Bond Financing as an Option
By Dennis Winkler
Ifyou are a 501(c)(3) organization in need of funding for capitalimprovements and expansion, consider using bond financing to meet yourneeds. Bond financing can be used for items including land,construction costs, furniture, or other equipment used for charitablepurposes. At least 95 percent of the financed money must be used fornot-for-profit purposes in order to qualify. Generally, bond financingis undertaken for larger transactions, usually $15 million or greater,and may offer considerable flexibility in terms of structuring.
Why use bond financing?
Themain advantage of using bond financing for capital improvements andexpansion is the low interest rate that the not-for-profit receives.This may help the organization to keep their endowment fund intact (andearning interest), to get their capital expenditures done now, and havethe bond repaid with future funds (from a capital campaign, forexample). The organization is also generally able to prepay the bondupon giving a 30-day notice.
So what is the catch?
Whilethe organization does receive a lower interest rate, there is a littlemore work that needs to be done for bond financing. On average, theentire transaction can take six to eight weeks to complete, with all ofthe paperwork and approval processes. Also, if the bond is sold to thepublic a document of disclosure must be prepared. The upfront costs inusing a bond are usually higher than a conventional loan. And as withany loan there are risks, including the possibility that the capitalcampaign will fall short, among others.
Bond financing isnormally backed by the organization’s credit and any credit enhancementthat it furnishes. Organizations commonly utilize bank letters ofcredit or other forms of credit enhancements such as bond insurance toback the bonds, since investors then rely on the enhancer’s financialstrength and not the organization’s. This ensures that the bonds can bereadily sold to third parties.
How do I begin?
Toobtain this bond financing, an organization must first locate ataxexempt issuer such as a local government entity or developmentauthority. The desires of the parties and local requirements determinethe form of the transaction. As with all significant financialtransactions, it’s strongly recommended that you consult your financialadvisor and legal counsel when considering bond financing.
