Massachusetts officials last week released a revamped $250 million borrowing program called I-Cubed that they anticipate will help entice out-of-state businesses to relocate to the commonwealth.

I-Cubed, as the Infrastructure Investment Incentive Program is known, aims to provide low-cost financing for capital projects that will generate new revenue growth for state coffers. Lawmakers approved I-Cubed legislation in 2006, but details of the program needed further evaluation and tweaking before officials could begin implementing the plan.

I-Cubed allows the Massachusetts Development Finance Agency to sell bonds backed by the state's general obligation pledge on behalf of municipalities for infrastructure costs on authorized developments. Qualified developments would be relocation or major expansion projects for companies that would generate new revenue for Massachusetts, including additional employment-tax revenue, sales tax receipts, and hotel and motel tax revenue, according to Laura Canter, executive vice president for finance programs at MassDevelopment.

"The main thing that we always want developers to know is this really is an incentive program to think about development differently, to really focus on bringing in new users," Canter said. "And so it's designed so that the projects that get approved are those that have proven that they are going to bring in new state tax revenues by bringing in companies from out of state or by bringing in major expansions. And so that's the thinking that we hope carries through the program."

To qualify for I-Cubed financing, projects must generate new revenues that equal or exceed projected debt service costs of 1.5 times coverage on the infrastructure needs. Bonding ranges from a minimum of $10 million to a maximum of $50 million per project, and cities and towns are limited to no more than two I-Cubed developments in a single municipality. In addition, developers must show that projects would not have been built without state investment.

Officials will give preference to economically distressed municipalities, and 11 areas that the state has designated as growth district communities. Those include Worcester, Springfield, Lowell, and the Devens community in central Massachusetts, among other municipalities. In addition, officials will give preference to projects that obtain Leadership in Energy and Environmental Design, or LEED, Silver certification from the U.S. Green Building Council.

Lieut. Gov. Timothy Murray announced the I-Cubed program and the new regulations that helped iron out specifics of the financing plan at a Boston Chamber of Commerce breakfast on Wednesday.

"This innovative financing program is another tool we will use to promote and support smart economic development in the commonwealth," Murray announced before the BCC. "The projects I-Cubed will help are those that will produce jobs and new local and state revenues. They are projects that are smart investments and those that otherwise would not be possible."

The secretary of Administration and Finance will approve which developments can receive I-Cubed financing. Once a developer obtains A&F authorization, it can then apply to local governments and municipalities for their approval to develop in the area. MassDevelopment's board must also approve the borrowing.

The I-Cubed program now has a 21-day period for public commentary. Developers will be able to apply for I-Cubed financing beginning in late October, according to A&F spokeswoman Cyndi Roy.

While the state will extend its GO pledge to the I-Cubed bonds, developers will pay special assessment fees to municipalities during the beginning stages of the project. Those fees will pay for debt service on the bonds.

"So to the bond market, this will feel like a GO credit of the commonwealth while behind the scenes, during the time that a project is being constructed, the developers have agreed to a special assessment on their development parcels equal to debt service," Canter said. "And the municipality is collecting that special assessment and forwarding it to the commonwealth."

Once the development reaches certain occupancy guidelines - which will differ from one project to the next - developers will then stop paying special assessment fees as the additional payroll, sales tax, and hotel-motel tax revenues will cover the debt service costs on the bonds. Yet regardless of how those new revenues perform, the cities and towns are responsible for reimbursing the state coffers for the debt service costs.

"Now those new taxes had been projected and modeled to equal or exceed debt service, but if they don't, if there's a shortfall, the municipality has to make up the difference to the commonwealth," Canter said. "The commonwealth is still servicing the bonds full faith, regardless of what happens either to the special assessments or to the municipal obligations."

Having the GO pledge will help the bonds price at market while at the same time developers and municipalities are responsible for paying the debt service costs, and not the state, according to Hal Davis, who is of counsel at Davis, Malm & D'Agostine PC. He also is president of New England Economic Development, which provides economic development consulting to businesses, developers, and municipalities.

"The obligation is guaranteed by the full faith and credit so it will be rated as a GO bond of the commonwealth, but it doesn't count in the commonwealth's own adopted bond cap because it's supposed to be self-sufficient and there's not supposed to be a drain on [state] revenue," Davis said.

Davis will also be supplying public commentary on I-Cubed financing on behalf of the National Association of Industrial and Office Properties.

Residential developments and in-state relocation projects that do not produce sufficient new revenue for the state would not qualify for I-Cubed financing, according to Davis. Out-of-state business looking to set up shop in Massachusetts would generate new revenue, yet evaluating which companies should receive I-Cubed borrowing will be more difficult for A&F to ascertain, Davis said.

"The tricky areas will be in the more commercial projects where the question is are new sales taxes being eliminated in one area and then just being transferred to another area, for example," Davis said. "So in the analysis, when the A&F has to approve, they look at what are the tax losses and then they deduct those from the projected tax gains for the commonwealth. So they have to do sort of a detailed financial analysis."

While developments cannot use more than $50 million of I-Cubed financing and the entire program totals $250 million, Davis said that amount "is a good first trial to see how it works."

Both Canter and Davis said the I-Cubed program could be used in conjunction with other types of financing, such as private-activity bonds or district increment financing, also known as tax increment financing in other jurisdictions. With DIFs, bonds are backed by future property tax revenues.

Certain developments can also obtain special assessment financing, which secures bonds via betterment fees or special assessment fees assigned to businesses and homeowners that benefit from infrastructure upgrades within a designated area.

Lawmakers in July shelved legislation to allow for special assessment financing throughout Massachusetts. Currently, developments must receive authorization for special assessment financing through specific bills tailored to each project, which Davis calls a "cumbersome" process.

"And since they're looking for obvious sources for money and things that would stretch the commonwealth's funds, maybe they'll look at the legislation again," he said. "Otherwise we'll re-file it again and some projects we're doing by special act amount to the same thing for special assessments."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.