PIDC Background

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PIDC Background

• Non-profit founded in 1958
• Joint venture between the City of Philadelphia
  and the Greater Philadelphia Chamber of Commerce
• Implementer of the Citys economic development
  initiatives
• Staff of approximately 50
• Activities focused around two primary products
  Financing and Real Estate

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Real Estate Services

• Land assemblage and sales
• Operate/manage industrial parks
• Operate/re-develop Philadelphia Navy Yard
• Conduct commercial real estate sales for the City
• Developer selection

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Financing Services

• Loan programs
• State and local grants
• Tax-exempt bond financing
• Significant emphasis on non-profit organizations
• Manage the Philadelphia Authority for Industrial
  Development (PAID)
• Have completed over 600 transactions totaling
  over 2 billion in the last five years

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Financing Overview

• Non-profits typically borrow to

• Manage uneven cash flow
• To bridge a fund raising initiative
• To acquire or merge with another organization
• To finance a major capital project
• Refinance previously issued debt
• To replace a lease expense with lower cost debt
  service

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Financing Overview

• Cash flow borrowing is typically funded with a
  taxable line of credit.
• Tax-exempt financing is available to 501 (c) 3
  organizations for eligible projects. Eligible
  projects are usually for capital expenditures
  with a long, useful life. However, some cash
  flow borrowing can be financed tax-exempt.
• Encourage all non-profits that are considering a
  borrowing to consult with a bond counsel firm to
  determine if a project is eligible for tax-exempt
  financing.
• The remainder of this presentation will focus on
  tax-exempt financing.

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Projects Potentially Suitable for Tax-exempt
Financing

• Existing debt should be evaluated for potential
  refinancing and/or restructuring. Objectives
  should be to separate cash flow and capital
  borrowings and to utilize tax-exempt financing
  where possible to
• Reduce interest expense
• Generate cash flow savings from appropriately
  matching assets and liabilities
• Evaluate leased facilities to see if
  ownership/debt financing results in savings

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What Are Tax Exempt Bonds?

• Tax exempt bonds are simply a loan that is sold
  to the general public.
• The creditors who make the loan (bondholders)
  do not have to pay tax on the interest they
  receive. It is exempt from federal income taxes.
• Tax exempt bonds can be structured as fixed rate
  bonds or variable rate bonds.
• Fixed rate bonds have interest rates that
  are set to maturity.
• Variable rate bonds have interest rates
  that fluctuate on a periodic basis (typically
  weekly).

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What are Tax Exempt Bonds?

• Borrowings of less that 10 million can be
  bank-qualified
• Bank qualified bonds benefit small borrowers
• Typically privately placed to commercial banks
• Trade refinancing flexibility for lower rate

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Advantages of Tax Exempt Bonds

• Lower interest rates than conventional
  financing options
• Interest is tax-exempt, therefore the federal
  government is subsidizing the bondholders
  rate of return
• Thirty year rate on non-rated borrowers is
  currently under 5.00
• Variable rate is approximately 3.90
• Long amortization of debt
• Can have final maturity of up to thirty years
• Depends upon assets financed
• Less intrusive relationship with creditors
• Bondholders are diversified and unrelated and
  cannot micromanage affairs of borrower as easily
  as a bank can
• Bondholders rights are spelled out in
  documentation which typically uses objective
  tests as opposed to bank consent provisions.

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Disadvantages

• Not everyone can qualify need to have minimum
  credit strength
• Not necessarily the lowest all-inclusive cost
• Relatively high issuance costs
• Need minimum size borrowing to make it favorable
  relative to other financing options
• Long timeline typically 90 day process or more
• Requires management time and focus (due
  diligence, working group meetings, investors
  calls/site visits)

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Who Can Use Tax Exempt Bonds?

• Need to be big enough
• Typically organizations with at least 4 million
  budget
• Typically need a loan size of at least 5
  million
• Need to be steady enough
• Need to have regular, consistent, constant
  revenues
• Real estate based revenues like rents are ideal
• Other forms of income can be acceptable (such as
  annual fees, membership dues or even grants) if
  they are consistent and predictable
• Need to be good enough
• Generally need to have positive operations or at
  least positive bottom line
• Will be measured in the form of debt service
  coverage ratio
• Need some liquid assets (cash and/or unrestricted
  investments)
• Cash/debt ratio of at least 25 OR at least 40
  days cash on hand

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Structure of Bond Financing

• Tax exempt bonds must be issued through either an
  authorized governmental entity or a conduit
  issuer
• The proceeds of bonds are loaned from the conduit
  issuer to the borrower. The issuer assigns its
  interest in the loan agreement with the borrower
  to the trustee.
• The borrower pays the debt service on the Bonds
  over to the Trustee, who pays the bondholders.

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Financing Team

• Authority governmental entity that serves as
  issuer of the bonds
• Bond Counsel nationally-recognized law firm
  that provides (among other things) an opinion
  that the bonds are legally authorized and issued
  and for a tax-exempt purpose
• Borrowers Counsel counsel to borrower on
  financing matters
• Underwriter/Bank financing source structures
  borrowing, serves as advisor to borrower
• Financial Advisor borrower may elect to hire an
  independent advisor to evaluate financing options

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