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Industrial Development Agencies and the 504 Loan Program:
Great Economic Development Partners
Brian T. McMahon and Michael O’Shea, Esq.
An IDA
can issue tax-exempt and taxable bonds for qualified projects,
convey real property tax abatements, typically through a
payment in lieu of tax agreement (PILOT), and abate mortgage
recording and sales taxes. They also have the power of eminent
domain.
IDA
projects can include the purchase or expansion of commercial
property, certain retail projects, waste disposal facilities
and projects for not-for-profit entities.
Typically,
IDA projects are financed by one of three methods: (i) tax
exempt bond financing, (ii) taxable bond financing or (iii)
straight lease transactions. Tax exempt bond financing and
taxable bond financing are more cost effective for larger
transactions due to the fact that up front transaction costs
are higher than conventional bank financing. The straight
lease transaction was created to allow smaller job creating
projects to enjoy many of the same benefits as IDA bond
financing.
In a
straight lease transaction the IDA takes title to, or
leasehold interest in, real property from a qualified
applicant, and leases such real property back to the
applicant. At the end of the term (usually 10 to 25 years) the
IDA re-conveys the property to the borrower for a minimum
price (typically $1). From a lender’s perspective a straight
lease transaction is characterized as conventional bank
financing. The IDA, as fee or leasehold owner, will join with
the borrower in the execution of the lender’s mortgage which
secures the obligation of the borrower arising under the
lender’s standard form of mortgage note. Other than containing
certain simple non-recourse language as to the IDA, the
mortgage executed by IDA and the borrower will be identical to
the form typically used by the lender.
If a
project qualifies as an IDA straight lease transaction, it
will generally qualify for financing under Empire State CDC’s
504 Loan program. Although the 504 loan program is not
available to not-for-profit entities it is available to a much
broader scope of retail project than IDA financing. The 504
Loan program is designed to encourage investment by small
businesses in land, buildings and other capital assets. A
typical 504 financing project would consist of 10% equity
contribution by the borrower, a bank first mortgage for 50%
and an Empire State CDC 504 loan for 40%. By reducing the
typical down payment the program allows for the preservation
of needed working capital.
The
following case study of a small manufacturing project
illustrates some of the costs and benefits of an actual IDA
straight lease transaction which combined the benefits of IDA
participation and a Empire State CDC 504. The borrower
purchased a 22,000 square foot building in New York City for
$3,825,000. The company’s equity in the project was $382,500.
An NYBDC member bank provided first mortgage financing of
$1,912,500 and Empire State CDC provided a subordinate second
mortgage loan in the sum of $1,530,000. The tax benefits
conveyed by the IDA included mortgage recording tax savings of
$96,390. The IDA’s PILOT provided tax abatements over a
twenty five (25) year period estimated to be in excess of
$600,000. The sales tax savings on construction materials and
manufacturing equipment were $33,000. The
borrower also obtained twenty (20) year below market fixed
rate financing from Empire State CDC (December 2006 rate was
6.09%) making a down payment of only 10% of the project cost.
This combination of state, local and federal economic
development incentives helped create 50 new jobs in the State
of New York.
IDAs
and Empire State CDC help to create and retain thousands of
jobs for New Yorkers. To learn more about IDAs and the New
York State Economic Development Council visiting its web site
at
www.nysedc.org. For more
information on the Empire State CDC 504 Loan Program visit
www.nybdc.com.
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Brian T. McMahon is an NYBDC board member and Executive
Director of The New York State Economic Development Council (NYSEDC).
NYSEDC is the state's principle organization representing
economic development professionals. Its 900 members include
the leadership of Industrial Development Agencies, Empire
Zones, Local Development Corporations, commercial and
investment banks, underwriters, bond counsels, utilities,
chambers of commerce and private corporations. |
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Michael O’Shea is a member of the firm
of Certilman Balin Adler &
Hyman, LLP of East Meadow, New
York. Mr. O’Shea represents Empire State CDC, NYBDC and
numerous banks. |
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