The American Recovery and Reinvestment Tax Act of 2009 (the “Recovery Act”) created a new category of tax-exempt bonds called Recovery Zone Facility Bonds (“RZFBs”) to assist economic development in distressed areas throughout the United States. The Recovery Act authorized $15 billion of tax-exempt RZFBs, promoting the financing of capital projects owned or used by private parties. This $15 billion is allocated among major metropolitan areas and counties of each state based on unemployment statistics in 2008.

Through the use of RZFBs, it is now possible for privately-owned or used projects to receive tax-exempt rates (which are lower than traditional financing rates) that are passed through to the borrower.

To date, there have been few RZFBs issued due to delays in the governmental entities providing guidance regarding how to apply for RZFBs. However, several counties in Illinois are close to providing such guidance. Therefore, it is critical that those interested in applying for RZFBs be proactive in submitting their proposed projects in the near future. RZFBs must be issued no later than December 31, 2010.

What Projects Can be Financed?

Applications for RZFBs require that their projects meet the following criteria:

Be any depreciable property

Is located in a “Recovery Zone”

Was constructed, reconstructed, renovated, or acquired by “purchase” by the private taxpayer after the date on which the designation of the Recovery Zone took effect

The original use of such property commenced with the taxpayer and substantially all of the use of the proceeds is in the active conduct of a “Qualified Business” by the taxpayer, and

Will create significant community impact (For example: jobs created, blight reduced, etc.)

What is a Recovery Zone?

The Recovery Act provides that the county or city has the authority and discretion to designate any area within its boundaries using certain criteria, including any area that is designated as having significant poverty, unemployment, rate of home foreclosures, or general distress; is affected by military realignment pursuant to the Defense Base Closure and Realignment Act of 1990; or is designated as an “empowerment zone” or “renewal community.”

In Illinois, the following counties have already established Recovery Zones: Cook, DuPage, Kane, Kankakee, Lake, LaSalle, McHenry, Rock Island, Stephenson, and Will Counties. Many other counties are at various stages of designating Recovery Zones.

Allocations of the funds among all 50 states and their respective counties and large municipalities can be found at: http://www.irs.gov/pub/irs-tege/rzblocalreallocations.pdf. Any state can reallocate its allocations to any issuer at its discretion. Additionally, any county or municipality can waive its allocation. Moreover, any county can sublimate all or a portion of its allocation to another issuer in its county.

The following allocations apply to Illinois as follows:  

Recovery Zone Facility Bonds

Illinois* - $1,000,457,000

Cook County - $196,814,000

City of Chicago - $199,770,000

*Allocation is sub-allocated among its counties and largest municipalities

What is a Qualified Business?

A “Qualified Business” includes essentially any trade or business, with certain specific exceptions, including the rental of residential property (unless part of a mixed-use project and at least 20% of the gross rental revenue comes from commercial tenants) and the operation of certain other specifically listed projects such as golf courses, country clubs, massage parlors, and racetracks or other gambling facilities.

Nonexclusive examples of projects that can be financed with RZFBs include: revitalization of downtown areas with renovations or construction of office buildings, commercial and retail buildings, manufacturing facilities, grocery stores, shopping centers, mixed-use projects, for-sale housing, hotels, arts centers, theaters, charter schools, hospitals, college campuses, high-tech and biotech facilities, homeless shelters, transitional housing, facilities to assist the homeless with education and home ownership, etc.

It is important to note that this definition closely mirrors that required for new markets tax credit (“NMTC”) financing under Section 45D of the Internal Revenue Code. NMTC financing is intended to provide gap financing in any particular financing provided the project is located in a “low-income census tract.” NMTC financing provides the borrower with an approximately 1% below-market interest rate for seven years with approximately 20% of the principal forgiven at the end of seven years in a nontaxable transaction. It is for this reason that it is expected that RZFBs and NMTC financing may often be combined to finance a project that is located in both a Recovery Zone and a low-income community.

In addition to RZFBs, the Recovery Act also authorized Recovery Zone Economic Development Bonds (RZEDBs), which are used in financing public and governmental projects and are taxable. Click Here to learn more about RZEDBs.