Business Financing Available Through Tax-Exempt Disaster Relief Bonds

Businesses in Iowa and other Midwestern states affected by the storms and flooding of 2008 can now access tax-exempt financing for many purposes. The financing is available under the Heartland Disaster Tax Relief Act of 2008, which was enacted as part of the recent federal bailout legislation.

The Disaster Relief Act creates a new category of tax-exempt bonds called "qualified disaster bonds." The state of Iowa has been allocated $2.6 billion of bonds to issue for these purposes—all of which must be issued before January 1, 2013. For private companies affected by the natural disasters, the use of qualified disaster bonds creates a significant economic incentive to acquire, build or replace facilities located in the disaster region.

Through this act, the federal government allows companies to use proceeds from disaster bonds to finance a wide array of projects on a tax-exempt basis.

What Are the Advantages of Using Tax-Exempt Bonds?

There are significant advantages to using tax-exempt bonds, such as disaster bonds, rather than other means of financing. Interest on such bonds is exempt from federal taxes; therefore, borrowers can finance at a lower interest rate than would be available using traditional taxable debt. As an added benefit, interest from qualified disaster bonds is not an item of tax preference for purposes of the federal alternative minimum tax, resulting in even lower market interest rates than certain other categories of tax-exempt bonds.

What Can the Proceeds From Disaster Bonds Be Used to Finance?

Proceeds from tax-exempt bonds can be loaned by government units to private entities. Generally, however, the proceeds from such bonds can be used by private industry for limited purposes including small manufacturing facilities, solid waste disposal facilities and certain other limited uses.

The Disaster Relief Act provides additional eligible categories for projects in the designated disaster region —significantly broadening opportunities to use tax-exempt financing. For example, allowable uses for disaster bonds may include acquiring, rebuilding and replacing agricultural facilities, manufacturing facilities, retail businesses, office buildings, warehouses and storage facilities. In addition, disaster bonds can be used to finance multifamily and single family housing and certain regulated utilities.

The key eligibility requirement under the Disaster Relief Act is that that at least 95 percent of the net proceeds of the disaster bonds must be used to finance the cost of acquisition, construction, reconstruction or renovation of depreciable real property where either (i) the person using the property suffered a loss in trade or business attributable to the flooding, tornadoes or storms of 2008 or (ii) the cost is incurred by a person designated by the state of Iowa as a person carrying on a trade or business replacing a trade or business.

Other Uses of Bond Proceeds

In addition to the uses identified above, the Disaster Relief Act authorizes the issuance of disaster bonds to finance residential development under relaxed restrictions and for the costs to repair certain public utilities.

Is This Relief Available Only in Iowa?

No. The Disaster Relief Act authorizes several Midwestern states to issue up to $13 billion of bonds to finance eligible projects in counties declared major disaster areas by President George W. Bush between May 1 and August 1.

In addition to Iowa, the Disaster Relief Act covers projects in areas of Arkansas, Illinois, Indiana, Missouri, Nebraska and Wisconsin.

Which Iowa Counties Are Included in the Disaster Area?

Seventy-eight of Iowa's 99 counties have been designated as part of the disaster area, therefore, proceeds of disaster bonds can be used to finance projects in any of these counties. Counties designated as part of the disaster area and, therefore, eligible for the program can be viewed on the Federal Emergency Management Agency Web site.

What Are the Restrictions on Use of Disaster Bond Proceeds?

There are certain restrictions—pursuant to state and federal rules—on how the bond proceeds can be spent. For example, the proceeds cannot be used to finance facilities such as golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, gambling facilities or liquor stores. In addition, there are restrictions on the percentage of bond proceeds that can be used for the acquisition of land and buildings and for the costs of issuing the bonds.

What Agency Will Administer the Disaster Relief Program in Iowa?

In Iowa, the program is being administered by the Iowa Finance Authority (IFA).

IFA is in the process of developing administrative regulations regarding the application process. These regulations are expected to be available by mid-December. The Disaster Relief Act does not place caps on the amount of disaster bond proceeds that can be used for any single project, but IFA may provide more guidance on this aspect of the program when it finalizes its regulations. The disaster bonds will be allocated to uses on the basis of order of need under the terms of an executive order issued by Gov. Chet Culver.