WASHINGTON - Tax-exempt enterprise zone bonds will be extremely difficult to market and thus almost unusable by the small commercial businesses that are supposed to benefit from them, lawyers at an American Bar Association conference said Friday.
"There will be absolutely no market for these bonds," said Thomas R. Wechter, a lawyer with Holleb and Coff in Chicago. Wechter was speaking to a conference held here on affordable housing and community development law sponsored by the association.
The 104 enterprise zones to be designated later this later this year by the Clinton Administration will be permitted to issue a new category of exempt-facility bond to finance zone businesses. But corporations investing in community development are more likely to put their money in projects financed with the low-income housing tax credit, which provide a higher rate of return with less risk, Wechter said.
"The rate of return [on enterprise zone bonds] is not going to be high enough to get corporate America to buy them," Wechter said.
With firms out of the picture, issuers would have to turn to individual investors and mutual funds, but they would demand such a high interest rate that a zone business would not be able to afford debt service payments, Wechter said.
Wechter's comments "are probably right," said David F. Polatsek, a Department of Housing and Urban Development senior attorney for community development.
Stuart C. Sloane, a local lawyer, agreed with Wechter's comments, and said the problem with enterprise zone bonds extends to the other tax incentives offered under he zone program.
"Where's the beef? Where are the incentives?" Sloane said. "There isn't the level of tax incentives for the private sector to really step in there" and provide seed capital for zone businesses, he said.
The three lawyers said the tax incentive package was much stronger when first proposed by the Clinton Administration more than a year ago. Through the legislative process, the tax-exempt financing component and the other incentives "were emasculated to a great extent." Sloane said.
The enterprise zone plan as originally proposed by President Clinton would have permitted a larger number of tax incentives, created more zones, and provided a bond component with fewer restrictions.
Under Clinton's plan, the bonds, to be issued in 110 zones, would have been bank eligible, regardless of the size of the issuer, and 50% of each issue would have been exempt from the private-activity bond volume cap.
The current plan calls for 104 zones, which comprise nine "empowerment zones" and 95 "enterprise communities." Both types of zone may issue bonds, but the bonds are subject to the volume cap and are not bank eligible. Wechter said that making the bonds bank eligible would have helped solve the marketability problem.
Only empowerment zones receive two additional tax breaks, but the lawyers said even those would not be enough to sustain a zone business. Businesses will be eligible for a tax credit for each employee who is a zone resident, and the firms will receive a larger income tax deduction for depreciation of equipment than other taxpayers now receive.
Aside from tax benefits, HUD has said the zones and communities will be eligible for special federal grants and will receive special status in competition for funding under numerous federal programs.
But even with those special grants, zone businesses still need capital from the private sector, which can only be raised through tax incentives, the lawyers said. In their current form, "the tax benefits are minimal" and "will not to offset the cost" of relocating to or starting up a business in a zone, Wechter said.
In detailing HUD's enterprise zone regulations, Polatsek said the department will have the authority to revoke an area's enterprise zone status if it is not operating appropriately.
But, he said, the Internal Revenue Service "has assured us orally" that any tax-exempt bonds issued by a zone that loses its status "will be grandfathered." Bonds "will not be affected by revocation," Polatsek said.
