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Tax-Exempt Bond Financing

For certain projects that qualify, Ziegler can underwrite tax-exempt bonds that bear interest rates that can range from 20-40% lower than taxable bonds. Typically, this type of structure is limited to construction or refinancing of capital used for constructing school or educational facilities. There are a number of different structures available.

Long-term Security
Your institution never has to worry about refinancing a short-term bank note or rising interest rates. The interest rate you've obtained through the bond issue is fixed for the entire 20 to 30-year term of the loan. For example, refinancing a short-term bank loan during a time of rising or high interest rates can mean higher mortgage payments. Since most non-profit institutions spend all of the money they receive, the additional costs could mean cutbacks on needed programs and services.


Reduce Your Risk
Because of the fixed rates provided with a long-term bond issue, you eliminate a substantial portion of the risk associated with borrowing on a multi-million dollar project. For instance, if enrollment and growth projections are not met, a bank may not be willing to refinance a short-term loan or renew a letter of credit or bank qualified bonds. Additionally, if interest rates have risen, your institution is faced with an increased new mortgage payment that it can't afford. With a fixed rate bond issue, your institution is not exposed to these risks and you know your total cost for financing. You have a fixed-rate, full-term loan, with no balloons.


Open-ended Mortgage
Is it possible that your institution will need to borrow additional funds for future phases of construction or additional projects? With traditional bank financing you would most likely have to refinance the original loan at the time of the second loan. This may involve additional fees, increased interest rates or prepayment penalties. Subject to certain conditions and credit qualification, fixed-rate bond issues underwritten by Ziegler typically allow additional financing to be added on to the existing loan balance, without changing any of the terms of the original bond issue. Interest rates on the new money would reflect current market rates however.


What about fees for a fixed-rate bond issue?
Bond financing does require your institution to pay underwriting fees, which are used to compensate the brokers who sell the bonds and the underwriter for the risk involved in purchasing the entire issue before bonds are sold. Fixed rate bonds do have underwriting fees that are slightly higher than bank loans or letter of credit backed bonds. However, the fees for a bond issue do not have to be paid with cash at closing, and can be financed over the life of the loan. By paying a little more in the way of up-front costs, your institution "purchases" more attractive loan terms described above. The fees paid on a one-time basis for a bond issue can be a bargain if you add-up the potential future unknown and undisclosed costs on traditional or variable rate financing.

Direct Purchase and Letter of Credit Bonds
These are two different types of tax-exempt bond financing vehicles that can make sense under certain conditions. These vehicles differ from traditional long-term fixed rate bonds in that they require the participation of a single lender, often a commercial bank. These structures are generally short term (1-10 years) but can carry with them lower rates and lower underwriting expenses. They are usually available only to extremely credit-worthy borrowers. You can engage Ziegler to underwrite or place your bonds utilizing the structures described below.  


Direct Purchase
Certain banking institutions are willing to purchase tax-exempt bonds directly for their own account, rather than making a conventional loan. Ziegler would underwrite these bonds on behalf of your organization using a tax-exempt conduit issuer. The bonds themselves would be purchased and owned outright by a commercial bank, and thus structured with common bank loan terms and conditions. Loan terms can range from one to ten years, with an interest rate that may be floating or fixed for a short period of time. The advantage with this structure is that it may result in lower underwriting costs and, initially, a lower rate. The downside with this structure is that the interest rates are not fixed long-term, exposing borrowers to interest rate risk, and the loan term may only be 3-5 years, which exposes borrowers to refinancing risk. This type of financing is usually only available to stronger credits that have some level of significant equity in their property. Ziegler can explore for you whether your organization can utilize this type of financing structure.


Letter of Credit Bonds
Bond issues can be either enhanced or unenhanced. An unenhanced issue typically means that the investors purchasing the bonds can only look to the borrower and its assets (land and buildings) for repayment. An enhanced bond issue means that there is some other guaranty or outside collateral that is helping to back the repayment obligation. One common form of enhancement is a letter of credit (LOC). LOCs are typically issued by a highly rated national bank and are set up to provide bond investors with 100% payment of principal or interest should the borrower default on their loan. By having this additional “guarantee” via the enhancement provided by the LOC, underwriters such as Ziegler can sell bonds to a larger variety of buyers and incorporate some unique features such as a floating rate, all driving down your cost of borrowing. Utilizing an LOC, was an extremely common way to borrow before 2008. Due to changes in the banking market and bank regulations after the financial meltdown, there is significantly less availability of this type of product, hence it is limited to only the most creditworthy borrowers. Ziegler can explore these options for you.

 

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Taxable Financing

In some instances, certain projects will not qualify for tax-exempt financing or for smaller borrowing amounts tax-exempt bonds may not be cost effective. In those cases, Ziegler is able to underwrite taxable bonds. Sometimes these taxable bonds are sold institutionally, in which case they have all the benefits outlined above with tax-exempt bonds. Certain borrowers elect to have their projects financed with taxable bonds that are sold to our retail investor clientele. This type of structure can provide some unique benefits.

