The Industrial Development Revenue Bond Program administered by the Mississippi Business Finance Corporation (MBFC) reduces the interest costs of financing projects for companies, through the issuance of both taxable and tax-exempt bonds. Certain tax incentives, such as those provided by the Mississippi Rural Economic Development Assistance Program (RED), are designed to enhance projects which are financed through MBFC issued Industrial Development Revenue Bonds. Companies that meet eligibility requirements may receive Mississippi corporate income tax credits. Credit amounts available to an eligible company are a function of the company project related debt service. Other tax incentives such as sales tax exemptions on bond financed assets are also available. Ad valorem exemptions may be granted if approved by the appropriate city and county.
The company must be a private enterprise located, or to be located, within the State of Mississippi. Under limited circumstances nonprofit entities may qualify.
- The recipient must meet the tax-exempt financing eligibility requirements imposed by state and federal law. At present, only manufacturing and processing business are eligible.
Below are examples of businesses that are eligible for taxable Industrial Development Revenue Bonds.
- Companies which manufacture, process, store, warehouse, assemble, or distribute agricultural, mining or industrial products;
- Research and development enterprises engaged in developing or improving new or existing products or processes; and
- Hotels, offices, shopping centers or other commercial operations that the board may approve.
MBFC considers each project on a case-by-case basis. The company must have adequate financial resources to give reasonable assurance that all principal and interest on the bonds can be paid. Generally, it must be shown that the project will benefit the local economy by providing increased employment.
USE OF PROCEEDS
The proceeds of a bond issue may be used for the acquisition and construction of real property, machinery and equipment, capitalized interest, and necessary reserve funds as approved. A limited amount may be applied to bond issuance expenses.
Although there is no restriction on the amount of taxable debt which may be borrowed, there is a $10 million capital expenditure limit on tax-exempt financing. The Deficit Reduction Act of 1984 imposed a limitation on the use of tax-exempt bonds by companies at all locations where facilities are financed with these bonds. Individual beneficiaries of tax-exempt financing may have no more than $40 million of such issues outstanding nationwide.
Expenditures made before MBFC approval of a project typically cannot be included in the bond financing.
Tax Exempt financing under Internal Revenue Code requires that:
- Bond proceeds used for acquisition of land must constitute less than 25% of the total bond issue.
- Bond proceeds may not be used to acquire an existing building unless an amount equal to 15% of the building cost, separate and apart from land cost, is used for renovation or improvement purposes. These renovations or improvements must be done within two years of the date of the bonds or the date of acquisition of the building, whichever is later.
- Except in very limited situations, bond proceeds many not be used to finance the purchase of used equipment.
LOAN AMOUNTS AND TERMS
The maximum term of a bond issue will be equal to 120% of the average life of the financed facility or 30 years, which is less, or a lesser term if required by MBFC or applicable law. The bonds may contain a call provision.
The interest rate on the bonds may be fixed or variable. The effective loan rate to a company under this program will be determined using a combination of the following: (i) the interest rate on the bonds; (ii) the costs of issuing the bonds; and (iii) the annual fixed costs attributable to the fees of MBFC, the bond trustee, and the paying agent, and if applicable, any credit facility issuer and the letter of credit issuer.
The bonds will be secured by an irrevocable direct pay letter of credit or other credit enhancement acceptable to MBFC. MBFC may also require additional security which could consist of a pledge of assets of the company.
ISSUANCE AND PLACEMENT OF BONDS
MBFC will issue bonds to obtain funds it may loan to the company. Only bonds rated investment grade or higher will be issued by MBFC. This typically requires that a letter of credit be obtained from a commercial bank or a guaranty provided by another company. The rating on the bonds depends entirely on the credit of the borrowing company, or the credit enhancement provided through a letter of credit or a guaranty. As an alternative, unrated bonds may be privately placed in large denominations.
Bonds will be sold by MBFC publically or will be placed with private investors. Determining how bonds are sold shall be a joint decision of MBFC and the company.
The borrower will be responsible for the following costs associated with the bond issue:
- The borrower will be required to pay to MBFC, concurrently with the submission of the application, a non-refundable application fee in the amount of $500. The borrower may also expect to pay a processing fee to the issuer of the letter of credit in an amount customarily charged by such institution for reviewing and processing applications.
- Costs of issuance include (to the extent applicable) the bond underwriters discount and fees of its counsel, the acceptance fee of the bond trustee and paying agent and fees of their counsel, bond counsel fees, printing costs, and rating agency fees.
- The borrower will be obligated to make certain annual fee payments on tax-exempt bonds. Such fees include (to the extent applicable) those of MBFC in the amount of 1/8 of 1% of the outstanding principal owed on the bonds or such lesser amount as allowable by the Internal Revenue Code, the bond trustee fees, the paying agent fees, and the remarketing agent fees. A one time processing fee, based on the amount of the transaction, is paid to MBFC on taxable bonds.
Financing manufacturing and processing projects with Industrial Development Revenue Bonds in Mississippi is a relatively simple and quick process, normally requiring about three months from start to delivery date. The following steps are involved in a typical tax-exempt issue. An application is not required for a taxable issue.
- The project is presented to the MBFC Board of Directors for consideration of an inducement resolution.
- A qualified company must submit three copies of a completed application and a non-refundable application fee to MBFC.
- Each application must be accompanied by a written indication of interest or commitment from a qualified bond purchaser or a financial institution to issue a letter of credit in support of the bonds.
- MBFC staff will review applications on the basis of completeness, program guidelines, financial soundness of the company, and state and federal law eligibility.
- If adopted, MBFC will require execution of an indemnity agreement. Adoption, however, does not commit MBFC to sell bonds to finance the project.
- In accordance with the Internal Revenue Code, local public hearings must be held before bonds are issued.
- At the bond closing, company representatives will execute all required documents.