its jurisdiction.
  • Waive any or all of the received volume cap back to the State.
  • Track all allocations and reallocations.
  • Provide notice of allocations or reallocations to local issuers to the Private Activity Bond Authority Board Office.
  • Provide notice of issuance and bond closings for all allocations or reallocations to the Private Activity Bond Authority Board Office.

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Waivers of Volume Cap AllocationsCities or counties that received an allocation must waive back to the State any or all of their cap from one or both categories of Recovery Zone Bonds. Upon such waiver, the State is authorized to reallocate the waived volume cap in any reasonable manner it determines.As per the Governor’s Executive Order No. 2010-02 the Private Activity Bond Authority Board will request waivers of initial allocations prior to December 31, 2009, and again prior to April 1, 2010, from applicable cities or counties that choose not to make their own allocations. The Board will make subsequent allocations from any waived volume cap to eligible issuing authorities through an application process based on need, economic impact and efficient distribution of resources.The Board will continue to request volume cap waivers and reallocate to eligible applicants as necessary so as not to lose any of this valuable resource.
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Recovery Zone Economic Development Bonds OverviewRecovery Zone Economic Development Bonds (RZEDBs) are conventional taxable bonds which allow States, Counties, Cities and Towns to obtain financing at lower borrowing costs and are issued for public/governmental purposes and may be used to finance certain “qualified economic development purposes” in a “recovery zone.”

Terms
A “qualified economic development purpose” is any expenditure for purposes of promoting development or other economic activity in a recovery zone, including:

  • Capital expenditures paid or incurred with respect to property located in the recovery zone.
  • Expenditures for public infrastructure.
  • Expenditures for construction of public facilities.
  • Expenditures for job training and educational programs.

A “recovery zone” for use of RZEDBs means:

  • Any area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress.
  • Any area designated by the issuer as economically distressed from the closure or realignment of a military installation from the Defense Base Closure and Realignment Act of 1990.
  • Any area designated as an empowerment zone or renewal community, in effect, as of the effective date of ARRA (February 17, 2009).

RZEDBs are bonds in which a qualified issuer issues taxable bonds and the U.S. Treasury provides either a:

1. Direct subsidy to the issuer:

  • 45% subsidy of interest paid for RZEDBs from the Treasury to the issuer. (This should result in the net interest cost being lower than tax-exempt bonds.)
  • Only for new money financings.
  • Not subject to future appropriation risk.

2. Tax credit to bondholders:

  • 45% tax credit for RZEDBs.
  • Tax Credit can be stripped and sold.

Note:
RZEDBs are subject to standard reimbursement rules that apply to ordinary tax-exempt bonds.

Davis-Bacon wages need to be met when using RZEDBs.
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Recovery Zone Facility Bonds Overview Recovery Zone Facility Bonds (RZFBs) are used by private businesses for depreciable capital projects (e.g., buildings and equipment) for original use in active businesses in designated recovery zones. This type of tax-exempt bond finances projects that traditionally have not been eligible to use tax-exempt bonds. These bonds are similar to traditional “exempt facility bonds” because:

  • They have lower interest rates that are passed on to the borrower.
  • The interest is tax-exempt, for Federal tax purposes, for the buyers or investors of the bonds.

RZFBs provide tax-exempt financing to “qualified businesses” in the private sector. RZFBs issues must:

  • Have 95% or more of the net proceeds used for “recovery zone property,” which, is required by a Special Rule to have “substantial renovations” done to it.
  • Be issued by December 31, 2010.
  • Be designated by the issuer as Recovery Zone Bonds.

The debt service on these bonds is funded directly by the private business that owns and uses the property. Features of these bonds include:

  • Conduit financing
  • Other financial partnering is available.
  • Government entities issue the bonds, then transfer the amount of the funds and the liability of the associated interest and principal, to the development partner of the economic development project.

Terms
An “exempt facility bond” is one type of qualified private activity bond that may be issued with interest excludable from gross income.A “qualified business” is almost any office, retail, commercial, industrial or other business activity located in a designated recovery zone for the construction, renovation, reconstruction or acquisition of property. RZFB’s can be used to finance depreciable capital projects and facilities on qualified businesses. The following facilities are not defined as “qualified uses” for these bonds and cannot be financed:

  • Residential rental property.
  • Any trade or business operating property for any of the following:
  • Private or commercial golf course.
  • Airplanes.
  • Health club.
  • Skybox or other types of Luxury Boxes. (Skybox is a VIP Box in a sports stadium.)
  • Country club.
  • Massage parlor.
  • Hot tub facility.
  • Sun tan facility.
  • Racetrack.
  • Gambling establishments.
  • Store, which the principal business is the sale of alcoholic beverages for consumption off premises.

A “recovery zone property” for use of RZFBs must meet the following criteria:

  • The property was constructed, reconstructed, renovated or purchased by the taxpayer after the recovery zone designation took effect.
  • The original use of the property commenced with the taxpayer.
  • It is an active “qualified business” by the taxpayer.

Substantial renovations” must be done on Recovery Zone property by the taxpayer. To qualify as “substantially renovated” all additions to the original property must:

  • Be done during any 24-month period starting after the effective date of the recovery zone designation.
  • Exceed the greater of:
  • An amount equal to the adjusted basis at the beginning of that 24-month period; OR
  • $5,000.

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Designation of a Recovery Zone:  The following is general criteria information for establishing a “Recovery Zone.”All boundaries of a city or county may be designated as a recovery zone if the governing body can, in good faith, state at least one of the following conditions exists throughout the entire city or county:

  • Significant poverty conditions.
  • Unemployment.
  • Rate of home foreclosures.
  • General distress.

A recovery zone designation:

  • Cannot extend beyond the geographic boundaries of the city or county.
  • Must be made in writing by the governing body of the city or county receiving the volume cap allocation. The written document must state that at least one of the recovery zone conditions (see above) exists throughout the area.
  • Does not need to be made immediately by the city or county receiving an allocation, but it must be made before or at the time the bonds are issued. Any costs incurred by a business prior to the time the recovery zone designation is made cannot be reimbursed with the proceeds from the Recovery Zone Facility Bonds, even if the eligible costs would have qualified under the purposes of the RZFB Program. This limitation is stipulated in the Recovery Zone Bonds Statute and only applies to RZFBs; not to RZEDBs.

For a copy of the Administrative, Procedural and Miscellaneous Rules regarding Recovery Zone Bond Volume Cap Allocations, please click here.