What is tax-exempt bond financing?
In an ordinary tax-exempt bond transaction, a local government entity, often a development authority, issues bonds to finance facilities for a private organization. Investors purchase the bonds and the development authority uses the funds either to make a loan to the nonprofit or to acquire facilities for lease to the nonprofit. The nonprofit agrees to make payments in amounts sufficient to pay debt service on the bonds. The primary benefit of tax-exempt bond financing is the lower interest rates paid by the nonprofit borrower. The bonds issued by the authority for the benefit of 501(c)(3) organizations can be qualified to pay tax-exempt interest to the investors, and the lower interest rates are passed on to the nonprofit borrower. Interest on such bonds also generally is exempt from income taxation in the state in which the bonds are issued. With capital facilities financed by low-interest, long-term bonds, nonprofit organizations can direct their fundraising activities into endowmen
