Designed to help Midwestern businesses recover from natural disaster, a little known federal program is also helping some weather a lousy economy.
“It’s a great, not-well-known program,” said Brad Canfield, president of CCB Packaging Inc. of Hiawatha.
In a few weeks, Canfield will move into a new office in an addition at CCB’s plant, 905 Center Point Rd. The $3 million, 45,000-square-foot project, also including warehouse space and a break room for plant workers, was funded through Midwestern Disaster Area Bonds.
A 2008 federal law allows the bonds’ buyers a tax exemption on interest earned from them. The bonds’ purchasers pass along the tax-break savings to borrowers as a lower interest rate.
“The banks come out ahead because they save on taxable income, and we get a little bit lower interest rate,” said Andy Tiedt, CCB’s finance director. Interest on the disaster bonds was about 30 percent less than conventional financing, he said.
Tax-exempt bonds are usually reserved for public projects, but the legislation allows state and local governments to issue them for a wide range of private borrowing in counties declared presidential disaster areas in 2008 — 78 of Iowa’s 99.
“It was conceived out of the disasters,” said Dean Spina, a Cedar Rapids attorney who’s represented CCB and other borrowers in the program. “It wasn’t limited to disaster.”
The legislation was passed in October 2008 — just as a man-made disaster, the banking crisis and subsequent recession, made its effects felt. Partly as a result of the economic slowdown, local governments in Iowa have issued bonds worth just 12 percent of the $2.6 billion in bonding authority the state’s granted by Congress.
“I think its use would have been much better if the economy hadn’t soured so much,” said Spina.
The program also hasn’t received much publicity.
“I’m sure there are businesses that have never been able to use tax-exempt bonds in the past and wouldn’t even have thought of it,” said Lori Beary, community development director for the Iowa Finance Authority, which administers the program.
Under Iowa Finance Authority’s generous definition, nearly any business is eligible for the program. Some uses are banned, including golf courses, health clubs, gambling facilities and liquor stores.
“That’s why you’ve seen everybody from Cargill to a small business,” Beary said. “Anybody that’s building a new building or expanding can get these.”
Cargill, the multinational grain merchant whose Cedar Rapids wet-milling plant was heavily damaged by the flood, is Iowa’s top borrower under the program — at $174 million backed by IFA-issued bonds.
Bonds issued by Linn County have backed loans for office, warehouse and retail projects, including the Edgewood Station project near Westdale Mall.
“We could build a little larger building,” said Ray Brown, chief financial officer of the ESCO Group in Marion, which financed $3.4 million for its new Marion offices. “We could start from scratch instead of doing a year-and-a-half renovation. It just allows companies to get their dollars to go farther.”
Attorney Spina said businesses “can easily save $275,000 over the course of 20 years, and a good part of that is saved over the first 10 years” when interest costs are highest.At the program’s present slow pace, Beary expects Iowa’s bonding authority to outlast the program itself, set to run through 2012. Spina hopes the program will be extended until the bonding authority is used up, as happened with a similar program for Gulf Coast states after Hurricane Katrina.