Tax-Exempt Financing for Non-Profits
Providing Tax-Exempt Financing for Non-profit Organizations
Wall Street Direct Loans is making 7 Day Tax-Exempt Floating Rate financing available to finance Non-profit Organizations. The average 7 Day Tax-Exempt Bond Rate over the past ten years, from 1998 until 2008 was been 2.65% excluding annual letter or credit and program fees.

The Wall Street Direct Loans 7 Day Tax-Exempt Floating Rate Bond financing facilitates cost efficient financing through access to the capital markets for qualified borrowers desiring to borrow $1,000,000 or more. The Bonds are secured by a Bank Letter of Credit. The Bonds are issued through a municipal entity and the proceeds are then lent to the Non-profit organization on a pass-through basis enabling the Non-profit organization to borrow at tax-exempt interest rates.

Wall Street Direct Loans is involved at many levels. Wall Street Direct Loans provides the initial due diligence to determine which borrowers qualify. Cornerstone also works with the Bank that provides the Letter of Credit which credit enhances the Bonds and provides liquidity to the Bond holders. Wall Street Direct Loans also serves as Placement and Remarketing Agent for the Bonds.

Who qualifies as a borrower?
Borrowers eligible for tax-exempt financing include any non-profit corporation, such as a hospital, nursing home, school, cultural institution or community organization, which is exempt from federal income tax as a . 501(c)(3) organization. Church-related organizations which do not have a . 501 (c)(3) determination from the Internal Revenue Service are still eligible if they are covered by an "umbrella ruling" granting tax-exempt status to a particular church and all organizations controlled by such church. Eligible borrowers can borrow without dollar limit on a tax-exempt basis.

What projects qualify?
Tax-exempt bonds for non-profit corporations can only be issued for capital projects (such as building, land acquisition, renovations and equipment), and at least 95% of the Bond proceeds must be used in furtherance of the non-profit borrower's exempt purpose.

Facilities which are leased to for-profit entities, or facilities which are used in an unrelated trade or business of a non-profit borrower, are generally ineligible for tax-exempt financing.

Facilities which are leased to for-profit entities, or facilities which are used in an unrelated trade or business of a non-profit borrower, are generally ineligible for tax-exempt financing.

Religiously-affiliated Organizations
Religiously-affiliated organizations, such as church-run elementary and secondary schools, may also qualify for tax-exempt financing. Although facilities to be used for "religious" purposes, such as a church, a chapel, or that portion of a school to be used for religious instruction, generally cannot be financed with tax-exempt bonds, other "neutral" facilities, such as classrooms (other than classrooms for religious instruction), gymnasia, cafeteria, etc. can generally be financed with tax-exempt bonds. Cornerstone, along with counsel, will work with each non-profit borrower to determine which specific facilities qualify.

Tax-exempt bonds can only be issued to reimburse the non-profit borrower for expenditures incurred before the Bonds are issued if the non-profit borrower has adopted an "inducement resolution" (sometimes also called a "reimbursement resolution"). If a borrower expects to incur such costs, it should contact Cornerstone and counsel to have an inducement resolution adopted at the earliest opportunity.

Many non-profit corporations use capital campaigns or other fundraising vehicles to address capital needs. One significant advantage of tax-exempt financing is that it allows a non-profit borrower to preserve its cash/endowment, which can be invested at taxable rates, while borrowing at lower tax-exempt rates. Non-profit borrowers considering tax-exempt financing for a project for which it is also fundraising should work with bond counsel to ensure that funds raised for a project do not decrease the amount of tax-exempt financing which can be used for the same project.

What is the $10 Million Limitation?
To comply with the $10 million limitation, the combined total of outstanding IDBs, together with all other capital expenditures relating to the borrower within the same local jurisdiction as the project to be financed, cannot exceed $10 million.  For this purpose, the other capital expenditures taken into account include all expenditures by the borrower, or by others for facilities of which the borrower is a principal user located within the same local jurisdiction as the project, that are (i) properly chargeable to capital account, whether or not the taxpayer elects to treat such expenditures as a current expense, and (ii) made during the 6-year period commencing 3 years before the issuance of the proposed IDB and concluding 3 years after such issuance.

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What can be financed?

Eligible expenditures include:
  • Real Estate
  • Acquisition Financing
  • Capital Expenditure Financing
  • Equipment Financing
  • Health Care Facilities
  • Nursing Home
  • School
  • Cultural Institution
  • Community Organization
Who Can Participate?

