Project Finance: Creative bundling counts
By Ken Holub, SVP Commercial Banking
July 11, 2016
For middle market businesses, there are often competing goals: pressure to stay competitive and meet customer needs – whether that means going into new markets or expanding facilities – along with the need for careful stewardship of capital. By being creative and bundling often underutilized financing tools, expansion and growth plans can be on track to meet those competing goals.
Combining tax credit programs, tax exempt bonds and specialized commercial loans can allow companies to meet their project financing objectives without sacrificing valuable equity and capital.
The Project Finance Tool Box
There are a wide range of project financing tools to bundle. Each has its unique requirements and benefits. Working with a CDE (Community Development Entity) or bank, companies can leverage the advantages of creative bundling over traditional financing by saving capital – less cash up front – and lower interest rates, while managing some downsides – a slightly longer process of 60-90 days (versus 45-90 days for traditional financing) or leasing restrictions. Every situation is unique, but generally these tools are meant for “owner-occupied” facilities where only a small portion can be leased out to third parties.
New Markets Tax Credits (NMTC)
Business owners can take advantage this locally managed federal program and its below-market interest rates.
- Who qualifies?
- Businesses including manufacturers, distributors, service companies and non-profits whose project will generate job growth and economic activity in distressed or underserved communities
- Minimal upfront equity required
- Forgiveness – typically – of capital after seven years
- Access – potentially – to 15-20% additional capital
- Project budgets of less than $5 million generally not cost-effective
SBA 504 Loans
Small businesses can purchase, build or improve their fixed assets such as real estate or equipment with a loan guaranteed by the U.S. Small Business Administration. Refinance of existing indebtedness is another use of this loan.
- Who qualifies?
- Businesses with less than $15 million in net worth and less than $5 million in after-tax profits averaged over two years,
- Property must be either owner-occupied or owned by an eligible passive company, and
- Project must support the community's economic development
- Fixed-rate financing for 20 years with low down payment – 10%
- Efficient approval process
Department of Commerce Economic Development Opportunity (DCEO) Advantage Illinois Participation Loan
DCEO loans are designed to help small businesses grow or expand by providing below-market, fixed-rates on medium to long-term financing. The maximum support is 25% of the project or 50% of the loan or $2 million – whichever is less.
- Who qualifies?
- Businesses with 750 or fewer employees
- Can be tied to an SBA 504 loan
- Short and simple documentation process.
Industrial Revenue Bonds (IRBs)
IRBs provide tax-exempt loans to manufacturers for the purchase of new manufacturing equipment, construction of a new facility, expansion of an existing facility or acquisition of an existing facility of the company.
- Who qualifies?
- Manufacturers or processors of tangible products
- Lower interest rates than traditional debt
- Fixed or variable rates
- Tax-exempt issues of less than $2 million are generally not cost-effective
Along with incentive programs, tax exempt bonds, tax credits and specialized loans available for project finance, growing companies can add commercial mortgages and working capital lines of credit. Both financing tools that have been packaged successfully with New Market Tax Credits.
Packaging with Chicago collar counties’ incentives
There are project finance opportunities dotting the suburbs and exurbs. Potential for packaging these incentives with other financing tools can be found in counties across northern Illinois. Their aim is to support new operations or expansion projects with business assistance and incentives.
- Cook: Built In Cook Program
- Lake: Lake County Partners
- Will: Will County Tax Abatement for new or retained business
- DuPage: DuPage programs
Snapshots of creative bundling in project finance
A cold storage company in the near west suburbs had a great problem – overwhelming customer demand. They needed more space, but they also needed to find an alternative to committing more equity. Their solution: packaging an SBA 504 Small Business Loan with New Market Tax Credits. The NMTCs were a good fit for their new 150,000 square foot facility, where they have added hundreds of jobs to the community – and kept their customers’ needs filled.
A neighborhood on Chicago’s northwest side was starved for a grocery store. A financing bundle created by combining New Market Tax Credits and the Cook County Section 108 Built in Cook loan participation program provided a solution to that need. Both loan programs check to ensure the projects that use their fund have an employment impact on the surrounding community. The new grocery store has created more than 100 new permanent jobs, a true positive impact.
A specialty food processor had ambitious growth plans. To turn plans into reality, they purchased and then rehabbed a facility in the western suburbs. With the new headquarters space they tripled their production capacity which allowed them to bring new product lines into the business. The location provided them to access New Market Tax Credits which were bundled with the Illinois DCEO loan participation program. The result is a win-win for the food processor and the community’s economic development goals.
Combine creativity with experience
Understanding the project finance landscape requires experience. Fully leveraging the blend of tools for growth available to your industry, your company, your community takes creativity added to experience. Make sure you work with an experienced advisor who can alert you to possibilities and then guide you through making the right choice of finance tools – alone or in combination – and who can help you weigh advantages and avoid potential road blocks.
Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice. Back to top