New York City has begun another round of applications for recovery zone facility bond financing, even though it has already selected projects that would use its entire $121 million allocation.
The city’s chosen issuer for the private-activity bonds — the New York City Capital Resource Corp. — has only issued a single $20 million deal as the program’s year-end expiration deadline looms.
“We are still making information about the program available, in the event that any project is unable to close before the end of the year,” CRC spokesman Kyle Sklerov said in an e-mail. “Our top priority is ensuring that the bonds get out the door to help stimulate the economy.”
New York City is not alone.
The tax-exempt RZFB program was supposed to boost economic development by offering cheap financing to commercial enterprises for the acquisition, construction, and renovation of property in distressed areas.
Unless Congress extends the program beyond 2010, or issuance ramps up dramatically, most of the $15 billion of private-activity bond volume cap allocated to municipalities nationwide will expire unused on Dec. 31. In sharp contrast to the taxable Build America Bond program, which is wildly popular, RZFBs have been little more than a footnote among the new and expanded debt programs created under the American Recovery and Reinvestment Act of 2009.
Only $547.6 million of RZFBs have been issued to date, according to Thomson Reuters. The program has gained momentum, though, with $491.3 million of RZFBs priced this year in 32 deals across the nation, compared to $56.3 million sold last year for 10 projects.
Market participants blame the dearth of issuance on the short time-frame to ramp up a new program, the tight credit market, and ambiguity about how states can reallocate unused volume cap.
“It’s certainly the sleeper of the access to credit provisions that were included in the recovery act,” said Lars Etzkorn, program director for the National League of Cities. “You don’t seem to have a private sector that has full confidence that we’re in a recovery.”
Economic uncertainty has made businesses reluctant to make depreciable capital investments in long-term projects, he said.
“It was enacted in the middle of a recession,” said Brian McMahon, executive director of the New York State Economic Development Council, a trade group. “There simply aren’t that many projects, and municipalities are dealing with their own budget issues, and those factors have combined to minimize the effectiveness of the program.”
Finding banks willing to lend has not been easy, either. The program is more attractive to higher-risk projects because of the higher interest rates they would pay with conventional financing, but that makes them less attractive to risk-averse lenders, according to John Cappellino, executive vice president at the Erie County Industrial Development Agency.
“The project has to be pretty strong these days to get someone willing to extend credit,” he said. “To get through underwriting and to get a credit decision in this kind of environment is difficult because no one wants to take any risk.”
For companies that can get financing, tax-exempt bonds do not necessarily offer a great benefit in a low-interest-rate environment.
“Some of the really good companies are borrowing at prime or below and those are the ones that tend to be bankable,” Capellino said. “They’re getting 2%-2.5% rates for good credit companies and you can hardly do a tax-exempt rate for that kind of a deal.”
The Erie County IDA is working to close five RZFB deals by the end of the year.
The first RZFBs priced in October 2009 when Cincinnati issued $9.9 million of the bonds on behalf of Graeter’s Manufacturing Co. to finance the construction and equipping of an ice cream factory. The largest and smallest of the 42 RZFB deals to date were in Alabama, where the Mobile County Industrial Development Authority sold $86 million of bonds last month for a steel plant and the Andalusia Industrial Development Board in June sold $1.1 million as part of a larger transaction to help finance an automotive parts manufacturing facility.
One reason local governments were slow to use the bonds was that they had their hands full sorting out other bond programs.
“You hadn’t seen states really getting into it because they were trying to figure out what to do with every thing else in ARRA,” said Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies.
“Keep in mind that state and local governments still have a hard time understanding the regular tax-exempt bond industry as it relates to [industrial development bonds] and exempt facilities and what-not and 501(c)(3) bonds, and now they’ve got these new things to deal with.”
When the U.S. Treasury announced allocations under the program in June 2009, it divided state allocations among counties and large municipalities.
New York counties and large municipalities received allocations totaling $555.1 million. New York City received the largest allocation, $121 million, while others received much smaller allotments. Seneca County, for example, received a $120,000 allocation. To date, the only deal completed in the state is a $20 million private placement in New York City on behalf of Albee Retail Development LLC, a partnership developing a mixed-use project in downtown Brooklyn called City Point.
Some have criticized the small size of some allocations as being impractical given the transaction costs associated with economic development projects.
“You get counties that get a $400,000 allocation — well, they’re never going to be able to do anything with that, let’s just be honest with it,” Rittner said. “Then you get counties with big allocations … who may be able to do something with it but it’s a little confusing as to who’s in control, who has the authority, and don’t forget that … no one knows how they work.”
McMahon said that projects that are not of a certain size probably will not be economically feasible.
“If you don’t have a significant or sufficient allocation, then you’re not going to be able to do the project,” he said.
Some states, such as California and Virginia, have aggressively used a provision in Internal Revenue Service guidance known as the “deemed waiver” provision to reallocate unused RZFB allocations.
In Rhode Island, the state’s five counties ceded their allocations to the state, which designated the Rhode Island Facilities Corp. to issue the $130.5 million of debt.
Vermont centralized its allocations of RZFBs to be issued through a state authority rather than by individual counties after the state attorney general said the counties did not have the authority to issue the bonds but could allow the state to do so.
New York has taken a conservative approach out of concern that the “deemed waiver” language was vague and asked municipalities to voluntarily waive their allocations if they didn’t intend to use them.
“A number of counties and municipalities have indicated that they would be interested in receiving reallocations from [the Empire State Development Corp.] for RZFB projects, but the state has received a relatively small amount, $2.3 million, in waivers from RZFB allocation recipients,” Division of Budget spokesman Erik Kriss said in an e-mail. “Because of the relatively small amount of waivers received and uncertainty about what Congress may do, there is not yet a formalized process for reallocating.”
ESDC chief financial officer Frances Walton said the state is trying to get a possible extension to the RZFB program to include “language that would clarify the states’ ability to redirect the cap if its not used.”
Jeremy Spector, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, said most of the deals that are getting done that he is aware of are happening in states where counties and municipalities waive their allocations back to the state and the state reallocates the cap.
“The intent of the notice can be interpreted to allow state law to determine the reasonable scope of the deemed-waiver provision, although clarification from the [IRS] would be helpful,” he said.
IRS spokesman Bruce Friedland declined to comment on the deemed-waiver provision.
New York City has requested additional allocations from the state, but so far that has not happened. Market sources have also suggested the possibility of a pooled RZFB issuance, which hasn’t happened yet, either.
The success of the RZFB program may lie in whether Congress extends it. A bill pending in the House would extend it by one year and increase some allocations. The bill would also clarify that allocations unused as of May 1, 2011, would revert to the state.
Etzkorn said that while the program will not be the savior for the economy, an extension would still be helpful.
“Certainly on a micro-level, in those communities where deals can be done, it will be of tremendous importance and will help a lot of people get good-paying jobs, retain those jobs, and work in better facilities,” he said.
