By {{Article.AuthorName}} | {{Article.PublicationDate.slice(6, -2) | date:'EEEE, MMMM d, y'}}
{{TotalFavorites}} Favorite{{TotalFavorites>1? 's' : ''}}
When someone in the construction industry finds a way to build a better mousetrap, the reaction of contractors, owners and investors varies widely. Some contractors jump right in, while others take a more cautious approach, seeking to bear higher costs using tried-and-true construction methods until time and experience proves the reliability or cost savings of the new technology. Both approaches have certain risks and rewards.

What if something entirely unique were brought to the table, and instead of asking an owner to save costs through (perhaps unproven) new construction techniques, an owner could find cost savings in the core financing of the entire project? Imagine cost savings related not merely to value engineering or to utilization of less expensive materials or labor. What if it were possible to have the best construction method at a lower financing cost? These goals are achievable when financing a construction project through bond financing instead of a traditional loan.

Whether constructing a facility for a nonprofit organization, a manufacturer, a health care entity or almost any other owner, a company is likely eligible for bond financing.

Most companies face the question of how to best meet the need for long-term financing for capital projects. Some of these issues simply concern refinancing an existing loan. Other instances involve acquiring new financing to expand or renovate an existing project. However, often the question of financing involves the construction of a new improvement. As it turns out, owners—often along with their contractor partners—can utilize bond financing for land acquisition, construction and even equipping a wide range of improvements.

To use Central Florida as an example, Enterprise Florida and its affiliate statewide conduit bond issuer, Florida Development Finance Corp., offer bonds for various types of construction and development projects. In Orlando, Fla., the Metro Orlando Economic Development Commission works with the industrial development authorities for Orange and Seminole counties to issue bonds for nonprofits. Many local banks and credit unions also are engaged in bond financing.

The Cost Savings Are Real
Depending on the size of the project, utilizing tax-exempt and taxable bond financing as an alternative to traditional loans can save hundreds of thousands of dollars or more. In the case of nonprofits, most can maintain relationships with their existing banks and lenders. If structured in the correct manner, bond financing can be a win-win for both banks and nonprofit entities.

Although bond financing is not necessarily available for every project, attorneys and bond issuers familiar with structuring these deals typically have the infrastructure in place to efficiently approve and issue these financing mechanisms.

The typical bond financing for a nonprofit could take 60 to 120 days, depending on the level of due diligence and credit underwriting the financial institution requires. The typical deal can range anywhere from $1 million to several hundred million dollars, depending on the size and scope of the project being financed, as well as the strength of the repayment source. Many nonprofits will pledge the proceeds of a capital campaign and other donations received to the repayment of the bond debt.

Taxable vs. Non-Taxable Bonds
If the particular transaction does not qualify for tax-exempt bonds, in many instances taxable bonds are available and beneficial for new construction projects. If issued by a governmental issuer, the bonds and any associated mortgages still may be exempt from certain documentary stamps and intangible taxes. Again, legal counsel or a tax advisor can help determine which bonds are available for a particular project and which are the most beneficial based on both upfront and long-term costs.

Bond financing can seem scary, especially if an organization is unfamiliar with the funding mechanism. Be sure to check with an accountant and bond counsel who can address the financial and legal considerations related to the use of bonds to help maximize the effectiveness of these resources. 

Equipment Acquisition
Among other expenses, construction industry professionals are often faced with large equipment purchases. Even in situations where a company leases its equipment, suggesting the availability of bond financing to a manufacturer or owner can free up significant cash that could allow otherwise stalled construction projects to move forward. Utilizing tax-exempt and taxable bond financing could result in savings (or even shared savings, depending on the contract) that provide an alternate way to finance these projects.

Industrial Development Bonds
Manufacturers and developers also can take advantage of Industrial Development Bonds (IDBs) to finance new and expanded manufacturing facilities for manufacturing companies. One advantage of financing using these bonds is lower interest rates, resulting in payments substantially less than similar payments on conventional financing.

Unlike conventional construction loans, bond financing generally does not require subsequent conversion to permanent financing. IDBs may be used to finance the costs of site acquisition, construction, purchase, and installation of machinery and equipment; interest during construction; and the expenses of bond issuance. Aside from the great cost-saving benefit to manufacturers and contractors working on these construction projects, the availability of this financing in certain regions provides an opportunity for relocating companies to more effectively establish a foothold in a new community.

Any construction executive involved in the finance or the cost structure of an ongoing project, including executives involved in business development, must familiarize themselves with bond financing and the prospect of using it in their own business and as a means for developers and other project owners to afford construction projects otherwise out of reach.

Peter Vilmos is a Florida Bar board-certified construction lawyer at Burr & Forman LLP, Orlando, Fla. For more information, call (407) 540-6622 or email pvilmos@burr.com. Brian Watson is a bond attorney at Burr & Forman LLP. For more information, call (407) 540-6629 or email bwatson@burr.com.

 Comments ({{Comments.length}})

  • {{comment.Name}}


    {{comment.DateCreated.slice(6, -2) | date: 'MMM d, y h:mm:ss a'}}

Leave a comment

Required! Not valid email!