Any nonprofit corporation which is exempt from federal income tax as a "501(c)(3) organization." Church- related organizations which do not have a 501(c)(3) determination from the IRS are still eligible if they are covered by an "umbrella ruling" granting tax-exempt status to a particular church and all organizations controlled by such church. Eligible borrowers can borrow without dollar limit on a tax-exempt basis.

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The 7 Day Tax-Exempt Floating Rate Bonds are designed to offer the customer utmost flexibility. The Bonds allow the Cornerstone customer to borrow on a short-term, 7 day reset basis. Alternatively, each borrower may independently select to fix or cap its interest rate through the use of interest rate swaps or liability caps. While there is a certain degree of interest rate risk with adjustable rate debt, short term rates historically have been well below long-term rates.

The average 7 Day Bond rate for the last 10 years, from 1998 until 2008, was 2.65%.

For interest rate information contact Peter Paras, Jr. of Wall Street Direct Loans at 888/773-3222.

Borrowers cannot issue tax-exempt bonds on their own. Under the Tax Code, only states or political subdivisions of states (such as cities or counties) can issue tax-exempt bonds. Once the Bonds are issued, the issuer lends the proceeds to the nonprofit borrower, and only the non-profit borrower is liable for repayment of the Bonds. The issuer’s procedural rules for issuing Bonds are determined by state and local laws. Typically, an issuer will ask an economic development entity affiliated with the issuer to give preliminary approval to the project before adopting an ordinance or resolution approving the issuance of Bonds. This process can take from 4-6 weeks.

Low Up-Front Cost
The total up-front cost of the 7 Day Tax-Exempt Floating Rate Bond Program (excluding fees and costs associated with the issuance of the Letter of Credit) is approximately 2.50% of the total amount borrowed by any borrower. Most, if not all of this up-front charge can be capitalized in the Bond issue if approved by the bank. The up-front charge is a one-time expenditure and covers the issuance costs associated with the Bond issue (e.g., placement, legal, printing, rating agency, and trustee fees, etc.).

On-Going Fees
In addition to the interest rate on the Bonds, on-going expenses of approximately 0.35% and the appropriate Letter of Credit fee will be passed through to the borrower.

Credit Approval
Borrowers that access the 7 Day Tax-Exempt Floating Rate Bond Program are required to provide a bank letter of credit. The Letter of Credit bank is responsible for evaluating and assuming the underlying credit risk of the transaction, to the extent of its legal loan limits. The Program requires that the Letter of Credit bank have short-term ratings of “A-1+/P=1” by Standard & Poor’s and Moody’s respectively.

Matching Assets to Liabilities
The program allows borrowers to: (i) receive a 7 day interest rate; (ii) hedge interest rate risk with the use of protection vehicles such as interest rate swaps or caps; and (iii) while in the 7 day mode, repay the borrowing in whole or in part without penalty with 45 days notice. These program attributes give participating borrowers utmost flexibility in managing the liability side of their balance sheets.

Program Timing
Generally, after execution of a detailed Commitment Letter by the borrower and the Letter of Credit Bank, the borrower can be funded within 45 days.

Qualified borrowers are eligible to participate in the 7 Day Tax-Exempt Floating Rate Bond Program subject to requisite Letter of Credit Bank approval. Existing or potential clients who are seeking funding for construction, acquisition, renovation, equipment and/or other capital expenditures, should consider the 7 Day Tax-Exempt Floating Rate Bond Program as a potential funding vehicle.

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Application, Closing and Funding Procedures
The Cornerstone program utilizes a straightforward application and closing procedure and is funded by the issuance of the 7 Day Tax-Exempt Floating Rate Bonds.

  • Complete and return an application to Wall Street Direct Loans.
  • Cornerstone undertakes a credit evaluation of each participant to determine security requirements.
  • Upon approval of the application by a Letter of Credit Bank, a Cornerstone Commitment Letter, executed by Cornerstone, is issued to the borrower detailing the required security elements, operative loan covenants and other requirements and contingencies necessary for loan closing.
  • Borrower's counsel reviews the Commitment Letter.
  • Borrower executes and returns Commitment Letter, along with any commitment fees stipulated in the Commitment Letter to Cornerstone.
  • Bond documents are generated and distributed to the financing team.
  • Borrowers generally can be funded within 45 days following execution of the Commitment Letter. Interim financing may also be available if a borrower has immediate funding needs.

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