The six reforms contained within Modernizing Agricultural and Manufacturing Bonds Act would lower capital access barriers for small manufacturers and first-time farmers by modernizing how the Internal Revenue Code regulates the issuance of small issue bonds. Below is a comprehensive overview of the six reforms contained in MAMBA that would upgrade Qualified Small Issue Manufacturing Bonds as well as First-Time Farmer Bonds.
Read a Summary of H.R. 5422
View H.R. 5422 on Congress.gov
+ 1. Expand the definition of “manufacturing facility”
Expands the IRC definition of “manufacturing facility” to include a facility that is used in the creation or production of intangible property.
Current federal law defines a “manufacturing facility” as one that produces tangible property. However, manufacturing processes, production, and technology have changed significantly since this definition was established. Today’s manufacturers encompass more modern, high-tech, and intangible manufacturing practices such as bio-technology, energy generation, food processing, software, design and formula development, and intellectual property. CDFA proposes expanding the definition of manufacturing, which would enable small issue manufacturing bonds to support manufacturers that produce software, patents, copyrights, formulas, processes, designs, patterns, know-how, format, and similar intellectual property. The expanded definition would align the growing high-tech manufacturing sector with the tools necessary to finance industry growth and expansion, making an immediate impact nationally on job creation and manufacturing investment.
+ 2. Eliminate restrictions on “directly related and ancillary facilities”
Modifies the IRC definition of “manufacturing facility” to include a facility that is functionally related, subordinate to, and located on the same site as a facility used in the manufacturing or production of tangible personal property or in the creation or production of intangible property.
The current usage of small issue manufacturing bonds is limited to the financing of facilities that house the production of tangible property, and that are directly related and ancillary to a manufacturing facility. A directly related and ancillary facility is defined as being located on the same site as the manufacturing facility, and not more than 25 percent of the net proceeds of a bond issuance can be used to provide such facilities. Facilities such as offices, locker rooms, and cafeterias are deemed “directly related and ancillary facilities” and thus are limited to a 25% use of net bond proceeds requirement. While a sound idea in theory, in practice the restriction on financing directly related and ancillary facilities has hindered the use of the tool for small-to-mid-sized manufacturers. Eliminating financing restrictions on directly related and ancillary facilities, and allowing manufacturing bonds to finance all facilities that are functionally related and subordinate to a manufacturing facility, will significantly improve the usability of the tool.
+ 3. Increase the maximum IDB size limitation from $10 million to $30 million
MAMBA increases the maximum manufacturing bond size limitation from $10 million to $30 million (adjusted annually for inflation).
The decision to increase the maximum bond size limitation from $10 million to $30 million is based on several issuer and industry surveys conducted by the Council of Development Finance Agencies. Issuers in every U.S. state have informed CDFA that most projects demand a total issuance amount of between $15 and $30 million. The $10 million limit on bond issuance is forcing many issuers to forgo the financing of worthwhile projects, hurting local economies. Additionally, in today’s terms the $10M bond size limit that was established in 1979 has less than a third of the financing power that it had when the limit was set in 1979. Increasing the maximum bond size limit to $30 million would remedy the problem of reduced financing power.
+ 4. Increase the limitation on small issue bond proceeds for first-time farmers
The bill increases the amount of bond proceeds that may be used by a first-time farmer to acquire land for farming purposes from $450,000 to $552,500 (adjusted annually for inflation).
The IRC provides that no more than 25 percent of bond proceeds may be spent on land acquisitions, and that no portion of bond proceeds may be used for the acquisition of land for farming purposes. However, the IRC provides an exception to this rule for land acquisitions by first-time farmers. The IRC states that the maximum issuance amount that can be used for farming purposes is $450,000. The $450,000 amount was set in the 2007 and indexed to inflation. The proposed increase to $552,500 would bring the total issuance amount stated in the IRC in line with the current issuance limitation.
+ 5. Repeal the separate dollar limitation on the use of bond proceeds for depreciable property
MAMBA repeals the separate dollar limitation on the use of bond proceeds for depreciable property.
