The Heartland Disaster Tax Relief Act of 2008 (the “Act”) was signed into law as part of the Emergency Economic Stabilization Act of 2008 on October 3, 2008. The Act provides temporary tax relief for areas in the Midwestern Disaster Area similar to the relief given to areas impacted by Hurricane Katrina in 2005.
The Midwestern Disaster Area includes certain counties within the states of Arkansas, Illinois, Iowa, Indiana, Missouri, Nebraska and Wisconsin (Kansas, Michigan and Minnesota are included in the Act but do not qualify for issuance of the bonds described herein) that were declared major disaster areas by the President on or after May 20, 2008 and before August 1, 2008 by reason of the severe storms, tornados or flooding (the “Disaster Events”). Maps of the portions of the Midwestern Disaster Area which qualify for such bonds (areas shown in red, light orange or orange) are below.
- Missouri (first Disaster Declaration)
- Missouri (second Disaster Declaration)
Qualified Midwestern Disaster Area Bonds
Among other tax benefits to assist individuals and businesses affected by the Disaster Events, the Act provides for the issuance of a new category of tax-exempt Midwestern Disaster Area Bonds (“Bonds”) for certain multi-family rental projects, nonresidential real property, public utility property, and principal residences as described below:
- Proceeds of the Bonds may be used to finance (a) the cost of a multifamily rental project for low and moderate income individuals, under relaxed tenant income limitations described below, (b) the cost of acquisition, construction, reconstruction or renovation of nonresidential real property (including fixed improvements associated with such property) or (c) the cost to repair or reconstruct public utility property, if, in each case, (i) the person using the property suffered a loss in a trade or business attributable to the Disaster Events, or (ii) the cost is incurred by a person designated by the Governor of the State in which the project is located as a person carrying on a trade or business replacing a trade or business with respect to which another person suffered such a loss. Bonds also may be issued to provide financing for mortgagors who suffered damages to their principal residences attributable to the Disaster Events.
- Bonds may be used to finance certain nonresidential real property projects, including (subject to the existence of state authority to issue bonds for such purposes):
- Manufacturing Facilities-
- Retail Businesses and Shopping Centers
- Auto Dealerships
- Office Buildings
- Warehouses and Storage Facilities
- Medical Office Buildings and other Medical Facilities
- Commercial Development
- Agricultural Facilities and Improvements
- Bonds may be issued for multifamily housing projects for low and moderate income individuals and families. Under the Act, the income restrictions for a project financed with qualified residential rental bonds are more liberal than before adoption of the Act. The project developer may choose either (i) to restrict at least 20% of the units to occupancy by individuals or families whose income is 60% or less of the area median gross income, or (ii) to restrict at least 40% of the units to occupancy by individuals or families whose income is 70% or less of the area median gross income.
- The Bonds must meet certain other requirements, including the following:
- Movable fixtures and equipment may not be financed with the proceeds of the Bonds.
- Proceeds of the Bonds may not be used to finance any skybox or other private luxury box, health club facility, golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or liquor store.
- If proceeds of the Bonds are used to acquire existing buildings, the borrower must make rehabilitation expenditures with respect to such buildings within two years equal to at least 50% of the portion of the acquisition cost financed with proceeds of the Bonds.
- Not more than 25% of the proceeds of the Bonds may be used to acquire land.
- The Bonds may not be bank-qualified.
- The weighted average maturity of the Bonds may not exceed 120% of the average expected economic life of the project financed by the Bonds.
- Not more than 2% of the proceeds of the Bonds may be used to pay costs related to issuing the Bonds, including legal fees, issuer fees and underwriter fees or discounts.
- Depreciation on the property financed by the Bonds must be deducted for federal income tax purposes on a straight-line basis.
- Except for certain preliminary expenditures and de minimis amounts, the borrower may not be reimbursed from bond proceeds for expenditures made for the project more than 60 days before the issuer of the Bonds adopts a resolution expressing its intent to issue the Bonds.
- The Bonds must be issued before January 1, 2013.
Limitation on Amount of Bonds and State Designation:
Iowa: $2.6 billion
Missouri: $1.4 billion
Arkansas: $957 million
Nebraska: $849 million
Illinois: $1.5 billion
Wisconsin: $3.8 billion
Indiana: $3.0 billion The authority to designate an issue of bonds as qualifying under the Act is given to the Governor of each state or the bond commission in states where bonds are required by state law to be approved by a bond commission.
Issuers of Bonds
The Act provides that the State or any political subdivision of a State may issue Bonds. The laws of each State will determine which State entity or political subdivision may issue Bonds within that State.
Advantages of Tax-Exempt Bond Financing
Interest on tax-exempt bonds is excluded from federal gross income, and in the case of Midwestern Disaster Area Bonds, not an item of tax preference for purposes of the federal alternative minimum tax (although the interest is included in adjusted current earnings for corporations in determining federal alternative minimum taxable income).