When the Campus for Jewish Life in Palo Alto gave the go-ahead to build a $90 million facility, a new branch of the Jewish Home, the directors knew it would take a lot of chutzpah to ask the community to finance such a plan.
After all, this was the “most significant project that any Jewish community in California has ever undertaken,” says Daniel Ruth, president and CEO of the Jewish Home. And the Jewish Home had already asked its supporters to help finance other hefty projects in the works.
The Home’s price tag at its San Francisco Silver Street site had already topped out at $55 million — “fully funded through wonderful philanthropic community,” says Ruth — and the total cost for the Palo Alto site is estimated at approximately $200 million.
So, when it came time to figure out how to finance the construction of the Palo Alto site, Ruth and his colleagues looked to other big Jewish community projects around the country to model their financing plan.
Tax-exempt bonds were “the only way the project could be done,” says Ruth, explaining that this is a common practice for faith-based communities across the country to finance significant undertakings like the Campus for Jewish Life.
Indeed, local large Jewish community capital projects are increasingly turning to tax-exempt bonds as the smart solution for financing.
These government-issued bonds, whose interest payments are not subject to federal income tax, are “a clever smart way to finance these projects,” says Ruth.
“The Home and community have to put in a much lesser amount of equity into the project,” he explains. “The rationale was easy.”
The bonds are often used by large nonprofit organizations such as universities and hospitals. Now Jewish Community Centers, private Jewish day schools and senior living projects are taking advantage of the opportunities tax-exempt bonds offer.
Both the Jewish Community Center of San Francisco and the North Peninsula Jewish Campus in Foster City, for example, have also issued tax-exempt bonds to finance their projects.
Tax-exempt financing “is not new in senior living,” explains Edwin Eng, vice president of Cain Brothers, the investment bank that has handled the bond financings for many local Jewish projects, including JCCSF and North Peninsula Campus. In fact, facilities across the nation — including the Reutlinger Community for Jewish Living in Danville and Rhoda Goldman Plaza in San Francisco have also used tax-exempt bonds.
Tax-exempt bonds help “bridge the gap between when the money comes in and when the money goes out, so that you can complete your project on time with reasonable costs,” explains Eng.
Tax-exempt bonds make it possible for organizations like these to pay for more than just the bricks and mortar for a new facility, says Eng. “Using tax-exempt debt helps organizations complete their capital development plans,” he says, adding that “tax exempt borrowing in conjunction with strengthening their investment reserves and endowments through building-related capital campaigns also help the organizations to have cash available to weather through future economic and other types of storms.”
Eng further explains that the alternative to obtaining tax-exempt bonds is going “to the bank to take out a regular real estate loan which probably would have cost more or would require staging the project over a longer time horizon.”
Three years ago, it was Paul Resnick, former president of the JCCSF, who spearheaded the tax-exempt bond issue to raise millions for the $60 million new facility on California Street.
Resnick explains that a nonprofit organization such as the JCCSF “can play both sides of the streets,” meaning that it “can borrow at tax-exempt rates, but because we don’t pay taxes, we can lend at taxable rates. So we took the money given to us and invested it.”
Asked about the risks of such an investment, he says that “any time you get involved with investing money, there are potential minuses.”
Because the JCCSF, for example, “is not necessarily a good credit risk,” Resnick says, the organization needed to get credit enhancement from two different banks to guarantee the tax-exempt bonds. “So if we didn’t make the payment on our bonds, these two banks were required to make the payments.”
Construction on the Campus for Jewish Life in Palo Alto — at the former Sun Microsystems site — is expected to begin in late 2006 and take two years. The $200 million project will cover purchase of the land, development of campus infrastructure (Jewish Community Center and Jewish senior residences) and total building costs plus an endowment. Executive Director of Campus Development Shelley Hébert says that board members may decide to obtain additional tax-exempt bonds to finance other aspects of the project as well.
The move to use tax-exempt bonds offers a clear snapshot of today’s economy. In February 1999, for instance, when the Jewish Bulletin ran its article “Can Jews raise $350 million for Bay Area construction?” — asking Bay Area Jews if they could afford the $350 million in the next several years to build and endow new institutions — most community leaders answered “yes” with surprising calmness.
“We’ve had a dip in the economic cycle in the past five years, making it more difficult to give when the funds are needed,” says Eng, explaining why local Jewish nonprofits have turned to bonds lately. “For some donors, it’s all about ‘I want to give you money but I can’t give it all to you right now.'”