Tax-Exempt Lending For Community Banks

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Government entities and nonprofit 501(c)(3) organizations are among the most active borrowers in the tax-exempt bond markets.

Historically, banks and other financial institutions have been involved in lending to tax-exempt entities in several ways. One of which is by providing a letter of credit to support variable rate demand obligations, or “VRDOs,” issued by or for the benefit of nonprofit borrowers and governmental entities, such as counties, cities, school districts, townships or boroughs, and sold in the capital markets by underwriters who initially purchase the obligations. In the case of nonprofit organizations that do not have the legal ability to directly issue tax-exempt debt, the obligations must be issued through a conduit authority having the power under Pennsylvania law to issue tax exempt bonds or notes for the benefit of the intended ultimate user of the VRDO proceeds, i.e. the “borrower.” Such issuers may include general municipal authorities, “special purpose” municipal authorities such as a hospital or water and sewer authority, industrial development authorities, redevelopment authorities, or one of the various state level issuers, such as the Pennsylvania Economic Development Authority or the Pennsylvania Higher Educational Facilities Authority.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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