1. Recovery Zone Bonds In North Carolina Sponsored by: NC Department of State Treasurer NC Association of County Commissioners NC League of Municipalities October 22, 2009

2. 2 Presented by: Vance Holloman North Carolina Local Government Commission Stewart Dickinson North Carolina Department of Commerce Mary Nash Rusher Hunton & Williams LLP

3. 3 Overview General Rules – Recovery Zone Designations – Recovery Zone Economic Development Bonds – Recovery Zone Facility Bonds Allocation in North Carolina Initial allocation Waiver and deemed waiver Reallocation Process for issuing Recovery Zone Bonds – Recovery Zone Economic Development Bonds – Recovery Zone Facility Bonds Question & Answer

4. 4 Recovery Zone Bonds Two Types: – Recovery Zone Economic Development Bond (“RZEDBs”) (Internal Revenue Code § 1400U-2) Finances governmental purposes in a recovery zone Form of Build America Bond – 45% credit to issuer – Recovery Zone Facility Bonds (“RZFBs”) (Internal Revenue Code § 1400U-3) Private activity bond – a kind of exempt facility bond Finances a private use in a recovery zone Allows private sector to borrow at tax exempt rate Typically the local Industrial Facilities And Pollution Control Financing Authority is the issuer For multi-jurisdictional projects, the North Carolina Capital Facilities Finance Agency may also be the issuer Can be used for governmental projects that have too much private use

5. 5 Designation of Recovery Zone: – A recovery zone is any area designated by the issuer as having “significant poverty, unemployment, rate of home foreclosures or general distress” – Issuer has broad discretion to designate a zone “in any reasonable manner as it shall determine in good faith in its discretion” (IRS Notice 2009-50) – Designation of entire county is permitted – Issuer should adopt a resolution designating recovery zone; resolution should recite factors that support the designation Designation of Recovery Zone

6. 6 Recovery Zone Economic Development Bonds Recovery Zone Economic Development Bonds (“RZEDBs”) – RZEDBs are a subset of Build America Bonds (“BAB”) – The amount of the refundable credit is 45% of the amount of interest payable on the interest payment date – The issuer must irrevocably elect for the obligation to be a recovery zone bond – Very specific reporting requirements for the 8038G Construction found in IRS Notice 2009-26 (found at www.irs.gov) Line 18 must read “Recovery Zone Economic Development Bond (Payment Option) Additional information must be attached Form 8038CP must be filed 45-90 days before each fixed rate interest payment date to receive credit on the related interest payment date

7. 7 Qualifications for RZEDBs – 100% of available project proceeds or APP (i.e. sales proceeds less an amount not to exceed 2% costs of issuance), net of any amounts placed in a reasonably required reserve fund, must be used for qualified economic development purposes – “Qualified economic development purposes” are described as “expenditures for purposes of promoting development or other economic activity in a recovery zone” and include capital expenditures paid or incurred with respect to property in the zone, and expenditures for public infrastructure and construction of public facilities Recovery Zone Economic Development Bonds (cont’d)

8. 8 Thus, RZEDBs can be used to finance nearly any capital expenditures that promote economic development or economic activity in the recovery zone – Infrastructure (roads, water and sewer, electric transmission) – Schools – Public buildings – Industrial parks Recovery Zone Economic Development Bonds (cont’d)

9. 9 Other Characteristics and requirements of RZEDBs: – Interest is taxable to the holder – Bond obligation must be issued by December 31, 2010 – General Tax Exempt bond rules (including arbitrage and rebate) under Section 103 of IRS Code apply – Issuer must have a reasonable expectation that it will spend Available Project Proceeds within three years – Yield for arbitrage purposes is reduced by the credit – No refundings allowed; can reimburse for expenditures paid after the effective date of ARRA (2/17/09) and originally financed with short-term temporary financing – Davis-Bacon DOES apply Recovery Zone Economic Development Bonds (cont’d)

