Kansas' Business Finance Programs

A variety of public and private programs are in place to provide financing alternatives to growing and relocating companies. We offer competitive industrial and commercial financing programs, tax incentives, and assistance plans with an eye toward long-term, low down payment packages. Best of all, we will customize a financing package to meet your individual needs.

Some financial packages offered to new and expanding businesses in Kansas are arranged through, or associated with, a local commercial lender. More than 500 commercial banks operate in Kansas, providing a broad array of depository, cash management, credit, investment, and international services for your business. Contact Kathy Moellenberndt or Jo Beilman at 785.234.2644.

Industrial Revenue Bonds (IRBs)

Industrial Revenue Bonds (IRBs) are among the most popular and cost-efficient methods of financing up to 100 percent of a growing business' land, buildings, and equipment.

IRBs are securities issued by cities, counties, and the Kansas Development Finance Authority (KDFA). Proceeds from the sale of the bonds to private investors are made available to enable creditworthy companies to purchase land and pay the costs of constructing and equipping new facilities or the costs of acquiring, remodeling, and expanding existing facilities. If IRBs are used to finance certain types of facilities, interest payable to the owners of the bonds is exempt from federal income tax. This type of IRB is generally called a "tax-exempt" bond.

Interest payable on bonds issued to finance other types of commercial facilities, or to finance non-qualifying portions of an eligible facility, is subject to federal income taxation. This type of IRB is generally called a "taxable" bond. Interest payable on all IRBs is exempt from Kansas income taxation. IRBs, in many cases, afford long-term, fixed-rate financing not otherwise available for a business' capital investments. Adjustable rate financing is also available, allowing a business that is willing to take the risk of higher interest rates to obtain lower borrowing costs.

In an IRB financing, the bond issuer acquires ownership of the property financed and leases it to the business. The lease rentals are used to repay the bonds with interest. Typically, the business is given an option to purchase the property at the end of the lease term for a nominal sum. Proceeds from the sale of the bonds are placed in escrow with a bank and used as directed by the business to pay the costs of constructing, acquiring, and installing the facilities. The business may have up to three years to spend the proceeds of tax-exempt bonds on eligible property.

Other benefits of an IRB include eligibility for a property tax exemption for the financed facilities of up to 100 percent for up to ten years and a sales tax exemption for labor and materials purchased for new facilities. These benefits and the structure of the financing are the same for all IRBs, whether tax-exempt or taxable. Specific details regarding the issuance of IRBs by a city or county are set forth in Sections 12-1740 et seq. of the Kansas Statutes Annotated. Many bond issuers also have their own policies and regulations regarding issuance of IRBs and the granting of property and sales tax exemptions for the financed facilities.

Interested companies should check with their financial/legal advisor(s).  Additional information can be obtained by email or phone from Kathy Moellenberndt or Jo Beilman, 785-234-2644.

Tax-Exempt IRBs: A Big Advantage

Because interest received by owners of tax-exempt IRBs is not subject to federal income taxation, the resulting "cost of money" to finance a qualifying project can be as much as two percent to 2.5 percent (average annual interest cost) below interest rates charged for a comparable conventional loan.

Since 1986, commercial facilities qualifying for tax-exempt IRBs have been restricted to manufacturing facilities. In 1993, the U.S. Congress indefinitely extended the authority of state and local governments to issue tax-exempt IRBs for such facilities. However, the use of tax-exempt bonds for manufacturing continues to be subject to restrictions as to the size of the financing, what may be purchased with the bond proceeds, and the amount of issuance costs that may be paid from bond proceeds.

Projects Eligible for Tax-Exempt Financing

Under current law, specific projects eligible for tax-exempt financing include manufacturing facilities; airports, docks, and wharves; mass commuting facilities; certain facilities for furnishing water, sewage, and solid waste disposal; qualified residential projects; local district heating and cooling facilities; facilities furnishing electricity or gas on a local basis; high-speed intercity rail facilities; and certain hazardous waste disposal facilities.

Customized Lease Agreement

Under a typical IRB, a company enters into a lease of the facility from the bond issuer (the Kansas city or county where your facility is located). Then, the rent payments are used to pay the principal and interest to the bondholders. When all bonds have been paid, the company may exercise an option to purchase the project for a nominal price, such as $100. The bonds are not general obligations of the issuer, payable from taxation; rather, they are sold on the strength of the company's ability to pay principal and interest when due (i.e., your financial strength).

