By Dennis Winkler

If you are a 501(c)(3) organization in need of funding for capital improvements and expansion, consider using bond financing to meet your needs. Bond financing can be used for items including land, construction costs, furniture, or other equipment used for charitable purposes. At least 95 percent of the financed money must be used for not-for-profit purposes in order to qualify. Generally, bond financing is undertaken for larger transactions, usually $15 million or greater, and may offer considerable flexibility in terms of structuring.

Why use bond financing?
The main advantage of using bond financing for capital improvements and expansion is the low interest rate that the not-for-profit receives. This may help the organization to keep their endowment fund intact (and earning interest), to get their capital expenditures done now, and have the bond repaid with future funds (from a capital campaign, for example). The organization is also generally able to prepay the bond upon giving a 30-day notice.

So what is the catch?
While the organization does receive a lower interest rate, there is a little more work that needs to be done for bond financing. On average, the entire transaction can take six to eight weeks to complete, with all of the paperwork and approval processes. Also, if the bond is sold to the public a document of disclosure must be prepared. The upfront costs in using a bond are usually higher than a conventional loan. And as with any loan there are risks, including the possibility that the capital campaign will fall short, among others.

Bond financing is normally backed by the organization's credit and any credit enhancement that it furnishes. Organizations commonly utilize bank letters of credit or other forms of credit enhancements such as bond insurance to back the bonds, since investors then rely on the enhancer's financial strength and not the organization's. This ensures that the bonds can be readily sold to third parties.

How do I begin?
To obtain this bond financing, an organization must first locate a taxexempt issuer such as a local government entity or development authority. The desires of the parties and local requirements determine the form of the transaction. As with all significant financial transactions, it's strongly recommended that you consult your financial advisor and legal counsel when considering bond financing.