Transcript Document
Variable Rate Demand Bond Program
Prepared for
Goodwill Industries of Lower South Carolina
Morgan Keegan & Company, Inc.
170 Meeting Street Charleston, South Carolina 29401 (843) 534-2324
January 6, 2004
Variable Rate Demand Bond
Reimbursement for principal and interest drawn under Letter of Credit
Borrower (Goodwill Industries) Letter of Credit Bank
Letter of Credit to pay principal and interest on Bonds. Also, if borrower defaults or if remarketing fails.
Issuer (JEDA)
Issues and sells Bonds to Placement Agent Principal and Interest on Bonds
Placement Agent and Remarketing Agent (Morgan Keegan)
Sell Bonds Periodic Put of Bonds
Trustee Investors
1
Historic Comparison of Short-Term Rates
2
Investment Banking and Legal Costs
(Assuming $7.5 million transaction)
Initial Fees 1
Underwriting Fee (3/4%)
2
Bond Counsel Placement Agent & Bank Counsel
3
Credit Rating (on letter of credit bank) Trustee Printing & Miscellaneous
Total
Annual Fees
Remarketing (12.5 basis points on outstanding principal)
4
Rating Surveillance Fee (if rated) Trustee Annual Fee
Total
2 3 4 1
Does Not Include Counsel to Goodwill Equates to $7.50 per $1,000 for 7-day variable rate issue Plus out-of-pocket expenses Based on an original principal amount of $7.5 million
7-Day Variable Rate Issue
$
$ 56,250 30,000 25,000 13,500 2,500 5,000
132,250
7-Day Variable Rate Issue
$ 9,375 2,000 2,500
$ 13,875
3
Variable Rate Demand Bond
Variable Rate Demand Bond Calculation of "All-In" Ongoing Costs
Annual Costs
Five Year Average Interest Rate on Bonds
2
Letter of Credit Fee
1
Remarketing Fee Trustee and Miscellaneous
TOTAL Rate
2.51 % 1.00
.125
.05
3.685
1
The five year average rate is 2.51%. Currently VRDB rates are approximately 1.11%
2
This fee will be determined through negotiation with the letter of credit bank. The 1.00% fee shown is only an estimate.
4
Documentation
•
Indenture of Trust Agreement and Form of Bond
To be supplied by Bond Counsel
•
Loan or Lease Agreement
Between Issuer and the Borrower
•
Letter of Credit
From LOC Bank to the Trustee
•
Reimbursement Agreement
Between LOC Bank and the Borrower
•
Placement and Remarketing Agreement
Between Morgan Keegan and the Borrower
•
Official Statement (Prospectus)
Describing the structure and terms of the transaction
5
Key Steps
1.
2.
Engage Underwriter/Financial Advisor and Bond Counsel.
Need “Reimbursement Resolution” adopted by Goodwill Board of Directors.
3.
Application to South Carolina Jobs – Economic Development Authority for Conduit Financing. Hold Public Hearing re: Issuance of Bonds.
4.
Request Letter of Credit Proposals.
5.
Approval by South Carolina Budget and Control Board.
6
Points of Contact
Charleston, South Carolina
Morgan Keegan
George B. Pugh, Jr.
Managing Director
Morgan Keegan & Company, Inc.
170 Meeting Street Charleston, South Carolina 29401 Phone 843.534.2324 Fax 843.534.2373
Morgan Keegan
Jennifer F. Mills
Associate Vice President
Morgan Keegan & Company, Inc.
170 Meeting Street Charleston, South Carolina 29401 Phone 843.534.2327 Fax 843.534.2373
7
501(c )(3) Tax-Exempt Bonds
TAX-EXEMPT BONDS FOR 501(c)(3) ORGANIZATIONS
Copyright © 2004 ALL RIGHTS RESERVED HAYNSWORTH SINKLER BOYD, P.A.
8
501(c )(3) Tax-Exempt Bonds
Introduction
This memorandum provides an overview of bond financing for a Section 501(c)(3) nonprofit organization, such as a YMCA, a school or a retirement center, in South Carolina and highlights the basic facts and concepts in simple terms. Nonprofit organizations interested in pursuing bond financing should contact Haynsworth Sinkler Boyd, P.A. with respect to the specific transaction under consideration.
Organizations that are exempt from Federal income taxation under Section 501(a) of the Internal Revenue Code are commonly referred to as “501(c)(3) organizations”. These organizations are generally permitted to take advantage of tax-exempt bond financing to fund capital improvements.
