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Published: June 15, 2009
Author: Richard Petershack
In October of 2008, Congress passed the Heartland Disaster Tax Relief Act in response to the severe storms, flooding, and tornadoes experienced throughout the Midwest. Along with other tax relief for individuals and businesses, the Act allows for Midwestern Disaster Area Bonds.
Midwestern Disaster Area Bonds are federally tax-exempt private activity bonds that are not subject to a state volume cap. Disaster Area Bonds issued to finance projects which meet the requirements of the Act are qualified exempt facility bonds, with significantly fewer restrictions than are set forth in the Internal Revenue Code for traditional qualified bonds.
Requirements for projects financed utilizing Midwestern Disaster Area Bonds:
The prospective project is within one of the 20 affected Wisconsin counties, or within an affected county in Arkansas, Illinois, Iowa, Indiana, Missouri or Nebraska.
95 percent or more of the proceeds of the bonds will be used for the cost:
- Of a multifamily rental property for low and moderate income individuals
- Of acquisition, construction, reconstruction, or renovation of nonresidential real property (property that may be financed by Disaster Area Bonds includes land, buildings and fixtures, but does not include moveable fixtures and equipment, or working capital)
- to repair or reconstruct public utility property
For projects involving a private business, if the person using the property:
- Has suffered a disaster-related business loss
- Is designated by the Governor as one who is carrying on a trade or business of another person that suffered a disaster-related business loss
There are some additional limitations on this opportunity, for example proceeds of these Bonds may not be used to finance a golf course, massage parlor, hot tub facility, or similar business. Additionally the Disaster Area Bonds must be issued by January 1, 2013. The Act does not place a limit on the amount of Disaster Area Bond proceeds that can be used by a single project, however; no more than $3,830,202,000 of Midwestern Disaster Area Bonds may be issued in Wisconsin.
Opportunities
Midwestern Disaster Area Bonds present another element that may broaden the opportunity available in developing a financing structure. Utilizing tax-exempt financing to reconstruct a disaster-related business loss creates a significant economic advantage for private entities. Additionally, depending on how broadly the Governor interprets projects that replace another person's separate disaster-related loss, a wide-array of projects may benefit from this opportunity.
Commercial facilities traditionally not eligible for tax-exempt financing may be able to utilize this potentially flexible qualification criteria. This may include a project to finance a new manufacturing facility which otherwise would exceed the capital expenditure limit. Alternatively these bonds could be utilized to renovate an existing manufacturing facility damaged in the storms, or to acquire a facility to carry on a trade or business of another.
Beyond manufacturing, these bonds could be utilized in a financing plan to acquire, build rebuild, or renovate a restaurant, affordable multi-family housing project, lodging, grocery or convenience store, warehouse, or office building. This opportunity could provide advantages for business owners hoping to re-develop their businesses in a new location, or alternatively for individuals looking to replace to a business lost due to the storms.
Midwestern Disaster Area Bonds also provide an opportunity for low-income housing projects to qualify for tax-exempt bonds with relaxed income restrictions. Projects may qualify through a restriction of 20 percent of units occupied by people whose income is 60 percent or less of the area median, or restrict at least 40 percent of units for people whose income is 70 percent or less of the area median.
Procedure for Midwestern Disaster Area Bonds
The Act provides that the State or any political subdivision of the State may issue Bonds within the State. Midwestern Disaster Area Bonds must still meet state law issuance requirements. Wisconsin has yet to finalize rulemaking for a Midwestern Disaster Area Bond program. However, application for these Disaster Areas Bonds, as with other private activity bonds, will rely on a team including bond counsel, underwriters, bankers and their counsel.
Richard E. Petershack is a partner in the firm and member of the Business Practice Group. His practice focuses on real estate, lending law and mediation. For more information contact Mr. Petershack at 608.283.6726 or rpetershack@axley.com. The author thanks Axley Brynelson law clerk Peter Rank for his assistance in drafting this article.
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