Commercial and Industrial real estate in the United States can be financed with below market interest rates through the use of taxable revenue bonds. These are bonds, which are issued by and in the name of an ownership entity, such as a corporation or limited liability company, that owns the property. Taxable means that investors in the bonds pay federal and State of Colorado income taxes on the interest that they receive for investing in the bonds. The bonds function just like a mortgage on a building and can be used to refinance higher interest rate bank or insurance company mortgages.
There is no IRS restriction on the type of company that can issue taxable bonds.
The proceeds of taxable revenue bonds can be used for the following purposes:
- Buildings and Equipment
- Machinery and Furnishings
- Land
- Costs of architects, engineers, attorneys and permits
- Costs of bond issuance
- Landscaping
- Refinancing higher interest rate debt.
The process starts by the company hiring an investment banker or financial advisor who specializes in this field of finance. The professional will guide the company through the various steps necessary to issue the bonds.
In order to receive this low of an interest rate, the investment banker helps to arrange a letter of credit or LOC with an “A” rated bank. The LOC which is issued by a bank having a rating of “A” or better by Moodys’ or Standard and Poors’, is a guarantee by the bank that the principal and interest on the bonds will be paid when they come due.
The LOC backed bonds are usually issued in a variable rate structure, with interest rates that change every 7 days. The base rate on the weekly floater is approximately 10 to 15 basis points over 30-day LIBOR. These bonds can be converted to a fixed rate at any time and can also be paid off at any time with no prepayment penalty, while in the variable rate mode.
The total interest rate that is paid is a combination of the base rate plus the cost of the LOC, (typically 1.00% annually) and a remarketing fee paid to a remarketing agent to adjust the rates weekly of .25%. For current interest rates, please contact us.
Gates Capital is currently working on several transactions of this type. We recently closed a transaction in Denver for a distribution company that purchased a new warehouse building. Our New York office has recently closed a $71 million financing for a new shopping center.
If you would like further information about this program, please call Robert DeMonbrun of Gates Capital at (303) 794-9692.
