22 MARCH / APRIL 2020 FINANCIAL MANAGEMENT At the start of 2020, Gov. Eric J. Holcomb announced the end of the third consecutive record-breaking year for Indiana economic development, with the state securing almost 300 commitments from companies seeking to expand in Indiana. These business expansion commitments should result in more than $8.44 billion in new capital investments and over 27,000 new Hoosier jobs with average wages of $28.60 per hour. This marks Indiana’s highest annual capital investment and average wages since the formation of the Indiana Economic Development Corp. in 2005.1 The IEDC’s economic development incentive programs, which include business tax credit and grant2 awards (based on amount of capital investment and number of new jobs created), play a critical role in facilitating many Indiana business expansions.3 From a banker’s perspective, if properly structured, these incentive programs can increase the amount of equity committed to fund new capital investments at closing and increase the net operating income available after tax to pay debt service over the term of a bank loan. Indiana offers three powerful investment tax credit incentive programs that can dramatically increase the amount of equity committed to fund new capital investments for business expansions at closing through Investment Tax Credit Programs: • Community Revitalization Enhancement District Tax Credit: 25% tax credit on certain approved project capital expenditures.4 • Industrial Recovery Tax Credit: up to a 25% tax credit on certain approved project capital expenditures.5 • Rehabilitation Tax Credit: up to a 30% tax credit on certain approved project capital expenditures.6 For projects with total capital expenditures in the range of $5 million to $10 million, these Investment Tax Indiana’s Investment Tax Credit Programs Only getting better! Credit Programs can result in additional net tax credit equity investment of approximately 20% of total capital expenditures. Most often the additional tax credit equity is invested in the project over the construction period and pledged to secure a bank construction loan. The tax credit equity commitment can also be used to obtain an additional bridge loan credit facility for up to 80% of the amount of tax credit equity paid on a quarterly basis. The tax credit equity commitments are often “backed” by a bank or an insurance company that has purchased the tax credit. The IEDC’s Investment Tax Credit Programs focus on Indiana’s most highly distressed urban and rural areas that typically qualify as “low- or moderate-income geographies”7 or “areas targeted for redevelopment by government”8 as defined by the federal and state9 bank regulatory agencies. Further, the businesses awarded under these IEDC Investment Tax Credits Programs are typically “small businesses,” and the tax credit equity investment in such small businesses are made with the primary purpose of “promoting economic development” that “supports permanent job creation” in low- or moderate-income geographies and areas targeted for redevelopment by government to cause “revitalization and expansion” as contemplated by federal and state regulatory agencies.10 Most tax credit equity investments made under the IEDC’s Investment Tax Credit Programs can be structured to qualify as allowable “public welfare” or “community development” investments as contemplated by Congress in 1992 pursuant to Section 6 of the Depository Institutions Disaster Relief Act of 1992, titled “Community Development Authority of Banks.”11 Since December 2017, the IEDC has awarded in excess of $200 million in tax credits under these programs. It is estimated that at least $100 million of awarded credit will be available for sale over the next four years across the state. Frank A. Hoffman President Strategus LLC frank.hoffman @strategusllc.com Shawn E. Peterson Vice President & Director of Innovative Finance & Incentives Strategus LLC shawn.peterson @strategusllc.com Strategus LLC is an associate member of the Indiana Bankers Association.
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