CHICAGO - Efforts to tap the $14 billion Midwestern Disaster Area Bond program are picking up steam in Iowa and Wisconsin, with at least one financing completed and a handful of projects in the pipeline nearly one year after its creation by the federal government to aid in redeveloping areas damaged by spring 2008 storms.

The two states in recent months have put in place procedures for using the program. The Iowa Finance Authority may have been the first in the Midwest to tap the program when it sold $74 million of tax-exempt qualified MDBs in June on behalf of Cargill Inc. The issuer is working on another $100 million deal for the company, said the authority's director of community development, Lori Beary. A handful of other potential borrowers are also looking at using the program through the IFA.

The privately held Minneapolis-based agricultural behemoth that provides food, agricultural, and risk management products suffered extensive damage at its Iowa facilities in the spring 2008 floods that resulted in 78 of the state's 99 counties being declared disaster areas.

Cargill is using proceeds of the bonds being issued under an MDB designation to reconstruct and expand existing facilities in Dubuque, Linn, Mahaska, Monroe, Muscatine, Scott, and Wapello counties. Kutak Rock LLP is bond counsels. The company also is also exploring an issue of $25 million through either Buffalo County, Neb., or the state's finance authority for its facilities there.

The Wisconsin Health and Educational Facilities Authority, which has two hospital clients that have expressed an interest in the program, on Monday passed a resolution that eases the initial application process to allow the clock to start ticking on reimbursement of spent funds, said executive director Lawrence Nines. Quarles & Brady LLP is WHEFA's counsel.

At the local level, business owners have also approached their municipalities about possible financings. Businesses in a total of 30 Wisconsin counties qualify. Gov. Jim Doyle earlier this month designated $50 million of bonding authority under the program. The state's Commerce Department is finalizing the application process.

"There is a fair amount of interest and a few financings that will be ready to go this fall," said Foley & Lardner LLP attorney David Ryan, who is representing one nonprofit borrower that works with WHEFA.

The government included the new category of tax-exempt bonds in the Heartland Disaster Tax Relief Act of 2008 to aid in the redevelopment of counties declared major disaster areas after being hit hard by severe storms and flooding between May 20 and Aug. 1 of last year. It was signed into law October as part of the Emergency Economic Stabilization Act.

The program allocates tax-exempt private-activity bonding that does not count against a state's volume cap - $2.6 billion to Iowa, $3.8 billion to Wisconsin, $1.4 billion to Missouri, $1.5 billion to Illinois, $3 billion to Indiana, $849 million to Nebraska, and $957 million to Arkansas. The deadline for issuing bonds is Jan. 1, 2013. The allocations were based on Census figures, with $1,000 allowed per person living in the disaster area.

Though similar to private-activity industrial development bond issues, the program extends tax-exempt benefits to projects and developments that might otherwise run afoul of tax code rules.

Bonds can be issued to benefit affordable multifamily rental projects under relaxed tenant income requirements or to cover the costs of constructing or reconstructing property damaged by the storms if a loss in a trade or business occurred as designated by the governor. A governor can also qualify a project that is replacing a trade or business damaged by the storms.

Some mortgage financings and public utility projects in need of repair or reconstruction also qualify.

Potential beneficiaries include retail businesses and malls, restaurants, auto dealerships, warehouses, agricultural properties, medical office facilities, and other commercial development with building and repair projects. Equipment purchases do not qualify.

"This is really a private-activity bond, but the definition of qualified projects is opened up to nearly any business that might not have qualified as an industrial revenue bond," Beary said.

Nonprofits like hospitals can benefit, as some medical offices might not qualify for a traditional 501(c)(3) financing due to violations of the tax code's private-use rules. Commercial, for-profit development projects like malls and retail stores otherwise would not qualify for tax-exempt financing under industrial development bond rules.

The state, a conduit, or a local government can act as the issuer on behalf of a project after the governor designates the project as qualifying under the act. While the program benefits projects that might not otherwise have qualified for tax-exempt financing, some of the same rules do apply to the program as other qualified private activity bonds. The weighted average maturity may not exceed 120% of the average life of the project. Cost of issuance is limited to 2%.

More recreational and luxury projects like country clubs, golf courses, massage parlors, suntan shops, gaming facilities, or liquor stores are not eligible. The bonds cannot be bank-qualified.

The program has a catch that has limited interest among some potential users. Borrowers cannot reimburse themselves with bond proceeds for project expenses more than 60 days before their issuer adopts an inducement resolution that expresses an intent to issue the bonds.

"This really does not apply to businesses that spent funds immediately on repairs," Beary said.

Potential users in Iowa can apply directly to the IFA for a designation under the program following Gov. Chet Culver's signing of an executive order authorizing the IFA to administer designations under the program.

At the IFA, Beary said some potential borrowers have been stalled over concerns as to what they can reimburse themselves for - in other words, what qualifies as a "loss" suffered by the spring storms.

Wisconsin borrowers first must apply to the Commerce Department before heading to WHEFA for borrowing assistance. The resolution approved Monday gives Nines authority to approve the initial intent to issue order without board action, allowing a borrower to quickly start the clock ticking on the time from which it can reimburse itself.

Structures used on future financings are expected to vary depending on the credit of the business or entity seeking the designation. with private placements with banks or finance companies expected to be popular and others using a variable-rate structure backed by a letter of credit.

While liquidity is still expensive and harder to secure, market participants said the program still provides a more affordable option.

Ryan attributed the rising interest in the program in Wisconsin to an easing of the credit crunch that froze the market last fall and to growing awareness of the bond program.

"It's a combination of the markets opening up for projects and people realizing that there is this tax-exempt financing help out there that will make a project more financially feasible," he said.

In Nebraska, MDBs would most likely be issued through the Nebraska Investment Finance Authority or through the counties. The authority, governor's office, and the Department of Economic Development are in the process of developing procedures for the program, said Steve Likes, an attorney with Kutak Rock LLP, which is working with NIFA on the program.

The state has so far seen little demand for the bonds, said Steve Clements, NIFA's chief operating officer. "We're not hearing the phone ring off the wall," he said. "Most of our businesses that had problems couldn't wait for the government to start up a program, they had to get back in business. If the bonds were needed and applied for, we could put it together very quickly."

Caitlin Devitt contributed to this story.

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