Stimulus bonds spur private development across region
More than $75 million in construction projects across the area could begin in the first quarter of 2011, with developers using a financing tool created by the federal stimulus act.
Passed by Congress in early 2009, the American Recovery and Reinvestment Act created a program called Recovery Zone Facility Bonds, which allow municipalities to issue bonds on behalf of private developers who might not be able to access more conventional financing.
Designed to spur private development activity, buyers of the bonds don’t pay income tax on the interest they earn, allowing them to charge developers a lower rate than traditional bank loans.
With the program expiring Dec. 31, developers behind four projects in Louisville already have lined up their facility bond financing. (See details on page 20.)
“I think most of these projects probably would have been able to get their financing in order and come to fruition, but I do think that having these bonds sped up the timetable,” said Bruce Traughber, director of economic development for Louisville-Jefferson County Metro Government. “They were designed to stimulate the economy and put people to work, and it’s working.”
Transfers from other counties helped Louisville finance more projects.
Nationally, the stimulus act allowed for as much as $15 billion in bonds to be issued across the country on which bondholders could earn interest free of federal income tax. Counties and large cities were allotted specific amounts of bonds they could issue on behalf of private developers, based on population.
In all, Kentucky received a $145.7 million allocation; Louisville-Jefferson County’s share was $33.9 million.
Traughber said Louisville Metro received applications for nearly $43 million in bond requests and was able to fulfill those requests because other counties across the state that did not receive any requests were allowed to transfer their bond allocations to other counties.
Indiana received $469.6 million in bonding authority; Clark, Floyd and Harrison counties’ combined allocation was about $16.1 million.
Cities had more applications than rural areas
Bill Skees, a bond attorney with Louisville law firm Frost Brown Todd LLC who has worked with several local projects, said the program does not put any city or county money at risk.
Cities and counties issue the bonds on behalf of developers, but only if they have a firm commitment from a bank or other institutional investor to buy the bonds and assume the risk.
He said the program has been a success, at least on the local level.
“Metro areas have been able to line up developers for these projects,” Skees said. “But in Kentucky, as well as most other states, it has not been nearly so successful once you get out into the hinterlands.”
Developers said the bonds allow them to borrow at discounted rates.
For example, Herbert Pierce, executive director of Bennett & Bloom Eye Centers, said Republic Bank & Trust Co. — which is buying the bonds for its relocation project — is offering a rate nearly 2 points lower than its standard loan rate.
Dave Lauer, CFO of Millennium Forge Inc., said about $10 million in bonds will help his company buy its leased facility and seven other buildings on 10 acres at 990 W. Ormsby Ave.
“The bonds provide the best long-term view of financing a big project like this,” Lauer said.
“They tend to be more friendly on the terms and how payments are structured, giving you an opportunity to get off the ground before the money is required to be paid back,” he said. “Combined with an advantageous interest rate, the bonds were very attractive.”
Unused Allocations
Not every county in the region had developers come forward seeking to use the Recovery Zone Facility Bonds that had been allocated.
Duane Murner, judge-executive of Oldham County, said Oldham officials transferred their allocation of $2.6 million to a project in Calloway County. Likewise, Rob Rothenburger, judge-executive of Shelby County, said its allocation was transferred to Louisville-Jefferson County Metro Government.
Floyd County in Indiana had two proposals come forward, but Don Lott, the county’s director of operations and planning, said both of them decided against using the bond financing. Floyd returned its $5.4 million allocation to the state.
James Goldman, president of the Harrison County, Ind., county commission, said the county uses money generated by Horseshoe Southern Indiana casino for economic development purposes, so the county decided to waive its $2.8 million bond allocation back to the state.
Bill Skees, bond attorney with Frost Brown Todd LLC, said developers will not be able to pursue any unused bond allocations after Dec. 31 unless Congress decides to extend the program.
Stimulated bond market
The 2009 federal stimulus act created the Recovery Zone Facility Bonds program, which allows cities and counties to issue a total of as much as $15 billion in bonds on behalf of private developers, so long as developers had banks and institutional investors lined up to buy the bonds. Interest earned on the bonds is tax-free.
Louisville-Jefferson County Metro Government approved four applications to use the bonds before the Dec. 31 deadline. Another project in Southern Indiana also is in line to use the bonds.
The following are descriptions of each project, according to Business First interviews with developers.
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