9. TAX INCREMENT FINANCING
In September 2007, the City of Atkinson, Nebraska, ("Issuer") issued a tax increment financing Note (the "TIF Note"), the net proceeds of which in the amount of $4,939,925 were paid to the Company through a loan (the "TIF Loan") to reimburse the Company for certain infrastructure improvements relating to the plant. Repayment of the TIF Loan is secured by the Company's pledge to the lender of the TIF Note ("TIF Lender") and other obligations relating to the TIF Note. The original amount of the TIF Note was $6,864,000 and bears interest of 9.5%.
In connection with the issuance of the TIF Note, the Issuer and the Company entered into a Redevelopment Contract ("Contract"). Under the Contract, the TIF Note proceeds were used for project costs, for the establishment of special funds held by the TIF Note trustee for interest and principal payments and reserves (the "Capitalized Interest Fund" and the "Debt Service Reserve Fund"), and for debt issuance costs. As of June 30, 2011 and December 31, 2010, the Capitalized Interest Fund was approximately $6,500 and is included in restricted cash on the balance sheet.
Payments on the Note are due in semi-annual increments which commenced at $139,000 on June 1, 2009 and increase to $444,000, with a final maturity in December 2021. Interest on the TIF Note is payable semi-annually on September 1 and December 1. The interest rate resets on September 1, 2012 and September 1, 2017 to a rate equal to the 5-year U.S. Treasury Constant Maturity index plus 4.75% for the applicable five-year period and the remainder of the term of the TIF Loan, respectively. The Company has the option to redeem or purchase the TIF Note in whole or in part. As of June 30, 2011 and December 31, 2010, the Company had $6,586,300 and $6,579,000 outstanding on the TIF Loan, respectively.
On July 6, 2009, the TIF Lender notified the Company that the Debt Service Reserve Fund was deficient, constituting a default under the TIF Loan. The Company and the TIF Lender entered into a Forbearance Agreement dated December 31, 2009 (the "TIF Forbearance"). The Company and the TIF Lender failed to extend the TIF Forbearance or reach other arrangements containing similar forbearance obligations by May 15, 2010, and the Company received a Notice of Default dated June 30, 2010 from the TIF Lender indicating that the Company was in default under the TIF Note due to nonpayment of $464,768 owing on June 1, 2010, and that the Debt Service Reserve Fund remained deficient by an amount of $588,553. Due to these defaults, the TIF Loan is classified as a current liability.
On August 12, 2010, the TIF Lender filed a lawsuit against the Company in the District Court of Douglas County, Nebraska alleging that the Company failed to make certain payments due under the TIF Note and failed to maintain the Debt Service Reserve Fund. In addition, the lawsuit stated that the TIF Lender accelerated the maturity of the TIF Note. The TIF Lender sought in the lawsuit repayment of $7,039,126 due as of August 9, 2010, plus such additional amounts as become due and owing under the TIF Note, with interest accruing after August 9, 2010 at the rate of 9.5% until the judgment is paid. On April 20, 2011, the court granted a partial summary judgment motion filed by the TIF Lender, subject to a hearing to determine costs and interest. The matter is still pending and TIF Lender has agreed to stay the proceedings as described below.
Effective June 30, 2011, the Company entered into a Forbearance and Standstill Agreement with the TIF Lender (the "TIF Forbearance Agreement"), under which the TIF Lender agreed to forbear from exercising its enforcement rights under the TIF Loan until the earliest to occur of (i) September 30, 2011, (ii) the Lender taking any action to enforce its rights or remedies against the Company and (iii) and the occurrence of an "event of default" under the TIF Forbearance Agreement that is not cured within the applicable cure period. The TIF Lender agreed to stay the legal proceedings until the forbearance period expires or the TIF Forbearance Agreement is terminated. In addition, the Company agreed to pay the TIF Lender $25,000 within three days of executing the TIF Forbearance Agreement and $25,000 per month thereafter.
Under the terms of the Contract, a portion of the real estate taxes paid by the Company are to be used to make principal and interest payments on the TIF Note. However, the Company did not pay certain real estate taxes. The Company has accrued the full amounts of 2009 and 2010 real estate taxes due as of June 30, 2011 and December 31, 2010 in accrued expenses on the balance sheet.
As provided in the TIF Forbearance Agreement, the TIF Lender reduced the accrued interest receivable from the Company by $464,474 as a result of the TIF Lender's purchase from the county of the past due 2009 Real Property Tax that was payable by the Company to the county tax assessor. Total accrued Real and Personal Property Tax payable by the Company as of June 30, 2011 was $2,373,150.