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Tax-Exempt Bond Financing for Nonprofit Facilities
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Tax-Exempt Bond Financing Methods
• Public Sale
• Streamlined (STEP)
There are two types of Private Placement transactions: 1) A financial institution, an institutional investor, or a sophisticated investor will purchase bonds for their investment portfolio through a negotiated sale. 2) Streamlined Tax-Exempt Placement: Bonds can only be purchased by financial institutions.
STEP uses standardized documents that reduce the time and cost of issuing tax-exempt bonds, making this type of financing feasible to a wider range of borrowers and projects. STEP works best for nonprofit projects with borrowing needs of less than $5 million. Information on larger bond issues »
STEP BONDS WORK LIKE REGULAR LOANS
The STEP program converts what would normally be a taxable loan into a tax-exempt bond. Because interest payments become tax-exempt income to the bank, the lender passes on their tax savings to the borrower in the form of a lower interest rate. Lower interest rates mean a lower debt service or a larger loan for the borrower. Lenders use the same underwriting criteria and determine the interest rate as they would for any typical commercial loan.
One way that the STEP program is made more affordable for nonprofit borrowers is by the reduction in the number of involved parties. STEP bonds involve only the borrower, the Commission, the lender, the fiscal agent, and each party’s attorney. There are no underwriters or rating agencies involved in the process.
Commission and Bond Counsel:
Each project is assigned to a Finance Associate in the Multifamily Housing & Community Facilities Division of the Commission. The Finance Associate helps the borrower through the bond process by reviewing the application, arranging for meetings and conference calls, and by being the connector between the various parties involved in the transaction. Bond Counsel ensures that the bonds will be tax-exempt by overseeing the bond development process, reviewing the 501(c)(3) status of the borrower, and developing the bond documents.
Borrower and their Attorney:
The borrower needs the representation of an attorney who will sign an Opinion of Borrower’s Counsel. The opinion states that the nonprofit is in good standing under the laws governing its creation and existence and is duly authorized and qualified under the laws of Washington State. The borrower may want their attorney to review the bank’s loan documents. It is not necessary to have an attorney skilled in tax-exempt bonds.
Lender and their Attorney:
STEP lending partners can be commercial banks, thrifts, and credit unions. Lenders use the same underwriting criteria and determine the interest rate as they would for any typical commercial loan. The lender’s attorney drafts the loan documents.
The STEP process takes approximately two to four months to complete. The following are included in a STEP transaction:
The first meeting that the Commission requires is the scoping meeting, which is when the parties, including the borrower, the lender, Commission staff, and bond counsel, meet to describe the transaction. The purpose of this meeting is to: Identify and address any issues that could affect the issuance of the bonds; outline and agree on the structure of the transaction; identify each party’s responsibilities; and develop a timeline for closing the transaction. A scoping meeting takes place after Commission staff have determined that the nonprofit and project are eligible for tax-exempt financing, after the lender makes a preliminary written commitment and has determined the proposed terms, and after an application and supporting documentation have been submitted by the borrower. The borrower must provide a deposit of 1% of the expected bond amount before or at the scoping meeting.
A public hearing, required by the Federal tax code, is held for each project prior to financing. The Commission considers public opinion in approving projects for bond financing. (Issues unrelated to the financing, such as the environmental impact of the project, are not considered by the Commission. The applicable land-use jurisdiction hears these issues.) The public hearing notice identifies a project's potential owner, its location, the type of project proposed, the amount of requested financing, and the population the project will serve. The public hearing notice is published in the local paper and is also forwarded to the executive of the local jurisdiction in which the project is located (such as the mayor, county executive, or city manager). At the hearing, the borrower makes a brief presentation on the project to the Commissioners and should be prepared to answer questions. The lender may attend the public hearing to speak in support of the project and to answer questions, but is not required. The Commission sends a summary of the public hearing to the Governor for review. The Governor must approve the issuance of bonds. Please see Commission staff for further information about the hearing.
After the scoping meeting, the attorneys draft the bond and loan documents and distribute them via email to all parties. The documents are commented upon via email and Commission staff schedule one or two conference calls to discuss the pending issues, any major changes to the documents, and any roadblocks to closing. Documents must be in “substantially final form” prior to the Finance Resolution.
The Commissioners make the final approval of the project for bond financing at one of their regularly scheduled monthly meetings. Generally, neither the borrower nor the lender needs to be present for this meeting. Before the Resolution can be approved, the lender must submit a Bond Purchase Letter to the Commission. This letter outlines the amount and terms of the bond and acts as the lender’s commitment to purchase the bond at closing.
Pre-Closing and Closing:
At pre-closing the documents are signed; therefore, all document signers must be present. Authorization for signers needs to be completed before closing. The closing takes place at the offices of the Commission’s bond counsel. All fees related to the cost of issuance not yet paid and Commission pre-paid fees are due at closing. If the bank and the project are in the Seattle area, the pre-closing and closing may take place the same day. If it is out of the vicinity, the closing typically happens the following day. Funds are distributed, and documents are recorded on the day of closing.
Please feel free to contact our staff to discuss program costs.
We are here to help you through the bond financing process. Please contact our staff. We prefer to start working with nonprofits during the preliminary capital campaign planning stage. Many decisions made early on will affect your financing flexibility.
Ask banks about their loan criteria and terms, and secure a preliminary bank loan commitment. Please ask lenders unfamiliar with our program to call us.