Tax Exempt Financing
A Financial Service for ACSI
United States Members
The ACSI Capital Corporation is a Colorado non-profit corporation that provides ACSI member schools and colleges (including early education programs) in the United States with substantially reduced interest and issuance costs for long-term debt. The ACSI Capital Corporation does this by providing a variety of financial advisory services so that its member schools might access tax exempt bond financing made available through the Colorado Educational and Cultural Facilities Authority (CECFA).
ACSI Capital Corporation Frequently Asked Questions (FAQs)
What are tax exempt bonds?
- A bond is like a loan that can be sold to one or more investors.
- Tax-exempt bonds offer interest rates that are generally one percent, two percent, or more below the interest rates for similar bank loans or other forms of conventional, taxable financing.
- Tax-exempt bonds become tax-exempt via issuance through a municipality or other government entity which acts as a conduit for the financing (the government entity accepts no responsibility to pay the bond).
- Tax-exempt bonds usually involve a greater time commitment from borrowers than comparable conventional loans. There is also the potential for limited public scrutiny of the proposed financing.
- Tax-exempt bonds transactions normally can be completed in 60–90 days.
- Tax-exempt bonds can be sold to the public or to one buyer via a private placement.
- Tax-exempt bonds can be used to finance both buildings and equipment.
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What is CECFA?
The Colorado General Assembly created the Colorado Educational and Cultural Facilities Authority (CECFA) for the purpose of providing tax exempt financing for colleges, universities, charter schools, private schools, and other educational institutions, as well as for cultural entities. The Colorado General Assembly has empowered CECFA to provide multi-state financing upon the satisfaction of certain requirements. Because it is incorporated and headquartered in Colorado, the ACSI Capital Corporation is authorized to obtain tax exempt financing from CECFA for the purpose of financing qualifying projects for ACSI member schools.
A broad range of facilities can be financed via CECFA, such as dormitories and housing facilities, classroom and lab buildings, administration buildings, research facilities, auditoriums, kitchens and dining halls, and recreational facilities. There are generally no limits to the size of the CECFA’s financing.
Visit CECFA for additional information.
Is ACSI membership required?
To pursue tax-exempt financing through the ACSI Capital Corporation, a Christian school or college must be a current member of ACSI and maintain its membership for the life of the loan.
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What are the fees charged by the ACSI Capital Corporation?
ACSI Capital Corporation’s fees depend upon the size of the bond offering. These fees are exclusive of other necessary implementation costs (CECFA fee, legal costs, credit enhancement, loan/investment banking fees, trustee, title and real-estate related fees, etc.).
| Minimum Initial Fee: (Under $4,000,000) |
$20,000 |
| .5 of 1% (50 basis points) of first $5,000,000: |
$25,000 |
| .3 of 1% (30 basis points) of next $5,000,000: |
$15,000 |
| .05 of 1% (5 basis points) of next $90,000,000: |
$45,000 |
| .03 of 1% (3 basis points) of all amounts over $100,000,000 |
------- |
Annual Fee
Five hundredths (.05) of 1% (5 basis points) of outstanding principal balance payable on the anniversary of the loan each year.
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ACSI Capital Corporation Eligible Uses of Tax-Exempt Bond Proceeds
Introduction
Tax-Exempt Bond Proceeds may only be used for certain purposes which fall into the five basic categories detailed below.
Use Category 1
New Capital Expenditures: This category includes expenditures for new construction/acquisition of land, buildings, equipment and related infrastructure that will be owned by the School. Generally, and with a few exceptions, the financed property must be used by non-profit groups as opposed to renting space/facilities to for-profit groups. Also, when the bonds are issued, the expectation must be that funds will be fully expended within three years.
Use Category 2
Refinancing Prior Debt: It is quite common to use tax-exempt bonds to refinance outstanding taxable debt, bank loan, taxable mortgages, and the like. A caveat is that the proceeds of the debt to be refinanced must have been used for qualifying projects as more fully described in Category 1. Tax-Exempt Bonds can also be issued to refinance existing tax-exempt bonds that the School may have issued.
Use Category 3
Reimbursing Prior Capital Expenditures Certain expenditures made before the issuance of tax-exempt bonds can be reimbursed with proceeds of tax-exempt debt. Examples of reimbursable expenditures include land purchases, architect and engineering fees, site preparation and surveying. If the school wishes to reimburse itself for these sorts of previous expenditures then it should adopt a “reimbursement resolution” as early in the process as possible.
