When Mark Sonderen was seeking funding for new equipment to expand production at Sonderen Packaging here, his banker recommended that the longtime paperboard carton maker seek financing through whats called an industrial revenue bond.


Such financing, which is intended to encourage creation and retention of manufacturing jobs, gives qualifying companies the ability to obtain low-interest loans through bond sales that offer investors tax-free returns.


Through an industrial revenue bond sale, Sonderen secured $2 million to buy a die cutter and gluer for Sonderen Packagings plant in late 2005. A die cutter cuts paperboard into precise shapes needed to make cartons.


It did allow us to get equipment at very good interest rates, says Sonderen, whos president of the company.


Industrial revenue bonds can be issued in amounts up to $10 million.


They can be used to finance new equipment, land acquisitions, construction of new facilities, and the purchase of existing facilities.


The applicant must show that the bond will create new jobs or keep jobs from being relocated.


In the last 10 years, 122 industrial revenue bonds totaling nearly $1 billion have been issued in Washington state, says the Washington state Industrial Development Financing Authority. Of those, 16 bonds totaling $48.2 million were issued in Spokane County, either through that financing authority or the Spokane County Industrial Development Corp., the only two public entities that issue them here currently.


Both entities are public bodies funded through fees generated from bond sales.


Sonderen says the low interest rate on the bond sold to fund Sonderen Packagings purchases in 2005 saves the company $2,000 per month, and that will continue over the course of the seven-year loan, compared with a market-rate commercial loan.


He says it took about two months to arrange the financing.


It wasnt that difficult and worked even better than I had planned, Sonderen says.


The loan formula also required the creation of five jobs, an amount the company has far exceeded.


Since we got that loan, weve created more than 30 jobs, he says.


Larry Vandenburg, Sonderens banker and vice president of commercial lending at Washington Trust Bank here, says an industrial revenue bond works the same as a loan as far as the borrower is concerned, but for the borrower to qualify, the funds have to be used for manufacturing or enhancing the value of a product.


A local funding agency, which in Sonderens case was the Spokane County Industrial Development Corp., issues the bond.


In this case, it was backed by a letter of credit from Washington Trust Bank, which also bought the bond.


Some banks sell them to other institutions, but we hold onto them, Vandenburg says.


Most local banks that provide letters of credit to back industrial revenue bond sales buy and retain the bonds to maintain a relationship with the borrowers, but larger banks often package the bonds together to sell to investment firms, Vandenburg says.


While the borrower enjoys an interest rate 1.5 percentage points to 2 percentage points below the market rate for commercial loans, the incentive for the bank or other investor is the tax-free interest the bond earns.


Fees for arranging such bond sales are higher than for a normal loan because theres considerable legal work involved, Vandenburg says.


The bonding process requires work by a bond counsel who represents the issuing authority and by separate attorneys who represent the borrower and the financial institution that backs the bonds, Vandenburg says.


To offset the fees, you need a loan of $500,000 or more to make sense, he says. Of the bonds, he says, They arent good for everything, but with Mark, I told him it could save him money.


Roy Koegen, of the Spokane law firm Koegen Edwards LLP, is the bond counsel who works with the Spokane County Industrial Development Corp. when it issues a bond, but he only remains involved long enough to qualify the bond for tax-exempt status.


We assign our interest to the bank, Koegen says. The terms of the loan and bond are the same.


Because state law disallows using public funds to finance industrial revenue bonds, the bank takes the risk, and the public development corporation doesnt incur any obligation, he says.


Jonathan Hayes, executive director of the Washington state Economic Development Financing Authority, says industrial revenue bonds are attractive to borrowers because of the low interest rates they carry.


Its cheap money, he says.


Only companies with good credit and strong potential for job growth can qualify for the bonds.


Companies that cant qualify for a regular commercial loan cant get industrial revenue bonds, Hayes says. The bonds are fully backed by a bank letter of credit. Banks underwrite them the same as commercial loans.


The bond process insulates the state Economic Development Financing Authority from financial risk, Hayes says.


He adds that his salary isnt even publicly funded.


We charge a fee like any other business, he says. The only reason were a government entity is to issue stuff tax-exempt.


In the last 10 years in Spokane County, the Washington state Economic Development Financing Authority has issued eight industrial revenue bonds totaling $15.6 million to finance manufacturing improvements and acquisitions that helped create or retain 476 jobs, Hayes says.


They include a $7.5 million bond sale in 2005 for Pristina Pine LLC, a Spokane Valley cut-stock company that makes wooden parts for door and window manufacturers, to finance the purchase of the land and facilities it had been leasing; a $2.5 million bond sale in 2004 for Scafco Corp., a Spokane Valley grain-silo and storage-bin maker, to finance the renovation of a building and construction of a new manufacturing building; and a $2.1 million bond sale in 2002 for U.S. Pies Realty LLC, an affiliate of Spokane-based Cyrus OLearys Pies, to finance a new pie production facility in Airway Heights.


The rest of the industrial bonds in Spokane County were issued by Spokane County Industrial Development Corp.


Contact Mike McLean at (509) 344-1266 or via e-mail at mikem@spokanejournal.com.