The basic security agreement for bondholders is a net-net-net lease. The lease is a company's unconditional obligation to pay the bonds and interest through specified payments throughout the term of the lease. Because the financing is lease/purchase, the company can take advantage of applicable depreciation guidelines, receive available tax credits, and deduct interest payments as a business expense. The bond issuer does not exercise control over any aspect of the building's construction or the company's operations. During the term of the bond issue and within specified limits, a company may make structural changes to the building, replace equipment and machinery, and even sell portions of the land no longer needed for future expansion.

Most bonds are structured to be repaid over ten to 15 years. Principal repayment terms are flexible and can be structured to meet your company's specific cash flow needs. The bonds are usually not callable (subject to repayment prior to maturity) before the third or fourth year. Availability of bond financing will depend entirely on the creditworthiness of your company, as determined by the prospective purchaser of the bonds.

Property and Sales Tax Exemption

Whether your property is financed through tax-exempt or taxable IRBs, Kansas law (K.S.A. 79-201a) permits exemptions for your project from ad valorem (real and personal) property taxation for up to ten years, commencing with the year after the year the bonds are issued. Issuers can require that all or a portion of the abated taxes be made available to local taxing jurisdictions in the form of payments in lieu of taxes. Nearly every IRB issuer will also provide property tax abatements to your company as an additional incentive to locate in the community. Statute K.S.A. 79-3606 exempts the cost of building material and labor as well as fixed items of machinery and equipment from state and local sales taxes.

Simple Application Process

Most issuers use a simplified form to apply for IRBs. In some cases, it doubles as the form used to apply for property tax abatements.

Getting Your Bonds Issued

The bond issuance process can take as few as 60 days and generally follows these steps:

• Select a bond attorney, an underwriter, or other bond purchaser, and secure an option to purchase a building site.
• Apply to the city or county for an IRB issue. For some projects, a company may want to apply to the Kansas Development Finance Authority (KDFA).
• The governing body adopts a resolution of its intent to issue bonds for the company.
• For a project qualifying for tax-exempt bonds, the issuer notifies Commerce of its adoption of the resolution of intent and files its application for private activity bond allocation.
• Negotiate the terms and conditions of the bonds and the financing with a bond underwriter, or other bond purchaser (such as a commercial bank), and prepare any required bond-offering document.
• If an ad valorem tax exemption is offered by the issuer, the local school districts and city or county government are notified as applicable.
• The issuer holds a public hearing concerning the bond issue and the granting of a property exemption, if applicable.
• A bond attorney drafts the lease agreement, the indenture of trust, the bond ordinance, and the company's guarantee agreement.
• The governing body adopts the bond ordinance.
• An IRB notice is filed with the Kansas Board of Tax Appeals (BOTA) at least seven days prior to issuance of the bonds.
• The basic documents are executed (signed) by the issuer and the company.
• The bond closing is held and funds are paid by the underwriter or the purchaser against the delivery of the bonds.
• Proceeds are deposited into an account maintained by the Trustee to be spent on the project as directed by the company.
• The bond attorney notifies the Kansas BOTA, within 15 days of issuance, that the bond issue has been closed.

Limitations

A bond issue can provide a company with up to $1 million of tax-exempt bonds for a qualifying project, regardless of project size.

A maximum of $10 million of tax-exempt IRBs can be issued for a manufacturing project, as long as a company's total capital expenditures at the project location do not exceed $10 million for a period of three years before and after the bond issue, including the amount of the bonds issued. If the $10 million limit is exceeded during the total six-year time frame, the tax-exempt status is forfeited and the company must redeem the bonds at a premium.

Despite the size restrictions on IRB-financed projects, advantages may still accrue to projects exceeding $10 million. For example, a $15 million project could combine a $1 million tax-exempt bond issue with a $14 million taxable bond issue.

Congress has placed an annual limit on the amount of tax-exempt IRBs that each state can issue. This limitation is called a "volume cap." An allocation of volume cap must be obtained for bonds for most privately owned, qualifying facilities. In Kansas, volume cap is allocated by the Secretary of Commerce. Bonds for government-owned solid waste disposal facilities, airports, docks, or wharves are not subject to the state volume cap. For calendar year 2002 and subsequent years, the State of Kansas has $225 million of volume cap to allocate to its eligible projects.