10. 10 Recovery Zone Facility Bonds RZFBs are a new category of “exempt facility bonds” under IRC § 142 – 95% or more of the net proceeds must be used for “recovery zone property” – “Recovery Zone Property” is depreciable property that is located and first used in the active conduct of a “qualified business” in a “recovery zone” – Property must be constructed, reconstructed, renovated or acquired by the borrower after the date the recovery zone was designated – Important: A used building can only be acquired with RZFB proceeds if the borrower spends money on renovation, rehabilitation, improvement and expansion that doubles the basis of the building with 24 months after the zone is designated – “Recovery Zone” for RZFBs is the same as the recovery zone for RZEDBs

11. 11 Recovery Zone Facility Bonds (cont’d) “Qualified Business” means any trade or business other than: – Residential rental property or – Facilities described in IRC § 144(c)(6)(b) (i.e., commercial golf course, country club, massage parlor, hot tub, suntan, racetrack, gambling facility, or business that sells alcoholic beverages for off-premises consumption) Example: – Shopping centers or other retail – Manufacturing – Distribution or warehouse facilities – Hotels – Restaurants – Office buildings The issuer is a county’s Industrial Facilities and Pollution Control Financing Authority under NCGS § 159C (N.C. Session Law 2009-140)

12. 12 Allocation ARRA established a limited allocation for Recovery Zone Bonds across the country ($10 billion for RZEDBs, $15 billion for RZFBs), to be allocated to the states, and then to large cities and counties within the states based on loss of employment between December 2007 and December 2008 – Initial Allocation by the U.S. Department of Treasury to states/large municipalities/counties found in IRS Notice 2009-50 – Found at www.irs.govwww.irs.gov Click on “Tax Exempt Bond Community” tab Click on “IRS Releases Guidance on ARRA Bond Provisions” Click on “Notice 2009-50 (Recovery Zone Bond Volume Cap Allocations)” and on the words within that paragraph that say “Click here to access these suballocations”—that will lead to the state by state list of city and county allocationsNotice 2009-50 (Recovery Zone Bond Volume Cap Allocations)Click here to access these suballocations

13. 13 Allocations – North Carolina law NCGS 143-433.6, as amended by Session Law 2009-140, provides that the North Carolina Tax Reform Allocation Committee (also known as the Volume Cap Committee) will be responsible for reallocation – North Carolina Department of Commerce (“Commerce”) is the administrative arm of the Volume Cap Committee If initial allocation is not used by a large municipality or county that received it, the allocation may only be reallocated by the State through the Volume Cap Committee A county can designate a city or town within the county to use the allocation without going back to the State, but cannot “transfer” the allocation to a governmental unit outside the county

14. 14 Total Allocation in North Carolina RZEDs Allocation – North Carolina received an allocation of $418,154,000 RZFBs Allocation – Total allocation: North Carolina received $617,231,000 – U.S. Treasury then made suballocations of that amount to large municipalities (Cary, Charlotte, Fayetteville, Greensboro, High Point, Raleigh, Winston-Salem) and to counties based on the ratio of employment losses compared to the state’s losses

15. 15 Total Allocation in North Carolina (cont’d) Commerce has introduced rules to be added to the North Carolina Administrative Code in Section 04 NCAC 01H.0400-.0404 Rules require counties and large municipalities to designate projects to be financed with recovery zone bonds by December 15, 2009 or allocation will be “deemed waived” for reallocation by the State County or large municipality can waive allocation and request the State to reallocate it to a project in another governmental unit Issuers should file a copy of IRS Form 8038/8038G as applicable with Commerce Forms for verifying use of allocation, waiver of allocation and requesting reallocation will be available at www.nccommerce.com under Business Services – Financial Incentiveswww.nccommerce.com

16. 16 Process to Keep or Waive Allocation Process for all RZ Bonds 1.Adopt a resolution designating recovery zone 2.Identify projects for RZEDB and/or RZFB financing 3.Adopt a resolution designating the project(s) to use applicable amount of recovery zone allocation 4.If issuer wishes to waive its allocation and request that it be reallocated to a project in another jurisdiction, adopt a resolution identifying the project 5.Either issue obligation before 12/15/09 or file forms with Commerce before 12/15/09 identifying project(s), waiving some or all of allocation, and, if applicable, identifying projects for waived allocations If bonds are not issued and no form is received on or before 12/15/2009 Allocation will be deemed waived for reallocation by the State

