Ohio Financing Roundtable
February 2009
Ohio Enterprise Bond Fund and Port Authorities:
How Can They Add Value To A Deal?
By David A. Rogers, Esq
The Ohio Department of Development (ODOD) operates and administers many development programs, including making loans and providing lease financing under its AA- rated Ohio Enterprise Bond Fund (OEBF). Loans are made on a project-by-project basis, but the credit behind the program is a sophisticated structure of pooled reserves and other enhancements.
In addition, many cities and counties around the State of Ohio (State) have created port authorities, and a few of them even operate seaports and airports. Most of the rest were created as an economic development tool in order to stimulate job growth and increased property values in the local community. Five ports, the Toledo-Lucas County Port Authority, Cleveland-Cuyahoga County Port Authority, Summit County Port Authority, Dayton-Montgomery County Port Authority and Columbus-Franklin County Finance Authority, have also created bond funds, each rated BBB+ by Fitch. These bond funds also make available loans and lease financing similar to the OEBF. How can these programs add value to a deal? As shown below, the State and each port authority has broad powers in the economic development arena, and by committing sufficient resources, the State or a port authority can do many things to facilitate and finance an economic development project.
OEBF
Since the OEBF's founding in the 1988, it has become a well known tool for facilitating economic development within the State. As a financing program, the OEBF starts with a substantial program reserve funded by profits from the State's liquor sales, currently in an amount over $10,000,000. In addition to that program reserve, each new borrower from the fund is required to post a "primary" reserve, in the form of bond proceeds, cash or a letter or credit, in an amount equal to 10% of the original principal amount of each loan. Depending on the type of project being financed, or the credit history of the borrower, ODOD may also request additional credit enhancement, including mortgages, security agreements, personal and corporate guarantees, additional letters of credit and key-man life insurance policies. Based on the reserves and such other credit enhancements, OEBF bonds are currently rated AA- by Standard & Poor's, and this enables unrated but credit-worthy businesses, both large and small, to access the national capital markets for fixed-rate taxable and tax-exempt financing at costs comparable to multi-national corporations.
Some basic program guidelines for borrowing from the OEBF include:
- Eligible businesses include manufacturing, research and development, and distribution. Retail projects are ineligible.
- Minimum loan size is $1.5 million, and the maximum loan size is $10 million.
- OEBF funding cannot exceed 90% of eligible project costs.
- Eligible project costs include certain purchases of land and existing buildings, costs of constructing new buildings or renovating existing buildings, and purchasing machinery, equipment and certain fixed assets.
- Loan terms are capped at 10 years for equipment and 15 years for real estate.
- One job must be created or retained for each $75,000 of loan proceeds unless the project is located in a priority investment area, in which case the ratio is one job for each $100,000 of loan proceeds.
- A first priority mortgage and/or lien position is required on the assets financed with a loan.
- Closing costs, application fees, and an annual servicing fee of .25% of the outstanding principal balance of the loan must be paid by the borrower.
OEBF is often used in conjunction with other State loan programs as well as other public lenders, including port authority bond funds. State loan programs include Chapter 166 direct loans (including regional 166 direct loans), the Research and Development Loan Fund and the Innovation Ohio Loan Fund.
Port Authority Powers
Port authorities possess a multitude of powers. These powers are what make them so useful as economic development tools. A few examples of port authority powers follow.
Acquiring Property to Facilitate Economic Development and Housing
A port authority may purchase, exchange, sell, lease, lease with an option to purchase, convey other interests in, or contract with a person or governmental entity that pertains to the acquisition, construction maintenance, repair, furnishing, equipping or operation of any real or personal property, related to any activity contemplated by Section 13 (economic development) or 16 (housing assistance) of Article VIII, Ohio Constitution. A port authority acquiring property pursuant to this authority may not use moneys raised by taxation, the proceeds of obligations secured by a pledge of monies raised by taxation, or any general revenues of the port authority. Using this power, a port authority may use non-tax revenues to acquire property from another political subdivision or private entity for the purpose of facilitating economic development or housing, and may then transfer interests in such property to others, sometimes at bargain prices.
A port authority can also use its power to facilitate the development of governmental and quasi-governmental facilities within the jurisdiction of the port authority, as well as commercial facilities and those used for traditional port authority functions.
