I. Why a Municipal Bond?
II. Statutory Rules for Bonds.
III. State Ceiling Amount for Private Activity Bonds.
IV. Procedures for issuing an IRB.
V. Sale of Bonds.
VI. Arbitrage/Rebate Requirements.
VII. Miscellaneous, but Very Important Considerations.

1. A lender will accept a lower interest rate on a municipal bond because the interest paid on such bonds is exempt from federal income taxes, and for certain types of bonds, Wisconsin income taxes as well.

2. While interest on all municipal bonds is generally exempt from income taxes, a financial institution will have its interest deduction limited, in one of two ways, for any bond acquired after August 7, 1986. The limitations are:

• The interest paid by the bank which is deemed attributable to the carrying of the bond, will be disallowed as a deduction; or
• If the bond is ABank Qualified,@ only 20% of the interest deemed attributable to the carrying of the bond will be disallowed as a deduction.

3. In addition, interest on private activity bonds, but not Section 501(c)3 bonds is an item of tax preference for alternative minimum tax purposes.

4. A ABank Qualified@ bond is one that is issued by a qualified small issuer and designated as such by the municipality issuing the bond. A qualified small issuer is one that will issue $10,000,000 or less of certain types of bonds within the calendar year. Bonds issued on behalf of private business can never be Bank Qualified, although bonds issued by Section 501(c)3 organizations generally will be if the dollar limitation will be met.

1. Municipal bonds are always issued under state law, but the tax treatment is determined under federal law.

2. Under the Internal Revenue Code, manufacturing facilities are the only type of project that can qualify for small issue tax exempt financing by a for profit entity. For a Section 501(c)3 entity, virtually any type of non-sectarian project qualifies under the Internal Revenue Code, but there must be a provision under state law that would authorize the issuance of a bond.

3. Section 501(c)3 organizations can utilize the industrial development revenue bond law to issue bonds for hospital facilities, nursing home (as distinguished from CBRF and assisted living centers), recreational facilities, clinic facilities, non-residential facilities located in or adjacent to a blighted area, as well as certain other projects. See Wis. Stat. 66.1103(2)(k). There are statutes other than the industrial development revenue bond statutes which can also be utilized. These statutes can be especially helpful in the case of refinancing existing facilities.

1. There is a limit on the total amount of private activity bonds that can be issued in the state in any calendar year. The limit gets allocated to various state agencies, and then reallocated toward the end of the year from those agencies which did not use their full allocation to those able to use more. The limit is referred to as the unified volume cap, or UVC.

2. Formerly, the allocation was available on an objective basis utilizing a scoring system developed by the Department of Commerce. Effective with the 2001 allocation year, the department will review applications which are to be submitted through the Area Development Managers of the Department of Commerce. In addition, any project requesting more than $5,000,000 of the allocation must go through a special public hearing to determine if such a large portion of the allocation should go to any one project.

1. Mail letter regarding good faith estimate of attorney fees anticipated to be paid out of bond issue to Clerk of Municipality and Department of Commerce. This must be done prior to approval of the initial resolution.

2. Submit Initial Resolution and Notice to Electors to Municipality for action. The open meeting notice given to members of the public under Wis. Stat. 19.84 must indicate that information with respect to the job impact of the project will be available at the time of consideration of the initial resolution. This will also necessitate compliance with the requirements of the particular Municipality such as submission of fees, application forms, other information, etc. In addition, the application or resolutions may have to go through various committees before being approved. Only construction and acquisition costs incurred after approval of the Initial Resolution are eligible to be financed with the proceeds of an IRB.

3. After approval of the Initial Resolution, make sure the Municipal Clerk (or bond counsel, if desired) publishes the Notice to Electors, which accompanied the Initial Resolution, in the official newspaper of the Municipality.

4. A separate Resolution Waiving Non-Discrimination and Public Bidding requirements should be approved by the Municipality and published in the official newspaper of the Municipality. While not required, it is advisable to have this resolution approved at the same time the Initial Resolution is approved and publication made along with the Notice to Electors. If the waiver resolution is not approved, certain public bidding requirements must be complied with.

5. Within 20 days from the date of publication of the Notice to Electors, a copy of the initial resolution together with a statement stating when the publication took place must be sent to the Department of Commerce.

6. After the Notice to Electors has been published, the electors of the Municipality have 30 days in which to file petitions requesting that issuance of the bonds be voted on by referendum. If the Municipality has registered electors, 5% of the number of electors must sign the petitions. If there is no registration of electors, the required number is 10% of the number of persons voting for the office of governor at the last general election.
If valid petitions signed by the requisite number of electors are submitted, the question of issuing the bonds will be put to a vote at a general or special election. The bonds cannot be issued unless approved by a majority vote at the election if one is required. If no valid petition is filed, the Municipality may issue the bonds after approving the Authorizing Resolution.