This reimbursement resolution is easy and simple to draft and is not binding if bonds are never issued. There is no need for a reimbursement resolution for funds expended within 60 days of the issuance of the bonds.
Use Category 4
Various including Working Capital up to 5% of bond proceeds may generally be used for purposes (including working capital) not outlined in the other four categories.
Use Category 5
Costs of Issuance, Capitalized Interest, and Reserves up to 2% of bond proceeds may be used to pay for third party bond-related costs such as legal counsel costs, investment banking fees, trustee charges, rating expenses and the like. If expenses exceed 2% of bond proceeds (which often occurs in smaller transactions) then the excess costs may be paid by a borrower contribution or the placement of a small amount of taxable bonds (often referred to as a “taxable tail”) in conjunction with the issuance of the tax-exempt bonds.
Interest payable on the bonds for a period equal to the greater of three years or the construction period plus one year can be included (i.e., capitalized) in the use of bond proceeds. This capitalized interest is held by the bond trustee and used to pay bondholders and thus saves the School from the need to pay interest from operations or whatever other source during the capitalized interest period.
The Debt Service Reserve funded from bond proceeds cannot exceed the lesser of 10% of the bond issue, 125% of annual debt service or the maximum annual debt service. The Debt Service Reserve Fund provides a “cushion” if the School faces temporary financial problems.
Prohibited Uses
It is generally not possible to use bond proceeds to pay for or refinance explicitly religious structures such as chapels or other places of worship. Bond counsel should be consulted if there are questions about whether a specific building is too “pervasively sectarian,” the legal term for a situation where the inherent religious use of a structure outweighs the more generally defined public benefit or secular use. Of course, the School can use non-bond funds such as contributions, investment earnings and the like to finance religious facilities if it so chooses.
Summary
The School may borrow low cost tax-exempt bonds to pay for a wide variety of new capital projects or to refinance existing capital project-related debt. To reimburse itself for previous expenditures the School would be wise to adopt a “Reimbursement Resolution” as soon in the construction/acquisition process as possible. Finally, the School should be careful to separate the funding of chapel and other explicitly religious facilities from funds other than tax-exempt bond proceeds.
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ACSI Capital Corporation Tax-Exempt Bond Structuring Alternatives
Repayment Period
Tax-exempt bonds are typically amortized over a period of 1–30 years (a 15 or 20 year repayment period is the most common).
Interest Rate
Tax-exempt bonds may be sold using a fixed or a floating (variable) interest rate. A fixed interest rate protects the School if interest rates rise in the future and allows certainty when creating budgets. Fixed interest rate bonds may be sold on a rated or non-rated basis. It is also common that fixed rate bonds are sold in a private placement to one institutional investor.
Floating rates are often lower than comparable fixed rates, but bear the risk that the variable interest rate may increase over time. The School may eliminate some of this interest rate risk by entering into an interest rate swap or another form of interest rate protection. Typically, floating rate tax-exempt bonds are rated based on the inclusion of a letter of credit from a commercial bank. Therefore, to successfully issue floating rate bonds, the School will need to obtain a letter of credit to secure the bondholders. The investment banker can help in identifying a letter of credit bank.
Optional Prepayment
If the School chooses to prepay some or all of the outstanding tax-exempt bonds because interest rates have decreased, or because it has generated excess funds from operations, capital campaigns or other sources, then it can typically do so at any time without penalty in the floating rate option. However, if the School chooses the fixed rate option or enters into some form of interest rate protection, then typically there is some “lock out” period (e.g., 5–10 years) during which the School may not optionally prepay the debt or may only do so with a penalty.
Security
Tax-exempt bonds are usually secured by a guarantee of the School and a mortgage on the property to be financed.
Bond Size
There is no maximum bond amount that can be issued, but it is typically difficult to justify a tax-exempt bond issue of less than $2 million (circumstances can vary).
Capital Corporation Tax Exempt Financing FAQs
Inquiry and Information
Ken Smitherman, Assistant for Support Services: President's Office
Email
Phone 719.528.6906 or 719.481.0129
PO Box 65130
Colorado Springs, CO 80962-5130
Additional contact information
Vice President of Finance
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