Insight Center: Publications

ARRA May Provide IP and Life Science Clients With New Financing Option

Client Alert


The recently enacted stimulus legislation, the American Recovery and Reinvestment Act of 2009 (ARRA), made a change to the Internal Revenue Code (Code) that may provide companies in the business of creating intellectual property, such as computer software, technology and life sciences companies, with a new financing option for a limited period of time.


For some time, the Code has allowed the issuance of tax-exempt “private activity” bonds to finance “manufacturing facilities,” subject to a number of limitations. These bonds are commonly called “small issue bonds.” The basic structure of these financings is for a state or local governmental unit, which includes authorized state agencies, to issue bonds and loan the proceeds to the true borrower (the manufacturer). The manufacturer is responsible for paying off the bonds out of its revenues through loan payments to the nominal issuer of the bonds. This structure is often referred to as a “conduit” financing, since the bond issuer is merely a conduit for the use of the bond proceeds and for payment by the manufacturer of the debt service on the bonds.

Generally, the maximum amount of bonds that can be issued for the benefit of the manufacturer is $10 million. In addition, the amount of the bond issue, plus outstanding prior small issue bonds for the manufacturer’s benefit, plus non-bond funded capital expenditures made by the manufacturer in the municipality or county where the bond-financed facility is located, during the six-year period that brackets the bond issuance date, cannot exceed $20 million. For example, a manufacturer could borrow $5 million on a tax-exempt basis to finance the expansion of its plant, so long as its capital expenditures in the municipality or county where the plant is located (and funded other than with tax-exempt bond proceeds), beginning three years before and ending three years after the bond issuance date, do not exceed $15 million, and there are no other outstanding prior small issue bonds for the manufacturer’s benefit.

Legislative Change

Until the ARRA was enacted, a “manufacturing facility” generally meant a facility used in the manufacturing or production of tangible personal property. However, for bonds issued in 2009 after February 17 and in 2010, the ARRA has broadened this definition to include a “facility which is used in the creation or production of intangible property which is described in Section 197(d)(1)(C)(iii)” — i.e., any patent, copyright, formula, process, design, pattern, know-how, format, or other similar item. According to the legislative history, intangible property is intended to include computer software and intellectual property associated with biotech and pharmaceuticals. A “facility” could be a building, equipment, or land, subject to certain limitations.

Of course, a host of other requirements must be met for these small issue bonds to be tax-exempt, including not exceeding the home state’s annual volume cap for this type of bond. Also, a potentially important countervailing consideration is that property financed with tax-exempt bonds is subject to less favorable tax depreciation rules than property not financed with tax-exempt bonds. Nevertheless, the law change may, for a limited time, present some of our IP-focused clients a new way to finance some of their facility costs with low-cost capital.

Any member of Pepper’s Public Finance Group would be happy to meet with clients interested in hearing more about this type of financing. We can explain the process and rules and, if warranted, approach potential bond issuers.

Gordon R. Downing

This is one of a series of articles published by members of Pepper Hamilton LLP discussing issues arising out of the American Recovery and Reinvestment Act of 2009. For our other publications, please refer to our firm's Web site at www.pepperlaw.com.

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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