Industrial Revenue Bond Financing
Andrew J. Hamilton
Executive Director
March 2020
An Attractive Source for Marketing Expansion
QCREDA bonds can support private manufacturing projects that fuel economic growth. The lower interest rates and longer payment terms of DOUBLE tax-exempt Industrial Revenue Bonds (IRBs) can be used to finance industrial expansion.
Because private manufacturing projects tend to be larger in scope, create jobs and expand the tax base, the federal tax code allows for a special category of securities known as “private activity bonds” They are also referred to as pass-through bonds or conduit bonds. These are essentially transactions laundered through QCREDA to become tax exempt to a private manufacturer. For Manufacturing firms, they are called Industrial Revenue Bonds (IRBs). They are a little complex but carry a lower interest rate than conventional financing.
INDUSTRIAL REVENUE BOND BASICS – Industrial Revenue Bonds (IRBs) are tax-exempt loans issued by governmental units, like QCREDA to finance a private company’s expansion, construction or acquisition of manufacturing facilities and equipment. QCREDA supports these projects because they can improve the economic well-being of the region. IRBs are issued at rates lower than conventional loans because interest paid on the bonds is DOUBLE tax exempt (from both federal and state income tax). The lower interest rate reduces the cost of financing and makes projects more attractive to pursue. Additionally, these bonds can mature in 20 to 30 years as compared to five to ten for typical bank loans.
HOW YOU CAN QUALIFY – If your project involves manufacturing, waste disposal/recovery or wastewater treatment then you probably meet the qualifications for an IRB. The next step is reviewing capital expenditures at the project site for the three years prior and subsequent to the issuance of the bonds, which must be $20 million or less. QCREDA does not have any specific economic development requirements or goals that must be addressed if a company is to obtain financing. You just put together a short application of the same information you would provide a bank.
HOW TO APPLY FOR AN IRB
CONTACT QCREDA – It is important to obtain a preliminary approval of an inducement resolution. Any hard project cost incurred after the date of this resolution is generally eligible to be financed with bond proceeds. However, expenditures made within 60 days before the resolution are also eligible. The overall process takes 60-90 days, but you can use interim financing or construction
financing and then use bond proceeds to take out the interim
loan.
CONTACT YOUR BANK – IRBs must be backed by a bank or other entity. If a bank is willing to approve a conventional loan, they are likely to approve an IRB. The only difference is that the interest they earn is not subject to state and federal income tax. The bank can purchase the bond directly or provide a Letter of Credit to back the bond that can be later sold to an investment house. In this case an
underwriter or placement agent may be necessary because the bonds will eventually be purchased for public resale. In either case, it is necessary to have a bond counsel to draft all the legal documents.
COST AND OTHER CONSIDERATION
There are some upfront costs associated with issuing an IRB. These include ancillary costs like underwriter fees and additional legal fees. Any assets financed with tax-exempt IRBs must be depreciated on a straight line basis. And, the process to issue an IRB can be complicated but the benefits gained from 20 years of interest savings significantly outweigh these issues. In most cases, the cost of issuing a bond break even in the first year.