Both federal and state law govern the eligibility of projects for tax-exempt IDBs. The federal restrictions primarily are contained in the Internal Revenue Code of 1986 and Treasury Regulation Section 103. These requirements affect the use of proceeds, volume limitations and several technical aspects of bond issuance. Applicants should consult with qualified bond counsel to ensure the project complies with federal regulations. In addition, federal law requires that a Tax Equity Fiscal Reform Act (TEFRA) hearing be held prior to the issuance of bonds. CIDFAC requires evidence of this hearing prior to CIDFAC approval.
The State of California, through the Industrial Development Financing Act of 1980 (Act), establishes further requirements for the issuance of IDBs. Tax-exempt IDB issuances must comply with both state and federal requirements. Taxable IDB issuances must meet only state requirements.
It is the activity or "use" for which a project is acquired or built – not the company – which determines eligibility for financing. A company whose major activity is not industrial may qualify if the activity for which the application is filed is industrial.
Not all activities clearly fit the categories specified in the Act. In general, activities qualify which have Standard Industrial Classification Code numbers ranging from 2000 to 3999. Other activities must be reviewed with qualified bond counsel before consideration by CIDFAC.
For those activities that include a mixed use of eligible and ineligible activities, the eligible activity must be the predominant use of the project to be financed.
Minimum Eligibility Requirements
CIDFAC’s legislative authority and CDLAC’s regulations require that projects meet certain requirements and produce certain, defined public benefits in order to obtain CIDFAC approval and tax-exempt allocation. For example, if a company is relocating within the state, the company is required to obtain written documentation that the community losing the facility has been contacted. The prevailing wage must be paid to workers involved in the construction or renovation of a facility financed with IDBs (see California Government Code, Section 915337(l). Further, to receive tax-exempt IDB funding, the project must provide public benefits to the citizens of California. One of those public benefits is the creation of jobs.
Eligible Businesses and Eligible Uses of Bond Proceeds
- Businesses which manufacture, fabricate or assemble tangible products for sale are eligible.
- Businesses which process for sale agricultural, mining or forestry products are eligible.
- Businesses which process or manufacture recycled or reused products and materials for resale also may qualify.
- Bond proceeds can finance the construction, expansion or acquisition of facilities, the purchase of equipment or machinery, or the purchase of land.
- Bond proceeds can pay the costs of issuance, and the costs of attorneys, architects, engineers or permits.
CIDFAC closely scrutinizes the relocation effect of projects. In passing the Act, the Legislature did not intend that tax-exempt financing be used to adversely impact one city or county for the benefit of another city or county. CIDFAC carefully weighs the overall public benefits created against the detriment to the community from which the facilities are relocated.
Before vacating an existing facility, an applicant who wants to relocate must document, in the application, its efforts to work with the current community. This documentation should include a timely notice of intent to move, so the jurisdiction will have time to initiate efforts to replace the lost jobs. A written acknowledgment of the relocation from the relevant city or county losing the jobs also is required. Applicants relocating also must include the measures they will undertake to defray the expenses of the move for current employees.
Federal legislation and tax codes place the following restrictions on the use of tax-exempt bond proceeds:
- 95% of the proceeds must be used for the defined project.
- The cost of issuance cannot exceed 2% of the bond proceeds.
- No more than 25% of the proceeds can be used for land cost.
- To acquire an existing building, a maximum of 15% of the bond proceeds must be used to renovate the facility.
- The weighted average life of the bond issue cannot exceed 120% of the weighted average of the estimated life of the assets being financed.
- The maximum bond term is 40 years.
- A Tax Equity Fiscal Reform Act (TEFRA) public hearing must be held before the bonds are issued. In California, this is part of the local approval process.
Restriction on Size of Bond Issues
The maximum face amount of a tax-exempt IDB bond issue is $10 million for each business in the project’s public jurisdiction. Further, federal law limits the business’ total capital expenditures in the project’s public jurisdiction, including those made with the IDB proceeds, to $20 million over the period that runs from three years prior to the bond issue through three years following the issue. Additionally, federal law limits the total IDBs outstanding by one company to $40 million nationwide.
Bond Financing Documents
After receiving the final resolution and debt allocation, and prior to issuing the bonds, the bond financing documents must be sent to CIDFAC staff for review and approval. Upon staff review of the financing documents, a "Certification of Sale" will be issued, which approves the project and certifies that the conditions specified in the resolution(s) have been satisfied. The bond financing documents related to the issuance may include but are not limited to the following:
- Loan, lease or sale agreement
- Private placement agreement
- Bond purchase agreement
- Trust indenture or escrow agreement
- Deed of trust
- Preliminary Official Statement and Official Statement
- Letter of credit or other guarantee agreements
- Bond counsel tax opinion and other legal opinions
The local issuer submits the application, including the appropriate number of copies and all supporting materials, to CIDFAC. If time and schedule permit, a CIDFAC staff member will visit the site and speak with representatives of the project prior to the Commission meeting.