IRS ruling may speed use of disaster bonds

A recent Internal Revenue Service ruling will help flood-damaged businesses find out whether they qualify for tax-exempt bond financing.

Midwestern Disaster Area bonds were authorized on Oct. 3, 2008 to aid disaster recovery in Iowa and other Midwestern states. Congress granted Iowa the authority to administer about $2.6 billion in bonding by 2013.

Gov. Chet Culver issued an executive order appointing the Iowa Finance Authority to administer the disaster bonds. To date, only two companies - Cargill in Cedar Rapids and Reel Deal Holdings LLC in Cedar Falls - have obtained financing backed by the bonds.

Dean Spina, an attorney with Bradley and Riley PC in Cedar Rapids, said an initial IRS interpretation of the statutory language in the federal bill authorizing the bonds appeared to narrowly limit their use.

“On Dec. 18, the IRS issued a notice that it will defer the statutory interpretation to Gov. Culver or his designee,” Spina said. “We expect that favorable determinations will be made on a variety of projects.”

Lori Beary, community development director for the Iowa Finance Authority, said most of the $2.6 billion in disaster bonds authorized by Congress is still available.

Cargill obtained $174 million in financing to repair plants in northeast and southeast Cedar Rapids that sustained significant flood damage. Reel Deal Holdings qualified for about $3 million to finance construction of a new corporate headquarters to replace a building destroyed by the June 2008 flood.

“The bonds are issued by state or local governments, which can be cities or counties,” Beary said. “The issuers do not have any financial liability and the bonds do not count toward their debt limit.

“The proceeds of the bond are loaned to a business typically at 1.5 percent to 2 percent less interest expense. That's because the interest is exempt from federal income taxes.”

The loan agreement specifies the repayment terms, which must be acceptable to the purchaser of the bond. A term of 20 years or more may be available.

“The loan can be used to finance the purchase of land and construction of a building as well as certain fixtures, but it cannot be used for equipment that can be moved. It also can be used to reimburse expenses incurred between June 2008 and Dec. 31, 2009, to repair or remodel flood-damaged property.”

Spina said a business borrowing $3 million at 5 percent interest for 20 years would realize a savings of $828,000 when compared with a rate of 7 percent interest over the same period.

Beary said businesses considering the use of Midwestern Disaster Area bond financing should contact a bond attorney to determine whether they qualify. She said $3 million would be the typical minimum loan because of the fees associated with issuing and selling the bonds.

Beary said a typical project likely will require three to six months before the financing is available. If a bank will commit to buy the bonds in advance, Beary said the process will take less time.

The disaster bonds must be issued by Dec. 31, 2012.