7. At least 30 days before closing the bond issue, notice of intent to enter into a revenue agreement, on a form prescribed by the Department of Commerce, must be given to the Department of Commerce and to any collective bargaining agent in the state with whom the Eligible Participant has a collective bargaining agreement.

8. Prior to closing, the Municipality must have received an estimate from the Department of Commerce with regard to the number of jobs expected to be eliminated, created, or maintained as a result of the project, both at the project site and elsewhere in the state.

9. Prior to passage of the Authorizing Resolution, a public hearing must be held on the question of issuing the bonds. Notice of the hearing must be published at least 14 days prior to the date of the hearing. In general, the hearing is scheduled as part of a regular meeting of the Municipality to avoid having the Board or Council members attend a special meeting. The notice must contain certain specified information with regard to the project and permit written or oral comments. There is no requirement that the Municipality approve or disapprove the bonds based on what is said at the hearing or even that the Board or Council members attend the hearing. Because no one generally makes any comments at the hearing, it is often scheduled for the same meeting at which the Authorizing Resolution is acted upon. If there is any reason to expect opposition, it may be wise to hold the hearing in advance of the meeting at which the Authorizing Resolution is to be acted on so that if the bond issue will not be approved, the time and expense of drafting documents can be saved. If the hearing and Authorizing Resolution are acted upon at the same meeting, care must be taken to hold the hearing before passage of the Authorizing Resolution.

10. At any time after passage of the Initial Resolution, document drafting can begin. If no problems are anticipated with regard to a referendum or opposition at a public hearing, it can begin immediately. If problems are anticipated, it may be advisable to wait until the 30 days pass or the hearing is held before document drafting begins.

11. The revenue agreement must contain the following provisions under state law:

• The borrower must be required to submit to the Department of Commerce within 12 months after the project is completed or 2 years after a revenue bond is issued to finance the project, whichever is sooner, on a form prescribed under Wis. Stat. 560.034(1), the net number of jobs eliminated, created, or maintained on the project site and elsewhere in the state as a result of the project.
• If the borrower operates for profit, the borrower must agree to notify the Department of Industry, Labor and Human Relations and the Area Private Industry Council under the Job Training Partnership Act, 29 USC 1501 to 1798, of any position to be filled in that municipality within one year after issuance of the revenue bonds. The Notice must be provided at least 2 weeks prior to advertising the position.
• No facility constructed with industrial revenue bonds shall be used for any purpose which includes any act of employment discrimination as specified under Wis. Stat. 111.322.

12. The project cannot result in any "lost jobs" either at the project site or at other project sites of the employer within the state. In the alternative, this requirement can be met by the employer agreeing to offer any new jobs to persons whose jobs were lost. Certain rules must be followed and reports filed with the Department of Commerce to insure compliance with these requirements.

13. Bonds cannot be issued until the Authorizing Resolution is approved by the Municipality. The major documents involved in the financing, such as the loan agreement, note, letter of credit, reimbursement agreement, mortgage, etc., must be prepared in substantially their final form and approved by all the parties before the Authorizing Resolution is approved. The face amount of the bond issue, amortization period, and interest rate must be determined before the Authorizing Resolution is approved. Closing on the bond issue can be held at any time after the Authorizing Resolution has been approved.

1. Bonds can generally be bank held or sold through an underwriter in a private placement or public offering. A bank will generally provide a letter of credit where an underwriter is involved.

2. Where the bonds are bank held, they can be structured as a Adraw-down@ loan where the borrower takes the proceeds when needed, and only pays interest on the funds drawn. When an underwriter is used, all proceeds from the sale of the bonds go to the trustee on the date of issuance. In the latter case, the issues of arbitrage and rebate, discussed infra, become items of major concern.

1. There are many rules that deal with determining whether bonds are arbitrage bonds and when any arbitrage profits must be rebated to the federal government. Many of the rules for each concept are quite similar, but nevertheless, they are two separate and distinct concepts. In general, if a bond is found to be an arbitrage bond, the interest paid on that bond is not exempt from federal income taxes. Where the rebate rules apply, there is no adverse impact on the bonds themselves so long as the appropriate amount is rebated to the federal government. If, however, the required rebate is not made, such failure will cause the bonds to be arbitrage bonds.

