Financial Incentives 

 Renovation projects throughout the City Center are adding to Birmingham's skyline and bottom line with the assistance of various incentives. These incentives can often be combined to make renovation projects economically attractive and fill a gap that allows the project to go forward. Each project is different, however, ONB can help guide developers through the eligibility and application process. We look forward to discussing development incentives in further detail.

Community Development Block Grant - City "Float" Loan (Interim Financing)
Short term financing through a City of Birmingham "FLOAT Loan" funded by HUD Community Development Block Grant provides low-interest financing for a maximum term of 30 months and is available primarily for qualified projects in the City Center and City neighborhoods. Loan terms average 18-24 months, with amounts ranging from $100,000 - $1,000,000. Eligible uses of CDBG funds include real estate acquisition, renovation and construction.

All projects must be guaranteed by an irrevocable Letter of Credit issued in favor of the City of Birmingham and are subject to federal guidelines and regulations. The cost to the borrower is the 1% base rate charged by the City of Birmingham, plus the cost of the Letter of Credit (current charges average 1.5%).

A “float loan” adds value to a project by reducing and deferring interest costs/principal during the construction and lease-up period. The loans are subject to availability of funds and approval by the Mayor and City Council. Contact ONB for eligibility guidelines and a loan application.

Bank Loan Float Loan
Loan Amount $1,000,000 $1,000,000
Rate (Prime + 2%)* 10% 2.5% [1% “City” plus 1.5% (Avg. LOC) = 2.5%]
Term (months) 24 24
Interest/Yr $100,000 $25,000
Interest/Life of Loan $200,000 $50,000
Savings – Life of Loan $150,000
*As of June 1, 2006

NOTE: Bank usually does not allow interest to accrue. Borrower must pay interest on a yearly basis. Thus, this is another advantage of the float loan that interest accrues over the two year term.

Birmingham Citywide Local Development Corporation – LDC (Interim Financing)
The LDC has made a portion of its fund balances available to entrepreneurs and developers pursuing acquisition, renovation or new construction in the City Center. The loans range from $100,000 - $250,000 for a maximum of 12 months, although an additional twelve month extension may be possible. An irrevocable Letter of Credit in favor of the Local Development Corporation in an amount equal to the loan proceeds is required. Loans are contingent on availability of funds and approval of the LDC Board. See ONB for details.

SBA 504 Loan (Permanent Financing)
This type of loan offers long term, fixed asset financing for acquisition, renovation of buildings, new construction or purchase of long-life equipment (10-year useful life) by businesses. Working capital and debt refinancing are not eligible.

Typically, a SBA 504 project includes a loan secured with a first lien from a private-sector lender (i.e. bank) covering up to 50% of the project costs, a loan secured with a second lien from the SBA covering up to 40% of the cost, and a contribution of at least 10% equity from the small business borrower.

The maximum SBA loan is generally $1,500,000 for a single project. The borrower must create or retain one job for every $50,000 provided in the SBA loan. All loans are subject to bank, local Certified Development Corporation and SBA approval.

SBA Loan
Total Project Cost $3,750,000

Bank Position 1st Mortgage
% Project Financing 50%
Loan Amount $1,875,000
Rate (Prime + 2%) 10.0%
Term/Amoritization (years) (10/15) 10
Monthly Debt Svc $20,149
Annual Debt Svc $241,788

SBA Guaranteed Loan 2nd Mortgage
% Project Financing 40%
Loan Amount $1,500,000
Rate (2 points above 10 Yr Treasury) 7.0%
Term (years) 20
Monthly Debt Service $11,629
Annual Debt Service $139,548

Debt Service/Equity
Total Annual Debt Service $381,336
Total Monthly Debt Service $31,778
Equity % of Project * 10%
Required Equity $375,000

* Equity Required for an Existing Business

As this example illustrates, an SBA 504 loan provides up to 90% financing with attractive, fixed rates over a 20 year period during the SBA loan.

Federal Historic Tax Credits
If a building is a designated historic property, it is eligible for a 20% rehabilitation tax credit (see attached City Center Historic District Map). The tax credit is a "dollar for dollar" credit against your federal income tax equal to 20% of the cost of renovation. In order to qualify, an owner must "substantially renovate the property", i.e. spend an amount greater than the adjusted basis of the building (ONB can help you determine whether or not your project qualifies). The adjusted basis of a newly acquired property is the value of the property minus the land value.
Most expenses directly related to the rehab are deductible including labor, materials, and most soft costs. (Acquisition costs are not deductible.) The tax credit is subject to approval by the Alabama Historical Commission. ONB’s Historic Preservationist is available to assist with your Part 1 application. Call for details.

Example:
Cost of Eligible Improvements………………. $1,000,000
Value of Historic Credit…………………...…… $200,000

NOTE: Although the credit can be carried forward 15 years and rolled back 3 years, there are restrictions on its use by individuals. The Historic Tax Credit is subject to a 5-year hold period. Be sure to consult your accountant for specific details.