For instance, if a community within the jurisdiction of a port authority wanted to develop a recreation center but didn't want to do so directly (or by creating a recreation district), a port authority could undertake the project. Alternatively, if a community or developer wanted financing for infrastructure at a new or renovated development, including parking or roads, a port authority could use a wide variety of tools like special assessments, TIF or new community financing to facilitate the port's ownership and development of those facilities. A port authority could also use this power to facilitate a lease-purchase of a government facility to a political subdivision, as was the case when the Rickenbacker Port Authority (now merged with the Columbus Airport Authority) entered into a lease-purchase involving the improvement and lease of a portion of the former downtown Columbus Lazarus department store building to the Ohio Environmental Protection Agency.
Facilitating Economic Development Transactions
In furtherance of any interest in real or personal property, a port authority may: (a) loan monies to any person or political subdivision of the State for the acquisition, construction, furnishing, and equipping of the property, and (b) acquire, construct, maintain, repair, furnish and equip the property, and (c) sell to, exchange with, lease, convey other interests in or lease with an option to purchase the same or any lesser interest in the property to the same or any other person or governmental entity, and (d) guarantee the obligations of any person or governmental entity.
In this context, a port authority may provide additional security for an economic development project by facilitating a structured financing, such as a synthetic lease (or off-balance sheet) transaction where a company finances the acquisition of a building and/or machinery and equipment by leasing the asset from the port authority instead of borrowing money to finance the acquisition. In this manner, a publicly held company can improve the appearance of its balance sheet because the financing will not be reflected as a debt of the company, but simply as an operating lease. In addition, in certain circumstances, a port authority may determine to provide additional security for a transaction by agreeing to guarantee (by a pledge of non-tax revenues of the port authority) all or a portion of the debt of a company in the context of a facility financing.
Receiving State and Federal Grants and Loans
A port authority may receive and accept from state and federal agencies grants and loans. Port authorities can use this power to facilitate economic development projects by administering and coordinating state and federal grants and loans in their jurisdiction.
Exercising Powers on Behalf of Another Subdivision
A port authority may contract with any other political subdivision of the State, usually pursuant to a cooperative agreement, to exercise any duties on behalf of such entity, except the levy of taxes or exercise of eminent domain (unless approved by the voters of such political subdivision) or to have such entity exercise powers on behalf of the port authority. For example, if the political environment in a community made it difficult for a political subdivision to undertake a public project, a port authority could undertake the project directly on behalf of that subdivision.
Additional Benefits of Port Authority Financing
Port authorities can make available to companies and developers an exemption on all sales taxes on building materials, if the transaction is structured so that the port takes title to the project.
Private business information submitted to a port authority is not a public record and is therefore kept confidential. Thus, such information is not subject to the sunshine law or public records law. This helps facilitate a port authority's ability to foster economic development efforts in working with private businesses.
Bond Funds
As mentioned above, several port authorities around the State have created bond funds, which are pooled security bond issuance programs modeled after the OEBF. The ports' bond funds have both substantial program reserves - - like the OEBF - - and primary reserves (10% of each loan amount) that secure all program bonds. Together, the five ports have closed approximately 125 bond issues. In addition to the two levels of reserves, all program bonds are secured by a combination of individual company credits, guarantees, mortgages and security agreements. Some are also secured by TIF or special assessment revenues. Given the broad powers described above, i.e., the list of "authorized purposes", port authorities can issue taxable or tax-exempt bonds through these bond funds to finance a variety of economic development projects. Finally, in order to create and maintain each bond fund, each issuing port authority maintains professional administrative capabilities.
Federal Stimulus Bill Opportunities
Under the new economic stimulus bill being considered by Congress (as this article is being written), a new category of exempt facility bonds is being created, "Recovery Zone Facility Bonds". Those bonds include bonds for all types of commercial projects, other than multi-family housing and bonds for projects that are excluded from "qualified redevelopment bond" status, such as gold courses, alcoholic beverage sales facilities and massage parlors. During 2009 and 2010 the practical effect of this law will be to allow for issuance of almost all OEBF and port bond fund bonds as tax-exempt bonds, assuming of course that the projects can get volume cap from the State of Ohio.
Conclusion
The programs described in this article are valuable tools that should help Ohio continue to provide leadership in economic development finance.
David A. Rogers is chair of the Bond, Structured & Public Finance practice group for Bricker & Eckler LLP. He may be reached at 614.227.2367 or drogers@bricker.com.
Information regarding OEBF came from the Ohio Department of Development website at http://www.odod.state.oh.us/EDD/loans_grants.htm#OEBF and from the Ohio Treasurer of State website at http://www.ohiotreasurer.org/index.php/businesses/oebf. Certain information regarding port authorities was previously published in Volume 16, Issue 3 (May/June 2004) of Finley's Ohio Municipal Service.
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