2. A bond becomes an arbitrage bond where it is determined that the proceeds of the bonds are invested in a materially higher yield than the yield on the bonds, thereby providing the borrower with arbitrage profits. AMaterially higher@ is generally defined as one-eighth of one percent. An exemption is available for a temporary period of three years for capital projects where:

• 5% of the proceeds of the bonds are spent within 6 months of the date of issuance; and
• 85% of the proceeds of the bonds are spent within three years of the date of issuance; and
• due diligence is used in completing the project.

In addition to the above, there is an available five year period if the project involves a substantial amount of construction expenditures, a 13 month period for a bona fide debt service fund, a one year period for investment proceeds, and a 30 day period if no other period applies.

3. The arbitrage rules apply not only to the initial proceeds of the bonds, but also to any collateral pledged for the bonds, insurance proceeds, or any other amount that may be looked at for making payments on the bonds.

4. A major exception to the arbitrage rules is that it is not considered arbitrage to invest in tax-exempt securities that are not subject to alternative minimum tax. In theory, you are then only investing in the same type of obligation as your bond, and are not taking advantage of the difference in rates solely to make a profit. Bonds that are subject to the AMT are private activity bonds that often pay a slightly higher rate than general obligation issues of a municipality.

5. The rebate rules say that when arbitrage profits are earned, such profits must be rebated to the federal government. Again, there are certain exceptions which allow the borrower to retain the arbitrage profits. First, no rebate need be made of any arbitrage profit where all proceeds of the bonds are disbursed within six months of the date of issuance of the bonds. This period may be extended to one year in the case of bonds issued on behalf of 501(c)3 organizations. The next exception is an 18 month exception that applies if at least 15% of the proceeds are spent within 6 months, 60% within 12 months, and 100% within 18 months. Finally, there is a two year rule that applies for certain construction issues that is available for 501(c)3 organizations, but not private companies.

6. There are also rules whereby a borrower can elect to pay a penalty in lieu of making a rebate.

1. Any property financed by an IRB must be depreciated over the class life of the property under a straight line method for tax purposes. For manufacturing machinery, this may very well mean using an 11 or 12 year life as opposed to 7, and straight line depreciation as opposed to double declining balance. Quite often, this means that an IRB will not make economic sense for a project involving only equipment. For real property, use of an IRB will require 40 year straight line depreciation as opposed to 39 year straight line depreciation. Where real estate is combined with equipment, it may make sense to use the IRB for the entire combined project if the amortization is for a sufficiently long period of time.

2. The average maturity of a bond may not exceed 120% of the useful life of the property being financed with the proceeds. The class life of the property can be used as a safe harbor, but the borrower can use a longer period if it can be satisfactorily shown.

3. No more than 2% of the bond proceeds can be used to pay issuance costs, such as attorney fees, underwriter fees, points, trustee fees, etc. There is no problem if such costs exceed 2%, its just that the borrower will have to pay for them with its own funds. Generally, this limit will not be exceeded in the case of a bank held bond, but likely will be for a private placement or public offering.

4. An IRB can be issued for up to $1,000,000. This limit can be increased to $10,000,000 by making an election. When the election is made, the limit is applied to the total face amount of the bond issue plus the total amount of capital expenditures incurred by the borrower and any principal user of the project in the municipality during a six year period beginning three years before the bonds are issued and ending three years later. A principal user is defined to include any person who uses 10% or more of the facility. This can include a major customer who is responsible for 10% or more of a company=s sales. In addition, it can include a capital expenditure that may not necessarily be owned by the Company.

5. There is also a $40,000,000 limitation on the use of bonds by any entity anywhere in the country. Again, this applies to facilities owned, as well as used by the borrower.

6. Manufacturing facilities include real estate and equipment used directly in the manufacturing process. Up to 25% of the proceeds of bonds can be used to finance facilities that are directly related and ancillary to a manufacturing facility. The 25% limit will apply to such area as purchasing, accounting, human resources, etc., to the extent related to manufacturing.

7. No more than 25% of the bond proceeds can be used to finance land.

8. You cannot use bond proceeds to acquire used property unless the used property will be substantially rehabilitated in connection with the project. For real property, substantial rehabilitation means incurring rehabilitation expenses of at least 15% of the cost of the real property.

The above is intended as a brief summary of the advantages, disadvantages and procedures to be followed when issuing an Industrial Development Revenue Bond. You must be aware that the IRB law has undergone many changes over the past few years, and likely will be changed in the future. If you have any questions concerning IDB=s, please contact Michael D. Willis at (920) 432-1400, or email him at mdwillis@nslawfirm.com.