Why No One Uses ARRA Bonds

Over the last six months, I’ve seen numerous marketing packets (mostly from law firms) advertising professional expertise to help owners/developers of real estate to get financing through ARRA bonds.  Curiously, in spite of all this marketing, I have yet to hear of a private development project in my local market that successfully secured ARRA bond financing.  I think the reason for this is that no matter how savvy you are when it comes to low-cost government subsidized financing, there is simply too much luck involved in issuing ARRA bonds.  And as far as I remember, none of the law firms whose marketing packages I’ve seen had “Luck” as an area of expertise.

When the American Recovery and Reinvestment Act was passed last year, there was a provision for private developers to take advantage of government subsidized financing through the issuance of Recovery Zone Bonds.  Recovery Zone Bonds come in two varieties: Economic Development Bonds and Facility Bonds.  The Economic Development bonds are meant for projects that deliver public facilities like schools, roads, etc..  The Facility Bonds are meant for projects that will be used privately, but have some benefit to the public at large (airports, power generation, significant green building, etc.).  The most attractive part of these bonds is that after the issuing authority in your state writes these bonds to finance your project, the interest you owe the State is subsidized directly by the Federal Government.  As such, your cost of borrowing as a developer is reduced dramatically.  Moreover, the bonds receive tax-exempt status.  That’s a great incentive, but there’s a reason we haven’t heard of a lot of private developers making use of these bonds.

One of the biggest flaws of these bonds is that a developer has to have the very best timing to take advantage of them.  I’ve been through all of the mumbo jumbo in the U.S. Tax Code that specifies how your Recovery Zone Bonds qualify for federal subsidies and tax exemption, and let me tell you, it’s not easy.  For a project you planned to start in mid-2010, the issuing authority in your state would have to have approved your project by the end of 2009.  Keep in mind that ARRA was passed in April 2009.  Effectively, you had 6 months to learn about the program, hire bond counsel, and get your project through all the necessary approvals.  Approvals does not just mean zoning and permitting, it means that your project also had to pass the issuing authority’s requirement for delivering enough “green” or publicly beneficial infrastructure.  Very few developers, no matter how savvy they are, would have been lucky enough to take advantage of that short window.

Suppose for a minute that a developer was in fact very lucky and the plan for his or her development was so perfectly timed that they were able to qualify for the bond issuance before the end of 2009.  Well, now there’s another layer of luck that is required.  If a state has outstanding federal tax obligations (many of them do) then they are far less likely to actually go through with the process and issue your bonds, in spite of having approved your project.  The reason is because the federal government may decide to withhold the interest subsidies due to the State on your bonds if the State has an outstanding balance with the federal government.  This is a risk no state wants to take.  So, even if you were lucky to get your project approved before the end of ‘09, there’s still a good chance your State will never end up issuing the bond for reasons completely out of your control.  That’s a poorly designed stimulus package if I’ve ever seen one.