A small measure of relief may be coming to some beleaguered Michigan communities that have been struggling recently with the difficult question of what actions they can realistically take to encourage much-needed local economic development while remaining cognizant of the financial limitations associated with lower revenues, higher costs and uncertain economic projections. The answer for some might be found in recovery zone financings.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “ARRA,” also known simply as the “Stimulus Act”). The Stimulus Act authorizes a number of temporary public finance programs designed to promote job creation and economic recovery. Among these programs are two that have very similar names but very different focuses: Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds.  

Similarities between the Two Recovery Zone Financing Programs  

  1. Volume Cap. Both programs provide for the issuance of bonds within certain volume caps (nationally $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds). The ARRA provides that allocations of this volume cap are to be made directly to Michigan counties and seven Michigan cities (those that constitute “large municipalities” under the ARRA), based on respective relative employment declines in the communities from 2007 to 2008. On June 12, 2009, the federal government released applicable allocations for these programs on a community-by-community basis. A copy of the allocations is available directly from the federal government, the state of Michigan or any of our offices.  
  1. Designated Recovery Zones. Both recovery zone programs provide subsidized financing alternatives for projects within designated “recovery zones,” generally those areas having significant poverty, unemployment, home foreclosure or general distress, or economic distress due to military base realignment or closure. Pre-existing empowerment zones or renewal communities are automatically qualified as recovery zones. Recovery zones must be designated prior to issuance of either type of recovery zone bond.  
  1. Bond Financing. While the two programs have different structuring and subsidization mechanics as described below, both programs are still, at their most basic, traditional bond financing programs. While they provide for borrowing at significantly subsidized rates, both programs require the issuer to repay the principal and subsidized interest through traditional means.  
  1. Limited-Time Offer. Like all ARRA programs, the two recovery zone programs provide for issuance of recovery zone obligations only through December 31, 2010. However, bonds issued during that time continue to qualify under these programs even after the expiration date of the respective programs. As both the duration of the program and the allocation of volume cap are finite, a community in receipt of allocation it does not intend to use should seriously consider “waiving” its allocation. Doing so allows the unneeded allocation to be reallocated for other qualifying projects in other communities within the state of Michigan.  

Striking Differences between the Two Recovery Zone Financing Programs

  1. Qualifying Projects. While the names of the two recovery zone programs are similar, their focuses are quite different.

Recovery Zone Economic Development Bonds (“RZEDBs”) are a type of Build America Bond. Generally, the proceeds of the bonds (with certain exceptions for permitted costs of issuance and reasonably required reserves) must be used for “qualified economic development purposes,” including capital expenditures paid or incurred with respect to property located in the recovery zone, expenditures for public infrastructure and the construction of public facilities, and expenditures for job training and educational programs. RZEDBs are bonds that finance public improvements.  

Recovery Zone Facility Bonds (“RZFBs”) are a type of private activity bond. Generally, the proceeds of the bonds (again with certain exceptions for permitted costs of issuance and reasonably required reserves and a private activity deminimus expenditure exception) are to be used for “recovery zone property,” generally including any depreciable property so long as such property was constructed, reconstructed, renovated or acquired by purchase by the taxpayer after the date on which the designation of the recovery zone took effect, the original use of which in the recovery zone commences with the taxpayer and substantially all of the use of which is in the recovery zone and is in the active conduct of a “qualified business.” Qualified business is defined to generally include any trade or business except that the rental to others of real property located in a recovery zone shall be treated as a qualified business only if the property is not residential rental property and the usual private activity bond business exclusions (golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, gaming or any store the principal business of which is the sale of alcoholic beverages for consumption off premises) apply. RZFBs are bonds which finance private improvements.  

For those familiar with pre-existing private activity bond authorization, it should be noted that the RZFB authorization is significantly broader in many important respects, making this program a viable option for many commercial enterprises that would not qualify for traditional “industrial development” private activity bond financing.  

  1. Tax Character and Credits. RZEDBs and RZFBs are structured quite differently.

RZEDBs are “direct payment” Build America Bonds. As such, they are taxable bonds that provide issuers with a direct federal subsidy equal to a percentage of the interest paid to investors on such bonds. RZEDBs, however, provide a deeper subsidy equal to 45% of the interest payable on the bonds rather than the 35% subsidy applicable to “regular” Build America Bonds.  

RZFBs are a new category of tax-exempt private activity bonds. As such, they are tax-exempt bonds that carry a tax-exempt rate. No additional subsidies, direct payments or tax credits are provided.  

Further Information  

There are a number of intricacies related to the issuance of both types of bonds, including unique limitations on permitted reimbursements, limitations on refundings and other applicable federal tax provisions. There are also differences in the applicability of other federal and state laws (for instance, Davis Bacon prevailing wage provisions are generally applicable to RZEDB projects but not RZFB projects). Accordingly, you should consult with knowledgeable professionals in connection with any proposed bond issue under either program.