A company may not have more than $40 million of tax-exempt IRBs outstanding, nationwide, at any one time. For this purpose, a company is defined as that entity that ultimately benefits from the tax-exempt bonds.

Community Development Block Grant/Economic Development

The Small Cities Community Development Block Grant (CDBG) program is a potential source of financing for companies that plan to create permanent jobs in Kansas. These funds are channeled through local governments. All cities or counties that do not receive an annual CDBG allocation from the U.S. Department of Housing & Urban Development (HUD) are eligible to apply. The eligible applicants include all Kansas cities and counties, except for Kansas City, Lawrence, Leavenworth, Overland Park, Topeka, Wichita, and Johnson County.

CDBG funds can be used for infrastructure improvements or for working capital, equipment, land, and buildings. Infrastructure funding takes the form of a half-grant and half-loan, with the loan portion having a ten-year term at two percent. Financing for working capital, equipment, and real property carries a fixed rate set at 3.5 percent below prime or four percent, whichever is greater. The term of the loan depends on the type of assets being financed: working capital up to five years, equipment up to ten years, and real property up to 15 years.

There are six funding rounds per year, with a 45-day application review period. The maximum amount of funds that can be applied for is equal to $35,000 per full-time job with a ceiling of $750,000. At least 51 percent of the jobs created or retained must meet HUD's low- and moderate-income (LMI) standard for the county in which the project is located.

CDBG funds must be matched with other funding from private or public sources. Projects that utilize more than $500,000 of CDBG funds must have at least $1 of matching funds for every $1 of CDBG funds. For projects that utilize $500,000 or less of CDBG funds, only $0.50 of matching funds are required for every $1 of CDBG funds. The CDBG program also provides loan guarantees on an open-window basis. The guarantee equals 75 percent of the loan amount up to a maximum exposure of $1 million. This assistance requires the creation of at least one job per $35,000 based on the guaranteed portion of the loan. The business has three years to create the jobs. The private lending institution establishes the interest rate.

The Community Development Division of Commerce administers the CDBG Economic Development Program. For further information, please call (785) 296-3004 or e-mail comdev@kansascommerce.com.

Kansas Economic Opportunity Initiatives Fund (KEOIF)

The Kansas Legislature established the Kansas Economic Opportunity Initiatives Fund (KEOIF) in recognition of the need to assist Kansas communities and businesses when an economic emergency or unique opportunity arises. Awards are based on the following:

• A major expansion of an existing Kansas commercial enterprise
• The potential location in Kansas of the operations of a major employer
• The award of a significant federal- or private-sector grant, which has financial matching requirements
• The departure from Kansas or substantial reduction of the operation of a major employer
• The closure of a major federal or state institution or facility

Possible uses of KEOIF funds include site and facility construction, improvements, equipment purchases, and other project-related costs associated with the establishment or expansion of a Kansas facility.

Requests for funds can be considered when a project includes significant local participation and commitment. The feasibility of the project is based on the local and statewide impact of the project. Projects are generally structured as five- to ten-year loans, which may be forgiven, based on job creation and guaranteed payroll commitments.

Kansas Existing Industry Expansion Program (KEIEP)

The Kansas Existing Industry Expansion Program (KEIEP) provides loans to assist in financing the expansion of small businesses in Kansas. KEIEP awards are performance-based and dependent upon the project's size. Expansions by existing Kansas commercial enterprises are eligible for awards. Projects that are working on the retention of small-sized to medium-sized companies in Kansas are also eligible under the program. The conditions and guidelines for KEIEP are similar to the KEOIF program, with exceptions relating to the size of the company. Companies wishing to access funds are required to commit to specific employment and payroll levels as a prerequisite for an award.

Investments in Major Projects and Comprehensive Training (IMPACT)

The Investments in Major Projects and Comprehensive Training program is designed to respond to the training and capital requirements of major business expansions and locations in the state. IMPACT may be utilized by individual businesses or consortiums of companies adding new jobs. The program is typically reserved for those projects involving at least 100 new jobs at a higher-than-average wage level. Projects with less than 100 new jobs may be funded, but must involve wage levels significantly higher than average. Under certain circumstances, IMPACT can also be used to retrain existing employees.

