Construction Financing: Savings, Taxable vs. Non-Taxable Bonds

Construction Financing: Savings, Taxable vs. Non-Taxable Bonds

When someone in the construction financing industry finds a way to build a better mousetrap, the reaction of owners, contractors and investors varies widely. Some contractors jump right in, while others take a more guarded approach, seeking to obtain higher costs using tried-and-true construction methods until time and experience proves the reliability or cost savings of technology. Both approaches have certain rewards and risks.

What if something entirely unique were brought to the table, and instead of asking an owner to save costs through (perhaps unproven) new building techniques, a business owner could find cost savings in the core financing of the entire project? Imagine cost savings related not merely to value engineering or to utilization of less expensive labor or materials. What if it were possible to have a construction method at a lower financing cost? These goals are achievable when financing a construction project through bond financing instead of a traditional loan.

Most companies face the question of how to best meet the need for long-term financing for commercial projects. Some of these situations simply concern refinancing an existing loan. Other instances involve acquiring new construction financing to expand or renovate an existing property. However, often the question of financing involves building of a new project. As it turns out, owners can utilize bond financing for land acquisition.

The Cost Savings Are Real

Depending on the size of the project, utilizing tax-exempt and taxable bond financing as an alternative to traditional loans can save hundreds of thousands of dollars. For nonprofits, most can maintain relationships with their existing lenders. If put together properly, bond financing can be a win for both banks and nonprofit entities.

Although bond financing is not necessarily available for every project, attorneys and bond issuers familiar with structuring these deals typically have the infrastructure in place to efficiently approve and issue these construction financing mechanisms.

The typical bond financing for a nonprofit could take 60 to 120 days, depending on the level of due diligence and credit underwriting the financial institution requires. A standard deal can range anywhere from $1 million to several hundred million dollars, depending on the size and scope of the project being funded, as well as the repayment source. Many nonprofits will pledge the proceeds of a capital campaign and other donations received to the repayment of the bond debt.

Taxable vs. Non-Taxable Bonds

If the particular transaction does not qualify for tax-exempt bonds, in many instances taxable bonds are available and beneficial for new construction financing programs. If issued by the government, the bonds and any associated mortgages still may be exempt from certain intangible taxes and documentary stamps. A tax advisor can help determine which bonds are available for a particular project and which are the most beneficial based on both upfront and long-term costs.

Bond financing can seem scary, especially if an organization is unfamiliar with the funding strategy. Be sure to check with your accountant and bond counsel who can address the financial and legal considerations related to the use of bonds to help maximize the effectiveness of these resources.

Equipment Acquisition

Among other expenses, construction industry professionals are often faced with large purchases of equipment. Even in predicaments where a company leases its equipment, suggesting the availability of bond financing to a manufacturer or owner can free up significant cash that could allow otherwise stalled construction projects to move along. Utilizing taxable bond financing and tax-exemptions could result in savings that provide an alternate way to finance these projects.

Industrial Development Bonds

Manufacturers and developers also can take advantage of Industrial Development Bonds (IDBs) to finance new and expanded manufacturing facilities for manufacturing businesses. One advantage of construction financing using these bonds is lower interest rates, resulting in payments substantially less than similar payments on conventional financing.

Unlike conventional construction loans, bond financing generally does not require subsequent conversion to financing. IDBs may be used to fund the costs of site acquisition, construction, purchase, and installation of machinery and equipment; interest during construction; and the expenses of bond issuance. Other from the cost-saving benefit to manufacturers and contractors working on these construction projects.

Any executive involved in the finance or the cost structure of an ongoing project, including executives involved in business development, must familiarize themselves with bond financing and the prospect of using it in their own business and as a means for developers and other project owners to afford construction projects otherwise out of reach.

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