CDFA Spotlight: Qualified Zone Academy Bonds By Stan Provus

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This article gives an overview of Qualified Zone Academy Bonds or QZABs.
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This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel.

The middle-income tax package signed by President Bush a couple of weeks ago reauthorized the Qualified Zone Academy Bond program through 2005. The program pays bond buyers (certain banks and financial institutions—not individuals or corporations) a federal tax credit rather than interest. Congress has authorized $400 million annually for the program since 1998. The $400 million in tax credit authority is distributed to jurisdictions based on poverty levels. The IRS publishes allocations to each state. For example, in 2004 California will receive $50,399,000, while Maine gets $1,861,000. Although the program got off to a slow start in 1998, there is now substantial demand.

Qualified Zone Academy Bonds (QZABs) may be used for most school renovation and rehabilitation projects as well as equipment and up-to-date technology. New construction does not qualify. Through the tax credit, the federal government covers, on average, all of the interest on these bonds, thus school jurisdictions do not have to pay interest on these bonds which results in a substantial savings—the bond investor gets a federal tax credit instead of interest. The maturity of the bond cannot exceed 50% of the present value of the principal amount borrowed or 12-16 years.

School districts qualify for QZAB financing if they reasonably expect at least 35% of their student body will qualify for the free or reduced lunch program. Also, individual schools can qualify even if their district does not.

To participate in the program schools must have “substantial business support.” This means written commitments (matching funds) of not less than 10% of the proposed project from a private sector partner. IDA’s may be able to help schools identify partners or act as composite issuers.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.