IMPACT has two major components: SKILL (State of Kansas Investments in Lifelong Learning) and MPI (Major Project Investment).

SKILL funds the following workforce training expenses:

• Instructor salaries
• Curriculum planning and development
• Travel expenses
• Material and supplies
• Training aids
• Training facilities
• Equipment for the local educational facility involved in the project (less than 50 percent)
• School administrative expenses (less than ten percent)

MPI funds other expenses, not limited to but including:

• Relocation expenses
• Labor recruitment
• Building purchases
• Equipment

To be eligible for MPI, an employer must spend more than two percent of payroll on workforce training or utilize funds from SKILL for employee education and training. While there is no statutory limit on the percentage of an individual project's IMPACT funds that may be utilized for MPI, these investment funds are limited to 20 percent of the total funding available under the IMPACT program.

IMPACT costs are financed through tax-exempt, public bonds issued by the KDFA. These bonds are retired through the revenue received from statewide employer withholding taxes. Individual project size may not exceed 90 percent of the withholding taxes received from the new jobs over a ten-year period.

The maximum amount of assistance for which a company qualifies is directly tied to the number of new jobs created and the taxable wages of those jobs over ten years. If the company is unable to create or retain jobs and employee wages in accordance with its annual projections, the business may be required to repay a portion of the funds on a shared basis with the state. If the company leaves the state before the bonds are retired, the full cost must be repaid, less any withholding tax contributions collected prior to the company's departure.

Tax Increment Financing (TIF)

Tax Increment Financing (TIF) is a real estate redevelopment tool applicable to industrial, commercial, and residential projects. TIF uses the increases in real estate tax revenues and local sales tax revenues to retire the bonds sold to finance eligible redevelopment project costs (K.S.A. 12-1770 et seq.).

A special kind of TIF, Sales Tax and Revenue (STAR) Bonds, was created by the 2003 Kansas Legislature. STAR Bonds allow state sales tax revenue generated by the project to be used as an additional source of revenue to retire bonds issued to finance project costs. In metropolitan areas, STAR Bonds can be used only for projects with anticipated capital investment of $50 million and with at least $50 million in projected gross annual sales. STAR Bond projects in rural areas have no specific financial threshold, but must be of major regional or statewide significance. Communities must have the approval of the Secretary of Commerce to issue STAR Bonds.

Monies raised through TIF may be used for redevelopment project costs approved by the city, such as land acquisition, site preparations, infrastructure, and other related costs. TIF cannot be used for the construction of privately owned buildings.

Financing is available from the proceeds of bonds to be issued by the city. Such bonds are primarily secured by the incremental increase in property taxes within the redevelopment district as a result of the new construction or rehabilitation, but may, under certain circumstances, also be general obligations of the city. The city may also use franchise fees and sales taxes generated with the redevelopment district to pay the bonds or finance the project costs.

TIF works for both privately owned land and publicly owned land to be sold for redevelopment. Advance developer commitment to the project is essential. TIF cannot be used speculatively to prepare a site for development.

Businesses have found that TIF offers several distinct advantages. Using TIF generally allows the financing of land acquisitions and other allowed costs with tax-free borrowing at generally lower interest costs. Also, TIF offers businesses the opportunity to purchase renovated sites at sub-market costs.

Rural Development (RD), U.S. Department of Agriculture
Business & Industry (B&I) Guaranteed Loan Program

The USDA Rural Development provides loans to businesses with the Business and Industry program. These loans are for business and industrial development. RD assistance is provided in the form of a loan guarantee of up to 80 percent for loans of $5 million or less, 70 percent for loans from $5 to $10 million, and 60 percent for loans over $10 million. Applicants apply for loans through private lenders. Business and Industry (B&I) loans are generally limited to a maximum of $10 million.

Funds from the B&I program may be used to finance business construction, business acquisitions, expansions, machinery and equipment purchases, and working capital. A company is required to provide sufficient cash or other assets as an assurance of its commitment to the project's success and to meet minimum loan requirements.

B&I loans may be made in areas outside the boundary of cities of 50,000 population or larger.

Rural Economic Development Loans and Grants Program (REDLG)

This program finances economic development and job creation projects in rural areas based on sound economic plans. Rural Economic Development Loans and Grants are available to any Rural Utilities Service (RUS) electric or telecommunications borrower to assist in developing rural areas from an economic standpoint, to create new job opportunities, and to help retain existing employment.