17. 17 Process for Reallocation The Volume Cap Committee will consider requests for reallocation on an ongoing basis In making reallocation decisions, the Committee will consider the following criteria (as stated in the rule): – Whether the unit is in competition with another state for project benefits such as jobs and tax base – Whether the availability of the reallocation is a crucial part of attracting a new company or keeping an existing company in place – Whether the requested reallocation will benefit a project for which a county or municipality is already issuing Recovery Zone Bonds – Whether the requested reallocation will benefit a project that was designated by a county or large municipality in connection with a waiver of its original allocation – The ability of the local government or company benefiting from the Recovery Zone Bond to obtain financing and close the issue in a timely manner, including demonstration of a commitment from a bank or other financial institution to purchase or underwrite the Recovery Zone Bonds.

18. 18 Process to Issue RZEDBs Process to issue bonds – RZEDBs – Must be issued in the same form as any other governmental debt in North Carolina General obligation bond or Revenue bond or 160A-20 installment financing

19. 19 Process to Issue RZEDBs – 160A-20 For 160A-20’s, follow the usual steps for issuance – Adopt a resolution authorizing filing of the application with LGC and making findings – Conference with the LGC re: process and project – Hold public hearing, if required – Send out RFP to banks seeking financing bids – Choose a lender – Adopt resolution approving financing – Execute documents – File 8038G and 8038CP to obtain credit

20. 20 Process to Issue Recovery Zone Facility Bonds Bonds to finance private entities are issued by the county industrial facilities and pollution control financing authority (the Authority) County/Large Municipality designates recovery zone and designates the Authority as the issuer of the Bonds Authority adopts inducement or preliminary resolution Recovery zone facility projects are “special purpose projects” under N.C.G.S. Ch. 159C; no need for Commerce approval of the project County holds public hearing and adopts approval in principal resolution

21. 21 Process to Issue Recovery Zone Facility Bonds (cont’d) Private company (with assistance from underwriter or placement agent) arranges for private placement or for letter of credit to support bonds Company must be able to qualify for the loan Application and bond documents submitted to the N.C. Local Government Commission (LGC) Authority meets to give final approval to bond documents LGC meets to approve bond documents Bonds are sold and funds spent on project Form 8038 filed with IRS

22. 22 Letter of Credit Backed Recovery Zone Facility Bonds – Structure Typical Structure – Recovery Zone Facility Bond – $10,000,000 “Low Floater” Borrower Authority Bond Trustee Bondholders Bank Note Assign Loan Agreement and Note $ RZFB Bond Letter of Credit Reimbursement Agreement Project Loan Agreement Owns Project Construction Fund $ $

23. 23 Process to Issue Recovery Zone Facility Bonds (cont’d) Typical Costs – $10 million Letter of Credit backed Bond Ongoing Interest Cost and Fees% of Principal Bond interest rate2.60 (10 yr. average) Letter of Credit Fee1.50 (estimated) Remarketing Fee.125 (estimate) Trustee Fee.025 (estimate) 4.25% total estimated annual cost Upfront Fees (Estimates) Underwriting Fee$50,000 (.5%) Estimated Legal Fees Authority Counsel5,000 Bond Counsel35,000 Underwriter Counsel15,000 Bank Counsel15,000 Company Counsel15,000 LGC Fee1,000 Rating Agency10,000 Trustee Accountant2,000 Miscellaneous Expenses3,000 $151,000* * Up to 2% of principal amount (in this case $200,000) can be funded from bond proceeds

24. 24 Questions? NC Department of Commerce (919) 733-0886 Stewart Dickinson Mark Poole Mary Mae Johnson Local Government Commission (919) 807-2350 Vance Holloman Tim Romocki Jim Baker Mary Nash Rusher (919) 899-3066 Hunton & Williams LLP