Recovery Zone Facility Bonds
Only a state, tribal, or local government—or an economic or industrial development authority authorized by a state or local government unit to issue bonds—can issue a tax-exempt Recovery Zone Facility Bond (RZFB). Neither a bank nor a borrower can issue debt on its own and qualify it as tax-exempt debt.
Recovery Zone Facility Bonds may be issued only in 2009 and 2010.
The governmental issuer typically loans the proceeds of the bonds to a business, passing on the lower interest rate. Tax-exempt bonds may be issued for 120% of the average useful life of the capital investment, and it may also be possible to issue tax-exempt bonds to finance nearly 100% of the transaction.
Retail, commercial, industrial, manufacturing, and agricultural businesses qualify. Certain business activities are not qualified to use Recovery Zone Facility Bond financing, including businesses that rent residential rental property (defined as a project where 80% or more of the gross rental income is derived from the rental of dwelling units), country clubs, massage parlors, hot tub facilities, suntan facilities, golf courses, racetracks, or gambling facilities.
Bond proceeds can be used to construct a building, renovate an existing building or equipment, acquire new equipment or a new building not yet placed in service by another taxpayer, and acquire used equipment not previously used in the Zone. However, bond proceeds can be used to acquire an existing building only if an amount equal to 100% of the adjusted basis of the property or $5,000, whichever is greater, is spent to recondition or rehabilitate the building within a 2-year period. Until further guidance from the Internal Revenue Service, proceeds cannot be used to acquire land.
All projects must be located in a designated recovery zone. Recovery zones include (a) any area designated by an issuer as having significant poverty, unemployment, home foreclosures, or general distress; (b) existing empowerment zones or renewal communities; and (c) areas designated by an issuer as distressed by reason of the closure or realignment of a military installation pursuant to the Defense Base Closure and Realignment Act of 1990. Many localities have designated entire jurisdictions (counties, etc.) as recovery zones.
Application to Energy Financing Programs
Recovery Zone Facility Bonds may provide funding for projects to be owned by a public entity or may also be used for similar projects owned by or for the direct benefit of private parties.