Wallace Property Tax Relief Act
If a building is designated an historic structure, it automatically qualifies for a 50% reduction in ad valorem taxes, reducing the assessment on qualified commercial structures from 20% of market value to 10%. (The Wallace Act has the effect of reducing City, County, School Board and State property taxes by half). The reduction is applied during the entire term of your ownership.

Example:
Assessed Value of Property……………….…… $2,000,000
Taxes at 20% Commercial Assessment………… $27,800 ($2 million x 20% x .0695 tax assessment rate)
Taxes with Wallace Tax Relief Act………………$13,900 ($2 million x 10% x .0695 tax assessment rate)
Tax Savings...................................................... $13,900

Tax Increment Financing (TIF)
A 1998 amendment to Alabama's constitution authorizes cities and counties to create tax increment financing districts that set aside the district's property tax increases in a separate TIF fund. Boundaries of Birmingham’s current TIF district include the total City Center. TIF funds can be used for making public improvements including streets, sidewalks and infrastructure which complement private investment in redevelopment projects. Businesses, developers and others who demonstrate a viable redevelopment plan that contributes to the urban renewal of the City Center may request support for their projects from TIF funds. ONB coordinates requests for these funds on a case- by- case basis.

Float Loan/SBA 504 Combination
A float loan could be paid off with financing under the SBA 504 Loan Program. Specifically your bank would provide a permanent, first mortgage loan for 50% of project costs including acquisition, renovation and other fixed assets, and SBA would provide subordinated financing for 40% of project costs at a fixed rate for 20 years. SBA can make a loan commitment good for 12 months and may possibly extend that commitment an additional 12 months. In any case, SBA will not fund a loan until construction is completed, and a construction loan would be required if a float loan were not utilized. The SBA rate will be determined by market forces at the time of the loan closing and debentures are sold. The principal benefits of the SBA 504 loan are long-term, fixed rate; subordinated financing at a favorable rate and 90% financing that minimizes capital allocated to real estate and makes more working capital available to your business.

The combination of a 24-month float loan (maximum $1,000,000) and SBA 504 financing could result in 100% financing for 24 months at 1%-2% interest rates and favorable long-term financing.

Alabama’s Capital Investment Tax Credit
The Capital Investment Tax Credit program allows an income tax credit of up to 5 percent of initial capital costs of qualifying projects to new and expanding companies. The credit is available each year, for 20 years, beginning in the year the qualifying project is “placed in service”*. The current rate of taxation in the State of Alabama for corporations is 6.5%. Alabama allows the deduction of federal income taxes apportioned and paid to Alabama from the gross apportioned and allocated income, creating a lower net effective income tax rate. The capital credit can effectively eliminate the Alabama income tax liability generated by a qualifying project.

• Companies eligible: Any trade or business described in 1997 North American Industry Classification
System (NAICS), Sectors 31 (other than National Industry 311811), 32, 33, and 42; subsector 511;
Industry Groups 5142 and 5415; Industries 54138, 54171; and National Industry 514191 and includes such trades and businesses as may be hereafter reclassified in any subsequent publication of the North
American Industry Classification System, or any process or treatment facility which recycles, reclaims, or converts materials, which includes solids, liquids, or gases, to a reusable product. In addition, headquarters facilities may qualify.

• Criteria for businesses to qualify for the capital credit incentive are:
Small Business Additions (additions to existing facilities and which investing company has 100 or fewer full-time employees in Alabama prior to date addition placed in service):
Creation of 15 new jobs;
Investment of $1,000,000.

All other Businesses (new and expanding):
Creation of 20 new jobs;
Investment of $2,000,000.

Headquarters Facilities:
Creation of 20 new jobs;
Investment of $2,000,000.

A Project located in a Favored Geographic Area** (new and expanding):
Creation of 5 new jobs;

**A Favored Geographic Area is:
(a). Any area designated as an enterprise zone by law or that is governed by the Alabama Enterprise Zone Act (see attached City Center Enterprise Zone Map).
(b). Any Alabama county which is considered to be less developed (Note: This does not apply to Jefferson County). This designation is comprised of counties ranked forty-fifth through sixty-seventh, inclusive, using the following factors:

(i) Percent change in population over the most recent five-year period.
(ii) Personal per capita income in the last calendar year for which data is available.
(iii) The average percent employed over the last 12 months for which data is available.
Favored Geographical Areas are ranked as of every January 1.

Alabama Enterprise Zone Credit
To stimulate business and industrial growth in depressed areas of the state, Alabama offers certain tax credit incentives to businesses that locate or expand within a designated enterprise zone. The program is administered by the Alabama Department of Economic and Community Affairs (ADECA), who determines whether the project meets the requirements for the program and must certify such to the Alabama Department of Revenue. Qualified participants will be eligible for a credit that may be applied against the income or business privilege taxes or sales and use taxes, where applicable.

Ad Valorem Property Tax Abatement
Description: The abatement of the non-education portion of a company’s real and personal ad valorem property taxes for up to 10 years.

