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Experts agree that the credit crunch has dried up most debt financing and made equity and mezz products more expensive and choosier to boot. One segment of the financial markets that is still providing finance, though, is the state and regional Industrial Development Agencies. Backed by letters of credit — which banks are still willing to write — these IDAs are still issuing low-interest and tax-free bonds to support all kinds of real estate developments. To give just one example, IDAs could provide up to $20 million of low-interest bond financing for new manufacturing facility project.

Joseph Carlucci, a partner at the Cuddy & Feder law firm, specializes in IDAs and bond financings. Having closed well more than 100 such financings, Carlucci tells GlobeSt.com that the credit crunch has left this niche of the finance markets surprisingly untouched. “To date, it is not any harder to obtain a bank letter of credit than it was a year or two ago.” The following is Carlucci’s primer on this form of financing, and why it is still flush some seven months into the credit crunch.

GlobeSt.com: What type of projects is IDA financing best suited for?

Carlucci: It has been used in all kinds of projects — office, retail centers, manufacturing. It’s been very popular with non-profits because they can borrow at tax-exempt rate.

GlobeSt.com: Explain to me why you say IDA financing is a good idea even when the debt and equity markets are lending at favorable terms.

Carlucci: Their main advantage is lower-cost finance and much longer repayment terms. Even if the project is a taxable bond, financing it is still cheaper. Last week (mid-February) the taxable rate was at 3.32% — now that interest rate has to be at least two to three percentage points less expensive than even the most competitive conventional financing available now.

GlobeSt.com: How is that possible?

Carlucci: Simple. The bond financings are 30 years or longer. Also, the deals we do have credit enhancements, so we are talking to AA banks.

GlobeSt.com: But you are still talking about loans, essentially. And banks have become much more risk-adverse in their credit analysis now.

Carlucci: Yes, but what is different is that the debt service has gone down dramatically. Also, as an added plus, these projects almost always bring some level of government incentives, such as a sales-tax abatement.

GlobeSt.com: Are you finding more people are interested in IDA financing now?

Carlucci: We have a group that does bond financing around the country, so this is a concept that has been around for a while. As we speak with potential clients and existing clients who have never used it before, we see that a lot of their old sources of capital are drying up. Even the good credits are having trouble getting commitments. This is a long way of saying, yes, more people are interested in it, if only because they have few other options now and are forced to consider something new. That has been the biggest reason why IDA financing isn’t used more – lack of awareness. For instance, this past week we just had a meeting with long-standing clients who tended to use conventional construction loan financing, but are now finding that the sources that they were accustomed to going to were not as open anymore. When we laid out the IDA option to them they said, ‘you have got to be kidding.’

GlobeSt.com: Who buys this paper? Won’t investors become as leery about these bonds as they are everything real estate related these days?

Carlucci: Mutual funds tend to buy these funds. A lot of state funds want state paper, so no, I don’t think the appetite for it will diminish.

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