• Loans, at zero interest, are made primarily to finance business start-up ventures and business expansion projects. Projects should primarily create jobs for rural residents or residents of cities having a population of 2,500 or less.
• Grants are made to these electric and telephone utilities to establish a revolving loan that is operated at the local level by the utility. The revolving loan fund facilitates rural areas by providing needed capital (a) to nonprofit entities and municipal organizations to finance community facilities that promote job creation in rural areas, (b) for facilities that extend or improve medical care to rural residents, and (c) for facilities that promote education and training to enhance marketable job skills for rural residents.

Rural Business Enterprise Grants (RBEG)

Rural Business Enterprise Grants help to eligible entities (public bodies, nonprofit corporations, and federally recognized Indian tribal groups), finance and facilitate development of small and emerging private business enterprises located in rural areas (this includes all areas other than cities of more than 50,000 people and the urbanized area contiguous and adjacent to such a city).

Grant funds, which go to an eligible entity as noted above, help provide assistance to small and emerging private business.

These RBEG funds may be used for such items as follows:

• For the acquisition and development of land and the construction of buildings, plants, equipment, access streets and roads, parking areas, utility and service extensions, and fees for professional services.
• For technical assistance and related training.
• For start-up costs and working capital, financial assistance to a third party through the establishment of a revolving loan fund by the eligible entity.

Small Business Administration (SBA) 504 Program

The U.S. Small Business Administration (SBA) 504 Loan Program provides long-term, subordinated, fixed rate financing for fixed assets including machinery and equipment with a life of ten or more years, or real estate loans with a maturity of 20 years. Assets appropriate for purchase under the 504 program include land and buildings, building renovation, and machinery and equipment. The program serves healthy, expanding businesses with a net worth of less than $7 million and average net profits of less than $2.5 million after taxes over the past two years.

Funded projects usually range between $500,000 and $2 million. The 504 loan can be made for a maximum of $1 million, which can cover up to 50 percent of a project's cost. One job should be created or retained for every $50,000 loaned. Projects meeting certain public policy goals may warrant a loan for up to $1.3 million. A state-funded network of Kansas Certified Development Companies (CDCs) assists with the preparation of the application and originates and services the subordinated loan. Other programs may be used in conjunction with 504 loans to provide working or fixed-asset financing for larger projects.

Small Business Administration (SBA) 7(a) Loan Guarantee Program

The U.S. Small Business Administration (SBA) 7(a) Loan Guarantee Program is the primary SBA mechanism for financing user-owned or user-operated business expansions. The program can also finance the purchase of an existing business or finance a start-up business. The program is used to provide long-term, low down payment financing for a variety of needs including fixed assets and working capital. The program operates through private-sector lenders that provide loans that are, in turn, guaranteed by SBA.

The SBA has no funds appropriated for direct lending or grants.

The SBA may authorize to guarantee up to 85 percent of a loan not to exceed $150,000 or 75 percent of a loan up to $1 million. The loan can cover up to 100 percent of an expansion of an existing business and a lesser amount for start-up costs for a new business. The SBA favors requests that include a reasonable equity injection from a company.

User financing applies to activities in which the borrower uses or occupies the assets purchased with the loan. This stipulation disqualifies developers. The 7(a) financing option applies to costs associated with expansion and acquisition of assets including working capitalÑusually five to ten years for working capital. The maximum term for loans on machinery and equipment is ten years, although they are usually five to seven years in length. The term of loans for renovation, remodeling, and lease hold improvements is generally less than ten years, and those for new construction and land acquisition may extend to 25 years.

For-profit businesses are eligible for loan guarantees, subject to certain size standards that vary according to business types. General size limitations are listed below:

• Manufacturing: maximum number of employees may range from 500 to 1,500 depending on product being manufactured.
• Wholesaling: maximum number of employees may not exceed 100.
• Service: sales may not exceed $3.5 million to $29 million, depending on the industry.
• Retailing: sales may not exceed $5 million to $24.5 million, depending on the industry.
• Agriculture: sales may not exceed from $750,000 to $9 million, depending on the industry.
• General Construction: sales may not exceed from $17 million to $28.5 million, depending on the industry.
• Special Trade Construction: average annual receipts may not exceed from $7 million to $11.5 million.