An IDA, also known as an Industrial Development Agency, exists to spur economic development. According to the New York State Economic Development Council, an IDA can help with economic development in a number of ways. These include issuing tax-exempt bonds, conveying tax abatements, abating sales tax on applicable construction equipment and materials and abating taxes associated with mortgage recording. The wide range of promotion, development and assistance services that an IDA provides makes the answer to the question “What is an IDA?” a comprehensive one.
The Town of Islip IDA, for example, is a quasi-governmental and tax-exempt agency that will work with businesses to achieve a favorable outcome. The net result of these efforts, and what’s at the heart of all IDA efforts, is to advance job opportunities and the general welfare of citizens living in Islip. When a company considers relocating to a different state or building in a distressed area, it’s up to an IDA to offer favorable financial incentives so that a project with wide-ranging perks is completed. Real-world examples of what is an IDA capable of completing can be found in various industrial, educational, manufacturing and transportation projects it has helped complete.
Below are some commonly asked questions related to the IDA and the assistance it can offer to businesses.
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The Town of Islip IDA is a public benefit corporation of the State of New York, established in 1974, pursuant to Section 898-b of the New York State General Municipal Law. It is a quasi-governmental, tax-exempt agency whose purpose is to promote, develop, encourage and assist in acquiring, developing and equipping various business facilities, thereby advancing the job opportunities, general prosperity and economic welfare of the people of the Town of Islip. |
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The New York State Industrial Development Agency Act defines eligible projects as: manufacturing, warehousing, research, commercial or industrial facilities, industrial pollution control, recreation, educational, cultural, horse racing and transportation facilities. In addition, certain health care, college dormitory and housing facilities can be assisted. The legislature has placed prohibitions on assistance to commercial retail facilities, allowing exceptions for tourist destination facilities, projects that otherwise will move out of state, or projects in highly distressed areas. |
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IDA’s assist business in two ways. They can act as a conduit for industrial revenue bonds (IRBs), which are used to finance business location or expansion projects. These bonds can be at rates that are more favorable than conventional financing mechanisms. Secondly, IDA’s can provide projects with tax benefits (property, sales and mortgage recording tax) that are not available to most development projects. |
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Very favorable for projects eligible for tax-exempt IRBs. These projects can enjoy as much as a 2% reduction in interest rates from that would be paid through conventional financing. Also, IRB financing can allow 100% financing of an entire project, including capitalized interest and soft costs, thereby reducing burdensome “up-front” costs. For projects that don’t qualify for tax-exempt financing, IDAs can issue taxable IRBs. The interest rates would be generally the same as conventional financing, but all other IDA benefits would be available to the recipient. |
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Under federal tax law, IDAs can issue tax-exempt bonds to cover manufacturing facilities, governmental projects and exempt facilities (airports, solid waste facilities). |
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In general, New York State law exempts governmental agencies, such as IDAs, from paying taxes. Therefore, in an IDA transaction, the agency takes over nominal ownership of a property and leases it back to the applicant company. The project then avoids paying a mortgage recording tax, sales tax on material purchased during construction of the project, and property taxes. However, the Town of Islip IDA requires, as do all IDAs, that companies make payments in lieu of taxes (PILOTS), typically for ten years and at a reduced rate from that which would otherwise be due on the property. The extent of the reduction, or property tax abatement, depends upon a variety of factors, such as the size of the project, potential economic impact, the number of jobs affected, location, type of industry, etc. |
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No. The IDA does not issue the bonds, lend money, or assume responsibility for repaying of the debt. If an IDA assists project defaults, payments on the bond are the sole responsibility of the company borrowing the money. The IDA simply acts as a conduit for the financing. A financial institution, usually a bank, an insurance company, a bond fund or other entity (through an underwriter) will buy the bonds and, in effect, lend the money. |
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No. The bonds are secured by the financial strength and credit of the applicant. Normally the loan is secured by a mortgage on the facility financed through the bonds, but additional guarantees and collateral are sometimes required by a lender. |
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No. The actual lending source is the sole choice of the applicant. The agency recommends that the company approach its own bank to determine if it would be interested in buying the bonds. If the bank is uninterested or the terms are unfavorable, it is suggested that the applicant shop around for an interested financial institution with favorable terms. The agency will provide the applicant with a list of financial institutions that have an “appetite” for, and experience with, IDA transactions. |
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No. If companies do not need financing, or plan to secure it other than through the IDA, the agency can still provide the tax advantages mentioned above through an agreement call a straight-lease transaction. These leases are virtually identical to bonding transactions, except that no bonds are involved. In a straight lease, the IDA takes title to a property and leases it back to a company, which then makes the company eligible for the mortgage, sales and property tax benefits associated with a bonding transaction. |
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The IDA application and approval process adds very little, if any, time to a project. Most of the IDA processes can run concurrently with bank negotiations and approvals. Depending on the application filing date, there could be a 2-3 week delay at the outset, before the IDA Board takes its first step in the process: approving an inducement resolution. IDA involvement will add cost to a deal. For bond transactions, the rule-of-thumb is that a project should be approximately $2 million before the benefits of IDA financing outweigh the costs associated with securing the bond. Straight-lease transactions are much cheaper than bond transactions and can make economic sense for smaller projects, even those below a half-million dollars. |
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The first step is to call the Administrative Director of the Town of Islip IDA to discuss the project, and do an initial informal eligibility review. That is followed by the filing of a simple, but formal, application that describes the project and its economics benefits, accompanied by official statements that demonstrate the financial capabilities of the applicant. The application is then forwarded to the agency’s bond counsel for formal review of its eligibility. Once eligibility is determined, an inducement resolution is then submitted for approval to the agency board and the company is on its way. |
