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Mahopac Volunteer Fire Department Uses Low-Cost Bond Financing to Build a New State-of-the-Art Firehouse

By Eon S. Nichols

What if I told you that for your new capital projects, you could borrow millions with an interest rate under 4.0%? And further, that you would be able to obtain sales tax and mortgage tax savings or exemptions in connection with your capital project? Don’t believe me, ask one of Putnam County, New York’s busiest volunteer fire departments — Mahopac Volunteer Fire Department — which recently borrowed $5.7 million to finance the construction of a new 25,000 square foot firehouse. The new firehouse will include apparatus bays, equipment storage and radio rooms, and a ready room located on the first floor, and, a second floor, which boasts a large meeting hall, kitchen, lounge, offices and a training room. The $5.7 million also provided financing for the purchase of fire trucks and other equipment used by the firefighters.

The Mahopac Volunteer Fire Department used a financing mechanism some have referred to as the “best-kept secret in real estate finance” —Industrial Development Agency (IDA) Bond Financing. IDAs are public benefit corporations, which, by virtue of state and federal law, have the authority to issue and sell tax-exempt and taxable Bonds. IDAs can be found in states and communities throughout the country, although they may be known by other names such as Economic Development Authorities.

The Mahopac Volunteer Fire Department applied to the Putnam County IDA requesting its assistance through the issuance and sale of $5.7 million in Bonds. The proceeds from the sale of the Bonds were used to finance the Volunteer Fire Department’s capital project. Typically, the Bonds are sold on the market to various investors (usually, bond funds and institutional investors). The investors are willing to buy the Bonds for investment purposes because interest on the Bonds are usually tax-exempt (meaning, the interest on the Bonds which a Bond buyer receives as income is not subject to federal, state, or local income tax).

An organization wishing to utilize IDA financing will need to submit an application to the IDA. Prior to submitting an application, the borrower should consult with expert counsel to structure the financing and ensure that IDA bond financing would be beneficial to the borrower. And more importantly, to ensure that the borrower would be permitted to use the IDA as a financing mechanism. The Mahopac Volunteer Fire Department retained Joseph P. Carlucci, Esq. and bond experts from Cuddy & Feder LLP, a law firm based in White Plains, New York to assist them with their bond financing. Cuddy & Feder LLP, which has counseled more than 100 organizations over the past 10 years on bond financings, helped the Mahopac Volunteer Fire Department to work through the transaction, offering guidance and assistance to the Volunteer Fire Department from the IDA application process up and through the closing of the transaction.

In addition, counsel advised the Volunteer Fire Department on some of the intricate rules of IDA financing. Under state and federal law (Internal Revenue Code), manufacturing companies, airport facilities and not-for-profit entities (such as the Volunteer Fire Department), can enjoy tax-exempt bond financing. For profit companies usually cannot enjoy tax-exempt bond financing but may undertake taxable bond financing for capital projects. Although the interest rate on taxable bond financing is slightly higher than tax-exempt bond financing, it is still much lower than a conventional commercial bank loan. The interest rates on tax-exempt and taxable bond financing can be as much as 50% lower.

If, after consultation with counsel, the borrower determines that bond financing would be beneficial, the borrower then selects an investment banker. The investment banker’s role is akin to that of a financial advisor. The investment banker will work with the borrower and the borrower’s counsel to structure the deal and guide the borrower through the financial aspects of the deal. The Volunteer Fire Department used J. Douglas Casey, an investment banker with the investment banking firm of Gates Capital Corporation located in New York City. Gates Capital Corporation helped the Fire Department to “crunch” the numbers, ensuring that the bond proceeds and the Fire Department’s contribution of equity would be sufficient to undertake and complete the project. Gates also helped the Mahopac Volunteer Fire Department to structure the repayment of the bonds (the amount of payments of principal and interest the borrower will make during the life of the Bonds). Bonds can have a term for as long as 30-40 years, a much longer period of time in comparison to a conventional commercial bank loan, which can be a great benefit to a borrower looking to reduce annual debt service.