First-time farmers that gain access to small issue bond proceeds can currently only use $62,500 of those proceeds for used depreciable property and $250,000 for existing buildings, farm improvements, and/or new depreciable agricultural property. Given the numerous restrictions that already apply to the usage of small issue bonds by first-time farmers, the separate dollar limitation is overly restrictive and has turned-off many would be farmers to the agriculture industry. By eliminating the separate dollar limitation, first-time farmers would have the freedom to use the entire $552,500 issuance for farming equipment, breeding livestock, and other capital assets essential to farming operations.
+ 6. Modify the definition of “substantial farmland”
MAMBA modifies the definition of “substantial farmland” to determine farm size by reference to the average – instead of median – size of a farm in the county in which the farm is located.
The 2014 Farm Bill changed the ownership limitation of a qualified beginning farmer to someone whose land ownership does not exceed 30 percent of the average acreage in a given county. Previously, the ownership limitation was defined as land ownership not exceeding 30 percent of the median county acreage. For reasons explained in the following paragraph, the change from median to average is beneficial to beginning farmers. However, the IRC still defines first-time farmers (equivalent to beginning farmers) as individuals owning less than 30 percent of the median county acreage. Most loans to first-time farmers combine the proceeds of a small issue bond issuance with a loan from the USDA Farm Services Agency (FSA), yet the 2014 Farm Bill changed how the FSA defines beginning farmers. The differing definitions impedes the ability of lenders to combine small issue bonds with FSA loans, limiting the availability of affordable capital for first-time farmers. By bringing the IRC land ownership definition in line with the FSA definition, small issue bonds can once again become a usable financing tool for first-time farmers.
Alongside the obvious need for technical alignment between the FSA and IRC definitions, the rapid growth of hobby farms (small farms operated for pleasure rather than for primary income) over the last decade strengthens the argument for changing the IRC definition of substantial farmland. The rapid growth of hobby farms has skewed the median size of substantial farmland downward, making it harder for first-time farmers to access small issue bonds. Changing the definition of substantial farmland to 30 percent of the average size instead of median would correct this problem. The enormous size of certain industrial farms (ranging from several hundred to several thousand acres) will generally skew the definition of substantial farmland upward, so long as the average size is used instead of median size.
MAMBA is currently endorsed by hundreds of development finance agencies, private sector participants, and key industry stakeholders including the
National Council of State Agricultural Finance Programs and the
National Association of Bond Lawyers. Hear what others have to say:
“As President of the National Council of State Agricultural Finance Programs, I fully support the amendments proposed in bill H.R. 5422. Increasing the dollar amounts and the repeal of the used farm equipment restriction would be of great benefit to first-time farmers. In this tough farm economy, our young farmers need all the opportunities to financing options that they can find.”
- Ryan Roles, President, National Council of State Agricultural Finance Programs,
and Senior Loan Officer, Minnesota Rural Finance Authority
"Tax-exempt financing has been used as a tool to encourage new manufacturing facilities. The current rules for small issue manufacturing bonds have some cumbersome provisions. We believe that an expanded use of this category of bonds will increase employment and manufacturing in the United States. This proposal reduces some of the impediments to the use of small issue manufacturing bonds."
- National Association of Bond Lawyers
“These proposed changes will make a big difference to businesses in Florida. These provisions would help many American small manufacturers and first-time farmers receive the financing they need to grow, create more jobs for Floridians, and build a strong local economy. The Florida Development Finance Corporation supports these proposed amendments and hopes for bi-partisan support to pass these much-needed improvements."
- Bill Spivey, Executive Director, Florida Development Finance Corporation
“America needs low-cost and efficient twenty-first-century financing tools to help our small manufacturers and small farmers compete in world markets as well as to grow the number of quality American middle-class jobs that these employers support,” said Illinois Finance Authority Executive Director Chris Meister. “In Illinois, we know, first-hand, the power of federally tax-exempt manufacturing and farmer bonds – proven and effective private-public tools – to spur essential capital investment and to create jobs. The Modernizing Agricultural and Manufacturing Bonds Act (“MAMBA”) reinvigorates these tools by substantially updating federal manufacturing and farmer finance law for the first time in decades in order to reflect the American economy of 2020, not the 1970s. We thank United States Representatives Stephanie Murphy (FL-7) and Darin LaHood (IL-18) for their bipartisan work to bring manufacturing and farm finance into the twenty-first century through the introduction of MAMBA in the 116th Congress.”
- Chris Meister, Executive Director, Illinois Finance Authority