In South Carolina, the South Carolina Jobs-Economic Development Authority (“JEDA”) issues bonds for the financing of a project for a 501(c)(3) organization.
The proceeds from the sale of the bonds are loaned to the 501(c)(3) organization which agrees to repay the loan, which is equal to the principal and interest on the bonds. Because the bonds are issued by a governmental entity, such as JEDA, the purchaser of the bonds may exclude the interest thereon from gross income for federal tax purposes, as well as exclude the interest from income taxation under South Carolina tax law. Such “tax exemption” results in an interest rate on the bonds that is substantially below prime and provides qualified nonprofit organizations the opportunity to undertake projects without paying the higher costs of traditional debt financing.
Inducement
A 501(c)(3) organization considering utilizing 501(c)(3) financing must first complete a JEDA application. If the application is completed to the satisfaction of JEDA, then JEDA adopts an inducement resolution which indicates JEDA’s agreement to issue bonds provided satisfactory financial commitments are in place.
A 501(c)(3) organization should
not
acquire or enter into any contractual obligations with respect to the purchase of any real or personal property before a reimbursement resolution is also obtained from its governing board. To enter into contractual obligations with respect to a project before the 501(c)(3) organization’s board adopts a reimbursement resolution may preclude or severely limit the use of 501(c)(3) bond financing. Haynsworth Sinkler Boyd, P.A., as bond counsel, assists with preparing the inducement resolution for JEDA as well as the reimbursement resolution for the Board of the 501(c)(3) organization.
Facilities Which Qualify for Financing
Most of the limitations regarding 501(c)(3) financing are found in the federal tax law, primarily the Internal Revenue Code of 1986, as amended. The Internal Revenue Code restricts the use of 501(c)(3) financing to organizations that have been recognized as a Section 501(c)(3) organization through a private determination letter from the Internal Revenue Service issued pursuant to an Application for Recognition of Exemption filed on IRS Form 1023.
For a bond to be treated as a qualified 501(c)(3) bond, certain requirements set by the Internal Revenue Code must be met. First, the property to be financed with bond proceeds must be owned by a 501(c)(3) organization or by a governmental unit. Secondly, at least 95% of the bond proceeds must be used by a 501(c)(3) organization in furtherance of the organization’s exempt purpose or by a governmental unit. Thirdly, for an organization’s activity to be deemed exempt, the activity must be substantially related to the exercise or performance of the organization’s exempt purpose.
Tax-exempt bonds may be used by a 501(c)(3) organization for the acquisition of land, the construction or renovation of buildings, and the acquisition of machinery, equipment or other fixed assets. 501(c)(3) organizations within South Carolina have used tax-exempt bonds to build fitness centers, tennis courts, swimming pools, athletic fields, children’s playgrounds, locker rooms, childcare facilities and to acquire fitness equipment. The financing has also allowed 501(c)(3) organizations to make extensive improvements to existing facilities.
Copyright © 2004 ALL RIGHTS RESERVED HAYNSWORTH SINKLER BOYD, P.A.
9
501(c )(3) Tax-Exempt Bonds
In order to use tax-exempt bonds for a fitness or wellness center, the center must be substantially related to a 501(c)(3) organization’s exempt charitable purpose and cannot constitute an unrelated trade or business. The establishment of a fitness or wellness center must also help to accomplish the exempt goals of the 501(c)(3) organization. In order to accomplish those goals, the membership fees charged for use of the fitness or wellness center cannot be so high as to preclude the general community from using the center.
For example, an organization cannot charge membership fees that are high enough to restrict participation in the program to a limited portion of the community.
Community wellness programs should also be available.
501(c)(3) Bonds – Structure
A 501(c)(3) organization must agree to make loan repayments in amounts sufficient to pay debt service on the bonds. All debt service is paid by the 501(c)(3) organization. Funds may be made available to the 501(c)(3) organization through fundraising campaigns. If fundraising campaigns are used, the 501(c)(3) organization should carefully consider the wording used in fundraising solicitations in order to maximize flexibility in determining which projects can be financed with tax-exempt bonds. For example, if funds are earmarked for a specific purpose, issues may arise if the 501(c)(3) organization attempts to use the earmarked contributions to finance other expenses. If the bonds are to be repaid with pledges, the pledges must be used to pay the debt service on the bonds.
