The 2009 economic stimulus bill just signed by President Obama should provide an important boost for smaller non-profits seeking to finance capital assets through the use of tax-exempt bonds, as well as for the financial institutions and developers which serve them. The bill suspends, for bonds issued in 2009 and 2010, three rules which inhibited banks from buying and holding tax-exempt bonds directly. These rules had the unintended effect of increasing borrowing costs by forcing most borrowers to either use a cumbersome letter of credit backed mechanism for accessing the tax-exempt market or in some cases to pay higher tax-adjusted interest rates (for bonds purchased directly by a bank). Most of the smaller non-profits which did use tax-exempt debt to borrow did so through (and banked with) the larger “money center” banks which have the capacity to issue investment-grade letters of credit. By increasing the size of "bank qualified" borrowings (which are exempt from certain rules limiting  the deductibility of interest paid on certain deposits by banks which hold tax-exempt bonds) to $30 million per borrower (from the prior $10 million per Issuer), by modifying the two percent (2%) de minimis rule to allow banks to deduct 80 percent of the interest paid on certain deposits deemed used to purchase and carry tax-exempt bonds, and by suspending the corporate alternative minimum tax as it applies to interest received by banks from tax-exempt bonds held by them, the economic stimulus bill encourages banks to purchase bonds directly. By removing barriers to direct bank placement of bonds, the bill will lower the transactions costs or interest rate for those borrowers which can effect direct placements of bonds with banks and thus may increase the effectiveness of tax exempt debt as a tool for smaller transactions and smaller banks.

Moreover, by targeting the smaller (up to $30 million) transactions, these changes in law may make the originating of tax exempt loans particularly attractive to smaller banks, which to date have been largely closed out of the marketplace because they do not issue investment grade letters of credit. These smaller institutions often efficiently serve smaller non-profits and in many cases continue to have the appetite to lend in this cycle, while their larger counterparts are in many cases struggling to lend or to satisfy the demand for credit from existing clients. 

Finally, this development may also be particularly interesting in our region where office condos now proliferate and where the price for such properties matches the transaction size targeted by these changes in the law. Combined with interest rates at or near all time lows, these provisions may in fact provide a useful stimulus for many non-profits, banks and developers and the communities they serve.

For more information, please contact:

Richard A. Newman
newman.richard@arentfox.com
202.857.6170