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Industrial Development Bonds

May 17, 2010

California cities, counties and state government have the authority to offer low interest financing to businesses locating in their communities through the use of tax-exempt industrial revenue bonds. An eligible bond project can be the construction of a new plant, or replacement of all or part of an existing plant. Industrial activities eligible for financing include assembly, fabrication, manufacturing and processing.

The primary advantage of industrial development bonds is that the financing provided bears an interest rate significantly lower than conventional methods (the lower interest rate is the result of the tax exempt status of the securities), the bonds are long term 15-30 years maturity, and are assumable.

Companies taking advantage of industrial bond financing receive approval for a project through a local industrial development authority or the California Economic Development Financing Authority. The authority makes findings regarding eligibility and public benefits pertaining to the project before authorizing the tax-exempt status of the bonds.

To qualify for industrial development bonds a borrower needs to meet certain eligibility criteria: 1) the firm must be engaged in a manufacturing, processing or value-added industry, 2) the total project cost should be at least $1 million and may not exceed $10 million, 3) the borrower must secure a standby letter of credit for 100 percent of the issue value from a bank with a substantial credit base, 4) the capital expansion must provide a public benefit such as creating new jobs; and 5) the project must have city or county support.

The proceeds from a bond issue can be used to pay for virtually all costs incurred by the company for its project including the financing of land acquisition, building construction, machinery and equipment, and other incidental costs as well as all expenses associated with the financing and issuance of the bonds. In addition, 5 percent of the net proceeds of the bond sale can be set aside for the working capital needs of the business.

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