There are bond authorities that are state-chartered in every state. These are housing agencies, healthcare facilities, authorities for the financing of industrial development, etc. The qualified projects for these authorities are energy-efficient projects for facilities owned by eligible borrowers.
Based on the federal tax code, here are some qualified borrowers for the tax-exempt bond program:
Healthcare that is nonprofit
Higher education that is nonprofit
K-12 schools that are nonprofit
Other nonprofit firms such as YMCAs, YWCAs, and museums
Multifamily housing for low-income earners
Manufacturing and industries for specified, exempt facilities
The interest rate for tax-exempt bonds is lower with associated longer tenors compared to other taxable bonds. As a result, such bonds offer an attractive incentive to finance renewable or energy-efficient projects for borrowers that qualify.
The tax-exempt status points to the fact that the bondholder will not pay taxes (these are federal, state, and local income taxes) on the bond's interest yields. As a result, judging by the term and credit quality of such bonds, they will have a lower interest rate compared to taxable bonds. The standard type is fixed interest rate bonds having rates of up to 10 to 15 years.
Judging by these reasons and benefits (longer-term, lower rate, and a huge buyer market), the local and state government can consider tax-exempt bonds as another means of financing when clean energy finance programs are directed to qualified sectors. It is essential for state and local governments to dialogue with such bond authority to explore how they can be involved in the state or local financing program.
Part of the mission of bond authorities is to employ their financing ability to make the public better. Many authorities also give taxable bonds alongside other financial products to compensate for the state's development goals, like support for SMEs. Bond authorities can be a channel for finance and serve as a marketing partner as they come with existing loan profiles.
The presence of low-cost financing can trigger project developments even though there should be marketing and project development with it. Local and state governments, alongside bond authorities, can form natural partnerships to finance energy-efficient programs.
Comparing Private Placements and Sales of Markets Bond
Loans scheduled to take care of energy efficiency programs and renovation of existing facilities are not impressive and range between $75,000 and $150,000 at times. This is a challenge for financing, taking care of costs of transactions, direct issuance of the bond proceeds, and looking for a relevant bond purchaser.
On a general note, bond authorities are a channel for financing, not the source. This means that even though they issue the bond, they still need to arrange the bond purchasers, and the borrower needs to approve his credit.
A bond sale can occur on a placement basis (private) straight to the bond purchaser without a credit rating. In other cases, the sale will be public, which appears at the capital markets and the credit rating from a certified rating agency in charge of bonds like Standard or Fitch.
For a private placement, the minimum size has a range of 500,000 to 1 million. There are authorities with streamlined procedures for taking care of the issuance of smaller bonds.
A public bond has its minimum size of $10 & $20 million dollars and sometimes could be more extensive. One can use a letter issuing credit to get a good rating from the relevant agency in charge.
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