Tax-Exempt Agricultural Development Bonds (ADBs)

Agricultural Development Bonds (ADBs) are tax-exempt bonds issued by the North Carolina Agricultural Finance Authority (NCAFA), which has authority under the North Carolina General Statutes (Chapter 122D) to issue bonds for many purposes. ADBs can be used to finance a wide range of agricultural projects that involve 'processing' or 'manufacturing' of agricultural products as long as the projects qualify for federal tax exemption under the Internal Revenue Code, resulting in lower financing costs to the borrower. Examples of ADB financings include cotton gins, feed mills, meat processing facilities, and agricultural waste to produce green energy. ADBs cannot be used for refinancing.

• Financing is available for projects in North Carolina.

• Firms undertaking agricultural projects that involve processing or manufacturing of agricultural products.

• Projects must qualify for federal tax exemption under the Internal Revenue Code.

• Eligibility under the federal tax code must be determined by bond counsel.

• Projects must be acceptable to NCAFA as an agricultural purpose, even if they qualify as tax-exempt.

No bond size limit, interest rate, spread, or issuance fee is published on the program page or elsewhere on the NCAFA site.

What is published: the benefit is the federal tax exemption itself. ADBs "can be used to finance a wide range of agricultural projects that involve 'processing' or 'manufacturing' of agricultural products as long as these projects qualify for federal tax exemption under the Internal Revenue Code. This results in lower financing costs to the borrower." NCAFA's programs page describes its role as "acting as conduit issuer for agribusiness processing, Ag related manufacturing or Ag waste disposal, in order to facilitate lower (tax exempt) interest rates," and notes NCAFA "has statewide bond authority."

Restrictions and process conditions that affect cost:

• ADBs cannot be used for refinancing.

• The "Inducement" step should be completed before money is spent on the project — "expenditures prior to inducement may be subject to exclusion from the bond issue in certain circumstances."

• A letter of credit is normally involved; NCAFA advises discussing its bond-security requirements before agreeing to a final LOC, since failing to do so "may result in delays."

• Eligibility under the federal tax code must be determined by bond counsel, and a project that qualifies as tax exempt may still be rejected by NCAFA as not serving an "agricultural" purpose.

Pricing is set at issuance against the borrower's credit and credit enhancement, so contact NCAFA (Executive Director, 919-664-1740) early for indicative terms.

Firms considering ADBs should contact NCAFA early in the process; NCAFA will advise on how to proceed with a bond issue. Certain steps such as the 'Inducement' should be completed prior to expending money on the project (expenditures prior to inducement may be excluded from the bond issue in certain circumstances). It is highly recommended that the firm discuss letter-of-credit and bond-security requirements with NCAFA before finalizing, to avoid delays.