In addition to the loan agreement between JEDA and the 501(c)(3) organization, there is usually a bond indenture between JEDA and either a bank which purchases the bonds for its portfolio or, more commonly, a corporate trustee for the benefit of the bondholders. The terms of the bonds are set forth in the bond indenture. In both cases a bank usually holds the proceeds from the sale of the bonds in a construction fund. Such bank, upon approval by the 501(c)(3) organization, disburses the proceeds for the cost of the project.
Tax-exempt bonds may be publicly sold or privately placed. Where bonds are publicly distributed, as is the case with most 501(c)(3) organization bond issues, a commercial bank usually provides credit enhancement by issuing a letter of credit which secures the bonds. The letter of credit serves as a guarantee. The use of this credit enhancement results in the bonds being rated at the credit rating of the bank issuing the letter of credit. Where there is a letter of credit, the 501(c)(3) organization enters into a reimbursement agreement whereby the 501(c)(3) organization agrees to reimburse the bank for any draws under the letter of credit.
There is considerable flexibility and room for negotiation of the terms between the 501(c)(3) organization and the bank or purchaser. The repayment schedule for the bonds can be tailored to the requirements of the 501(c)(3) organization. The term of the bonds usually ranges from 15 to 25 years.
501(c)(3) Bonds – Structuring with a Capital Campaign/Endowment
In a 501(c)(3) financing, the organization must agree to make loan repayments to JEDA in amounts sufficient to pay debt service on the bonds. Funds often are made available to the organization through fundraising campaigns. If fundraising campaigns are used, the organization should carefully consider the wording used in fundraising solicitations in order to maximize flexibility in determining which projects should be financed with tax-exempt bonds. For example, if funds are earmarked for a specific purpose, issues will arise if the organization attempts to use the earmarked contributions to finance other expenses. If the bonds are to be repaid with pledges or there otherwise exists a sufficient nexus, the pledges must be used to pay the debt service on the bonds within 13 months of receipt. This requirement dictates that the organization strongly consider variable rate debt structure as opposed to fixed rate debt structure during the time capital campaign receipts may be received or enter into a fixed rate swap for only the portion of the debt that will not realistically be paid with campaign receipts.
Copyright © 2004 ALL RIGHTS RESERVED HAYNSWORTH SINKLER BOYD, P.A.
10
501(c )(3) Tax-Exempt Bonds
This presents the development department of the institution with a challenge since it’s generally easier to raise funds to construct a facility than to pay for operational expenses.
In the event that the 501(c)(3) organization needs to commence the project prior to completion of the bond process, it may use its own funds or secure interim bank financing before the bonds are issued. The organization can then be reimbursed for these expenses or pay the interim bank loan with proceeds of the bonds. However, the reimbursement resolution adopted by the Board of the 501(c)(3) organization must be in place as discussed above before the expenditures are incurred, and the bonds must be issued within 18 months after the later of the date a project is acquired or placed in service.
Procedure
(1) The 501(c)(3) organization retains Haynsworth Sinkler Boyd, P.A. as bond counsel.
(3) (4) (2) Bond counsel and the 501(c)(3) organization review the 501(c)(3) organizations plans.
The 501(c)(3) organization completes the JEDA application and forwards it to bond counsel for review and transmittal to JEDA.
JEDA adopts the inducement resolution.
(5) (6) The 501(c)(3) organization Board adopts a reimbursement resolution.
The 501(c)(3) organization negotiates with a financial institution for the sale of the bonds via a public sale or private placement. The 501(c)(3) may wish to utilize an underwriter or placement agent to assist in the sale of the bonds. Most local banks can also assist in this process.
(7) (8) (9) (10) (11) organization Bond counsel, counsel for the 501(c)(3) organization, and counsel for the trustee or purchaser of the bonds meet, often via telephonic conference call, to finalize the terms of the bonds.
JEDA adopts a resolution authorizing the submission of a petition to the State Budget and Control Board requesting approval of the bonds to finance the project.
JEDA reviews the proposed bond documents.
A public hearing is held before the city or county council where the project is located at least 15 days after giving published notice of the proposed bond financing.
The closing takes place at an agreed upon place, at which time all documents are executed and the bonds are paid for and delivered to the purchaser.
Once a commitment letter is accepted by the 501(c)(3) organization, the bond issue can be closed within a 60- to 90-day period.
An Additional Federal Limitation
The Internal Revenue Code restricts the weighted average maturity of the bonds to 120% of the weighted average economic life of the facilities being financed and prohibits taking accelerated depreciation for property financed with 501(c)(3) bonds. Generally, cash certificates of deposit or taxable securities may not be pledged as security for tax-exempt bonds or in connection with a letter of credit issued to secure 501(c)(3) bonds.