Long-term Security
Your institution never has to worry about refinancing a short-term bank note or rising interest rates. The low interest rate you've obtained through the bond issue is fixed for the entire 20 to 25-year term of the loan. For example, refinancing a short-term bank loan during a time of rising or high interest rates can mean higher mortgage payments. Since most non-profit institutions spend all of the money they receive, the additional costs could mean cutbacks on needed programs and services. Some say that bonds are inflexible. That's right, the rate you lock-in will never increase!


Reduce Your Risk
Because of the fixed rates provided with a Ziegler bond offering you eliminate a substantial portion of the risk associated with borrowing on a multi-million dollar project. For instance, if attendance and growth projections are not met, a bank may not be willing to refinance a short-term loan. Additionally, if interest rates have risen, your institution is faced with an increased new mortgage payment that it can't afford. With Ziegler, your institution is not exposed to these risks and you know your total cost for financing. You have a fixed-rate, full-term loan, with no balloons.


Open-ended Mortgage
Is it possible that your institution will need to borrow additional funds for future phases of construction or additional projects? With traditional bank financing you would most likely have to refinance the original loan at the time of the second loan. This may involve additional fees, increased interest rates or prepayment penalties. Ziegler loans allow additional financing to simply be added on to the existing loan balance, without changing any of the terms of the original loan. Interest rates on the new money would reflect current market rates however. The standard loan documents for Ziegler financing contain provisions, which allow qualified credits to issue additional bonds at a later date without having to refinance the original loan.


Greater Flexibility and More Control
It is important to read the fine print associated with any financing. Traditional bank loans may have loan covenants that do not fit your institution's operational needs and can significantly affect future financial strategies and options. The covenants your institution must comply with under a Ziegler bond offering are generally more flexible than that of traditional bank financing. Unlike Ziegler, many traditional loan documents restrict the amount of money your institution can borrow or spend on additional capital projects. Some bank loans are set up with a longer term fixed rate, but require that all future building fund pledges be used to pay down the debt, thus really forcing you to have a short-term loan. Ziegler gives you total flexibility with the use of your building fund receipts. Use these monies to either pay down the loan, or for future projects that you decide on.

Typically, permission from the lender is required to borrow or spend more than the set amount. This type of restriction can be limiting and puts its ability to grow in the hands of a third party. Ziegler leaves this control in the hands of your institution.


No Prepayment Penalties
Unlike a bond offering, many commercial banks do not allow you to refinance your loan unless you pay a prepayment penalty. These penalties are typically based on the potential lost profit to the bank for the remaining years that the loan would have been outstanding. These hidden costs can make it financially impossible to switch lenders or get out of the deal. Ziegler financings do not carry any prepayment penalties or restrictions.


What about fees?
Some may say that taxable bond financing through a retail structure is a more costly alternative to traditional bank financing. Here's what we say. Bond financing does require your institution to pay up-front loan fees, which are used to compensate the brokers who sell the bonds and the underwriter for the risk involved in purchasing the entire issue before bonds are sold. However, the fees for a bond issue do not have to be paid with cash at closing, and can be financed over the life of the loan. By paying a little more in the way of up-front costs, your institution "purchases" more attractive loan terms described above. The fees paid on a one-time basis for a bond issue can be a bargain if you add-up the potential future unknown and undisclosed costs on traditional financing.

 

Cost factors that a local bank will find impossible to quantify for you include:

  • Variable or Fixed Prepayment Penalties
    • These are hard to quantify and typically require you to pay the bank all of their lost future profit on a loan if you repay any or all of the loan early. If you decide you can't get along with the bank, you have to pay this fee to refinance with another lender.
  • Loan Fees to Renew the Loan after Construction or after the Term Expires
    • With a bond financing, you can pay one fee for a full-term loan. No need to pay multiple fees to renew short-term loans as they come due.

 

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Free Debt Capacity Analysis

Ziegler can assist your school in determining a potential range of debt financing that you might qualify for. This information can be invaluable for your school’s leadership as you contemplate facility needs, and whether to lease or purchase.

In order to get started, print and fill out the basic information form below, and return back to us. We’ll use that information to prepare a personalized analysis of the credit profile of your school and what level of financing you might be able to qualify for. Additionally, we will send you a free set of slides to help you better understand financing options available to charter schools.

Charter School Initial Loan Worksheet

 

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Additional Services

No matter what your need, Ziegler can call upon the expertise of associates with knowledge in a variety of areas:

  • Capital Markets. Includes tax-exempt retail and institutional trading as well as taxable fixed income bonds and preferred stock.
  • FHA/HUD. Ziegler’s mortgage banking solutions to improve financial operations.
  • Research. Our own ZieglerResearch.com for credit monitoring on debt securities.
  • Wealth Management. A wide range of products and services to meet your personal financial goals.