The investment banker is also responsible for selling the Bonds in the market. In the Mahopac Volunteer Fire Department’s bond financing, Gates did not sell the Bonds in the market because a local bank was willing to purchase the Bonds. Usually, this is not the case. Whether the Bonds are publicly sold in the market, or are privately placed as in this case, the bond financing procedure is similar. The investment banker will also work with the borrower to create a financial package/profile of the borrower, and using that financial package; the investment banker will offer the debt and/or shop around for banks. The reader may question, why are banks involved if this is IDA financing?

When the Bonds are sold in the market, borrowers will usually find it cost-beneficial to have the “credit” of the Bonds enhanced by a letter of credit from a bank, rather than sold on the credit rating of the borrower, if any. The letter of credit issued by a bank will secure and enhance the marketability of the Bonds. The letter of credit is like a guaranty for the investors buying the Bonds because payment of principal and interest on the Bonds are paid by the bank through the letter of credit. The borrower then repays the bank. An investor feels extremely secure in purchasing such Bonds because the payment of principal and interest on the Bonds are guaranteed by the bank; that is, the bank will pay the Bond owners even if the borrower is unable to pay principal and interest on the Bonds.

The security which the letter of credit offers to the Bond holders greatly enhances the marketability of the Bonds, making them easier to sell in the market. As the bank guarantees the payment of the Bonds, the bank will usually want a security interest in the assets of the borrower, typically, a mortgage on real property which the borrower owns. In the Volunteer Fire Department’s case, the firehouse was mortgaged. Because the IDA was involved in the bond financing, the Volunteer Fire Department was exempt from the payment of mortgage recording tax, another great benefit of using the IDA which, in the case of the Volunteer Fire Department Bond issue, would have cost $59,850.

After the borrower submits the application to the IDA and the IDA agrees to issue and sell Bonds to finance the project, the legal work begins. Typically, the IDA will have its own counsel responsible for ensuring that the documents which the IDA signs at closing are in order. There will also be a Bond Counsel who will work closely with the IDA and its counsel. The investment banker will also have its own counsel. The Bond Counsel and the investment banker’s counsel’s duties are to ensure that the issuance and sale of the Bonds are in accordance with applicable state and federal law, that all relevant information is disclosed in a public document provided to Bond purchasers in advance of closing, and most importantly, that the interest on the Bonds will be tax-exempt if tax-exempt Bonds are being issued and sold. Further, due to the complexities and time required to access all information and documents needed for the bond financing, organizations undertaking a bond financing usually find it beneficial to use a consulting firm. In this case, the Volunteer Fire Department used Joel E. Rosenberg, an accountant and consultant with the firm of Price, Rosenberg and Bassik, P.C. That firm offered its consulting as well as accounting expertise to the Mahopac Volunteer Fire Department (handling certain tax issues and document production) to close the transaction in a timely and cost-efficient manner.

The entire process may take up to 3 to 4 months and the costs to the borrower may range from 3% to 5% of the amount of Bonds being issued (up to 2% of the Bond proceeds may be used to finance the cost of the transaction). At first glance, the cost may seem high but the overall savings to the borrower are well worth it when compared to a conventional commercial bank loan – a much lower interest rate which provides a borrower with bottom line savings; a longer repayment term which will lower a borrower’s annual debt service and help the borrower to free-up money to be spent for other purposes.

In addition to the benefits mentioned above, there may be real estate tax abatements, energy costs savings and sales tax exemption. The Volunteer Fire Department was a not-forprofit, and by virtue of that status, they did not have to pay sales tax on the goods and materials bought in connection with their project. Manufacturing facilities and other for-profit entities do not automatically have sales tax exemption; however, if they undertake a project financed by the IDA, they would be able to avail themselves of sales tax exemptions on goods and materials bought in connection with their project.

In comparison to conventional financing, IDA bond financing is a mechanism which offers growing companies, for-profit or non-profit organizations like the Mahopac Volunteer Fire Department, the ability to borrow money to finance capital projects at extremely low interest rates, repayments over very long terms (30 years typically) and provides other savings. The volunteers of the Mahopac Volunteer Fire Department can attest to this low-cost financing mechanism, as they soon will have their state-of-the-art firehouse with efficient and reliable equipment, which undoubtedly will increase their productivity and efficiency and save lives.


Eon S. Nichols, Esq. is an associate at Cuddy & Feder LLP, a law firm based in White Plains, New York.