Fees
The administrative fees are payable to JEDA on the date the bonds are issued and the proceeds are available to the 501(c)(3) organization. The current fees are as follows: Copyright © 2004 ALL RIGHTS RESERVED HAYNSWORTH SINKLER BOYD, P.A.
11
501(c )(3) Tax Exempt Bonds
SOUTH CAROLINA JOBS-ECONOMIC DEVELOPMENT AUTHORITY
The following fees are in addition to the $500 application fee
STANDARD FEE SCHEDULE For All Bond Issues Under $10,000,000 (Amended 8/16/2000 by JEDA BOARD) Authority Fee Amount of Bond Issue* Not Exceeding: $ 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 $ 3,500 3,500 3,750 5,000 6,250 7,500 8,750 10,000 11,250 12,500
Amounts over $10,000,000 will be charged 1/8 of 1.0%
JEDA charges an application fee of $500, due at the time of inducement, with the bond fee balance payable at closing. If there is not a letter of credit, JEDA charges an additional fee to undertake “due diligence” with respect to the creditworthiness of the borrower.
The 501(c)(3) organization is also responsible for fees of bond counsel, any lender or underwriter, any remarketing agent, any trustee, its own counsel, and counsel to any other professionals and their expenses in connection with issuing the bonds. No more than 2% of the bond proceeds may be used to pay issuance costs for tax-exempt transactions, exclusive of the letter of credit fee.
Function of Bond Counsel
Bond counsel acts as an independent expert whose primary responsibility is to render an objective legal opinion with respect to the authorization and issuance of the bonds. Unless engaged in a separate capacity in addition to its role as bond counsel, bond counsel does not advocate the interests of the 501(c)(3) organization or any other party to the transaction. JEDA, the 501(c)(3) organization and other parties should be represented by their counsel in negotiating the terms of the financing.
For further information, please contact:
Jeremy L. Cook,
Charleston
(843) 724-1117 [email protected]
Copyright © 2004 ALL RIGHTS RESERVED HAYNSWORTH SINKLER BOYD, P.A.
12
Debt Service Schedule
Preliminary $7,500,000 G oodwill Indus tries of Lower S outh C arolina, Inc. New Money - 25 Year Is s ue - Variable R ate As s umes 5.0% Interes t R ate De bt S e rv ice S che dule Date 02/01/2004 02/01/2005 02/01/2006 02/01/2007 02/01/2008 02/01/2009 02/01/2010 02/01/2011 02/01/2012 02/01/2013 02/01/2014 02/01/2015 02/01/2016 02/01/2017 02/01/2018 02/01/2019 02/01/2020 02/01/2021 02/01/2022 02/01/2023 02/01/2024 02/01/2025 02/01/2026 02/01/2027 02/01/2028 02/01/2029 Total Princ ipal 155,000.00
165,000.00
175,000.00
185,000.00
190,000.00
200,000.00
210,000.00
220,000.00
230,000.00
245,000.00
255,000.00
270,000.00
280,000.00
295,000.00
310,000.00
325,000.00
345,000.00
360,000.00
380,000.00
400,000.00
415,000.00
440,000.00
460,000.00
485,000.00
505,000.00
$7,500,000.00
Coupon 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% 5.000% Inte re s t 375,516.51
367,250.00
359,000.00
349,767.59
341,469.68
331,500.00
321,500.00
310,571.65
300,413.21
288,500.00
276,250.00
263,137.07
250,344.34
236,000.00
221,250.00
205,466.61
189,761.01
172,250.00
154,250.00
135,063.72
115,408.74
94,500.00
72,500.00
49,431.83
25,284.78
$5,806,386.74
Total P+I 530,516.51
532,250.00
534,000.00
534,767.59
531,469.68
531,500.00
531,500.00
530,571.65
530,413.21
533,500.00
531,250.00
533,137.07
530,344.34
531,000.00
531,250.00
530,466.61
534,761.01
532,250.00
534,250.00
535,063.72
530,408.74
534,500.00
532,500.00
534,431.83
530,284.78
$13,306,386.74
Yie ld S ta tis tic s B ond Y e ar Dollars .......................................................................................................................................................................................
Ne t Inte re s t Cos t (NIC).................................................................................................................................................................................
2004 - New - VDRN - 01.05 | SINGLE PURPOSE | 1/ 5/ 2004 | 4:24 PM
Morgan Keegan & Company, Inc.
Fixed Income Banking Page 1 13