PURPOSE OF THE EDC
The EDC of Livonia serves two main purposes:
1. To help qualified businesses and non-profit organizations that are presently located or would like to locate within the City of Livonia secure financing at rates of interest below normal commercial lending rates.
2. To help increase employment and capital improvements within the City of Livonia and thereby increase the tax base.
- Land acquisition
- New construction
- Renovation of existing property
- Acquisition of equipment and/or machinery
- Replacement housing project incidental to an industrial or commercial enterprise
- Leasehold improvements
EDC FINANCING - HOW IT WORKS
The primary means by which the EDC assists qualified businesses and non-profit organizations is through the issuance of Industrial Development Revenue Bonds. The Internal Revenue Code authorizes the issuance of qualified small issue bonds for manufacturing facilities. Thus, it is possible for private borrowers to have tax exempt industrial revenue bonds (IRBs) issued to pay the capital costs associated with their manufacturing activities. These bonds effectively permit the borrower to borrow at rates that are lower than taxable financing.
The EDC lends the sale proceeds of the bonds to the borrower for whose benefit the bonds are issued pursuant to a loan agreement, and uses the pledged loan repayments to make the payments of principal and interest on the bonds.
The rules of the road generally include the following: At least 95% of the proceeds of the IRBs must be spent to acquire or construct manufacturing facilities. For this purpose, manufacturing generally means a process that modifies the condition of personal property. In addition to what would conventionally be thought of as manufacturing, activities such as printing, food processing, metal treatment, and certain assembly count as manufacturing for this purpose. Of the bond proceeds, at least 70% must be spent for core manufacturing facilities (e.g., that is property used in the manufacturing process itself), and the remaining 25% of bond proceeds (other than 5% usable for issuance and certain other costs) may be used for related and ancillary purposes (storage facilities, office space, test labs, employee parking lots, showrooms, loading docks, etc.).
No more than 2% of bond proceeds may be used to pay issuance costs of bonds, however, most credit enhancement fees (e.g., letter of credit fees) may be financed without regard to this limitation.
If an issue is over $1,000,000, the capital expenditures of the borrower, any principal users (e.g., lessee) of the bond financed facilities and persons related to such users, which are made in the municipality in which the bond financed facilities are located, may not exceed $10,000,000 during the six year period beginning three years before the date of issuance of the IRBs and ending three years after the issuance of the IRBs. Prior outstanding IRBs may count as well. A potential problem with respect to the capital expenditure limitation is that tooling purchased by the borrower’s customers and retained and used by the borrower may have to be counted as capital expenditures toward the $10,000,000 limit. This rule may be of particular concern to auto suppliers.
No more than 25% of the proceeds of the IRBs may be used for the acquisition of land and no proceeds of the bonds may be used to purchase used property unless, in the case of a used facility including a building (and in certain cases, the equipment therefore), rehabilitation expenditures are made in an amount not less than 15% of the costs of the used facility.
There is a $40,000,000 limit for the total amount of IRBs outstanding for each user during a three-year period. This limitation was added a number of years ago to limit the use of IRBs by national entities.
A trade-off for the use of IRBs to finance a manufacturing facility is that generally the borrower must use straight-line depreciation for the bond financed facilities over a somewhat extended life. Nevertheless, in most cases the borrower determines that the savings in interest cost will offset the tax cost of slower capital write-offs.
If the bond proceeds are not spent within six months of the date of issuance of the bonds or invested in tax exempt bonds, any arbitrage profit (i.e., the excess of actual earnings on bond proceeds over the amount that would have been realized if the proceeds had been invested at a yield equal to the yield on the bonds) must be rebated to the United States government.
Changes in use of a bond financed facility to a non-qualified use may result in the IRBs losing their tax exempt status or the inability of the borrower to deduct its interest payments for tax purposes.
There is an inducement requirement associated with IRBs. This means that no more than 60 days after a borrower incurs an expenditure to be financed with IRBs, the bond issuer (i.e. EDC) must adopt an “inducement” resolution with respect to the proposed financing. The amount of IRBs that can be issued annually in each state is limited by a formula based on population ($50 per capita). In order for the financing to go forward, the state must provide for the issue of a portion of such annual allocation. Michigan has approximately $600,000,000 of total allocation per year and has dedicated a substantial portion to manufacturing facility IRBs in each recent year.
COSTS INVOLVED IN ARRANGING EDC FINANCING
There are certain financial obligations to the applicant, however, these costs can and should be included in the amount of financing requested. These obligations are as follows:
The Bond Counsel acts as legal counsel to the EDC in connection with the issuance of the bonds. Bond Counsel works with the applicant to ensure that the bonds to be issued will be tax exempt. The Bond Counsel also works with the applicant and lender to fashion the final legal documents related to the bond issue to the satisfaction of all parties. Lending institutions will not enter into a Revenue Bond Purchase without the transaction being represented by a nationally recognized Bond Counsel.
The application fee is necessary to help offset administrative expenses. And, the fee serves to ensure that the business applicant is serious about following through on the project. The fee for application and review shall be 1/10 of 1% of the estimated principal amount of the EDC bond payable in the sum of $500 at the time of filing the application (not refundable) and the balance upon adoption of the Inducement Resolution by the Board of Directors.
PROCEDURES INVOLVED IN OBTAINING EDC FINANCING
- Applicant secures financial commitment from a lending institution. When approaching a lending institution for financing, state your intent to obtain EDC financing. Most institutions find this an attractive transaction because it offers them a tax shelter that in turn, allows them to provide you with financing at a lower rate.
- Submit an application to the EDC Board of Directors. This application must be filled out entirely and accompanied by the following: Legal description, site plan, letter of intent from lending institution, $500.00 application fee.
- EDC Board adopts the Resolution of Inducement, which designates the Project Area (legal description of the property involved in the project) and the Project District Area (the area that is affected by the project), and submits it to the City Council.
- City Council confirms the Project Area and Project District Area and appoints two additional directors to the EDC Board to serve only until the Project Plan has been completed for this particular project. In some cases, a Project District Council is required. City Council also makes this determination. If the application submitted is in order, and all requirements of Public Act 338 and the City of Livonia are met, the entire procedure can be completed within 60-90 days. The sole function of the Livonia Economic Development Corporation is to HELP. We want to help business in the City secure the most attractive financing available to them and we want to help our City maintain its reputation for being one of the finer communities.
To Contact the Economic Development Director, click here.
- Bond Counsel works with the applicant to prepare a Project Plan. The Project Plan must include a certificate from the project developer stating that prevailing wages will be paid to all workers on the project. In most instances this is union scale. It is not required that the project have a union developer but the prevailing wage must be paid. In addition, if a project is being moved from one community to another, and it will involve the transfer of more than 20 employees, approval must be secured from the community from which the project is moving before the Project Plan can be approved.
- The EDC Board approves the Project Plan and submits it to the City Council.
- City Council calls for a Public Hearing on the Project Plan, giving ten days notice to property owners in the Project District Area, publishing the notice one time in the Livonia Observer newspaper, and posting ten notices within the Project District Area ten days prior to the Public Hearing.
- City Council holds a Public Hearing and approves the Project Plan by resolution.
- The EDC Board adopts the Bond Authorizing Resolution.
- Closing on the sale of the Bonds.