Eligibility: All Industrial or Research Projects in SICs 20-39 and 50-51, Industrial Group 737, and Industry
Numbers 0724, 4613, 8731, 8733, and 8734 with a capital investment of at least $2 million, or the lower of $2 million or 30% of their original investment in the case of expansions, are eligible.

Rate: The assessment ratio for industrial property in Alabama is 20% of market value. The millage rates in The City of Birmingham, Jefferson County, and the State are as follows:
City, County, & State Total Mils: 69.50 mills
City, County, & State Education Mils: 33.80 mills (may not be abated)
City, County, & State Non-Education Mils: 35.70 mills (may be abated)

Term: Companies may utilize this abatement for up to 10 years.

Sales Tax Abatement
Description: The abatement of the non-education portion of a company’s City, County, and State sales tax on the purchase of construction materials.

Eligibility: Same as ad valorem tax abatement.

Rate: The combined City, County, & State sales tax in Birmingham is 8.0%.

Term: This is a onetime abatement of sales tax before the project is placed in service.

Use Tax Abatement
Description: The abatement of the non-education portion of a company’s use tax on the purchase of manufacturing or production equipment.

Eligibility: Same as ad valorem tax abatement.

Rate: The combined State, city, and county use tax rate is 2.875%
(State = 1.5%, City of Birmingham = 1.0%, Jefferson County = .375%).


Term: This is a onetime abatement of use tax before the project is placed into service.


State Industrial Development Grant
Description: The State Industrial Development Grant program may be utilized by companies to offset development cost.

Eligibility: Manufacturers developing publicly held property for private use are eligible.

Rate: The grant size is determined by the capital investment of the project and may be as high as $150,000. This is a onetime grant; however, new grants may be obtained for each new expansion.

Industrial Access Road Grant
Description: The Industrial Access Road Grant program may be used to develop transportation infrastructure for new and expanding industrial projects.

Eligibility: Roadwork on a public right-of-way, which is necessary for access to a project, which will create new jobs and capital investment, may qualify.

Rate: Grant requests are evaluated on a cost benefit basis, with jobs, capital investment, and road costs being the primary aspects of the evaluation.

Deed/Mortgage Tax
Description: A one-time abatement of taxes associated with the creation of deeds and mortgages for a new project.

Eligibility: Any project may qualify for this abatement; however, each is evaluated by the appropriate governmental unit on a case-by-case basis.

Rate: The tax is .15% of the deed/mortgage amount.

Alabama Industrial Development Training
Description: Customized pre employment recruiting, screening, and training at no cost to the client company.

Eligibility: New and expanding businesses can qualify if they provide either new jobs or jobs with upgraded skill requirements.

Rate: While no funding in lieu of training is offered under this program, estimates of its value range up to $1,500 per job, depending on skills required.

Community Express Loan Program
The Community Express Pilot Loan Program is a collaborative effort between the SBA and the National Community Reinvestment Coalition (NCRC) and its member organizations. Under the pilot, designated lenders are authorized to implement an SBA Express-like program to increase SBA lending to pre-designated geographic areas generally comprising Low and Moderate Income Areas (LMIs) and to women, minorities, and veterans. The program also includes a technical assistance component. Community Express complements the SBA Microloan program by providing financing to those businesses that fall between the parameters of SBA's Microloan program and conventional loan programs. Community Express represents a unique opportunity to expand existing partnerships and build new partnerships between participating lenders and community organizations.


“Lending Friends” Micro Loan
"Lending Friends", a BBRC micro loan program, is a financial intermediary to the SBA's micro lending program. As an intermediary, the BBRC has the ability to obtain funds from the SBA for the purpose of financing micro businesses. With the assistance of the SBA, the BBRC has extended its financing capabilities beyond the Birmingham city limits to include all of Jefferson County.

Revolving Loan Fund (RLF) Program
The Revolving Loan Fund Program can provide long term capital to eligible businesses for the acquisition, construction, expansion and/or renovation of land and buildings, as well as for the purchase of machinery and equipment. Funding is also available for inventory and working capital needs on a shorter term.

Advantages of the RLF Program: 20 year terms for real estate
Fixed interest rate
Up to 90% financing

This program can provide financing for existing industries and local businesses wishing to expand and create new jobs.

Birmingham Economic Development Administration Revolving Loan Fund (EDA)
The EDA loan program provides gap financing for businesses located within the Birmingham city limits. Loans are made to assist in acquiring and renovating land, buildings, machinery and equipment.

Commercial Revitalization District Rebate Program
Many Commercial Revitalization districts offer rebates on repairs and improvements to existing buildings. For businesses that comply with the design guidelines in a designated rebate area, there is a 20% rebate (maximum at $40 a front per linear foot) for improvements to the façade of the building and a 10% rebate (maximum $1.00 per interior sq. ft. or $5,000, whichever is less) on other capital improvements as approved through the Design Review process.

Summary
Incentives can be mixed and matched, subject to availability. Operation New Birmingham packages float loans for the City, County and LDC and is available to assist throughout the loan application and approval process. Contact us for more information or help in structuring a plan that works for you.