Industrial Revenue Bonds Frequently Asked Questions
Q1. What are industrial revenue bonds?
A1. Industrial revenue bonds (IRBs) are tax-exempt bonds issued in the name of a municipality or State agency for the benefit of a manufacturing company.
Q2. Who can borrow with industrial revenue bonds?
A2. In order to borrow by using IRBs, the company must be a manufacturer or a processor. This includes industrial projects for assembling, fabrication, manufacturing or processing which creates a product for resale. Some examples of manufacturers and processors include dairies, food processors, metal manufacturers and processors, circuit board manufacturers, printers, etc. If you do not fit in these categories, you are still able to borrow using taxable revenue bonds.
Q3. What does tax-exempt mean?
A3. Tax-exempt means that the purchaser of the bonds pays no federal or state income tax on the interest that he receives from the bonds. Therefore, the interest rates are considerably lower than conventional types of financing.
Q4. What are the federal eligibility requirements in using industrial revenue bonds?
A4. The federal eligibility requirements for the use of the bonds are:
- 95% of the proceeds must be used for the defined IRB project.
- 2% of the bond proceeds can be used for costs of issuance.
- 25% of the bond proceeds can be used for land costs.
- To acquire a used building, a minimum of 15% of the bond proceeds must be used to renovate the facility.
Q5. What are the restrictions on the size of the IRB issue?
A5. The restrictions on the size of the IRB issue are:
- The maximum face amount of a tax-exempt IDB issue is $10.0 million per applicant per public jurisdiction.
- Total capital expenditures in the public jurisdiction for the period three years prior to the bond issuance and three years after, including the IDB, cannot exceed $10.0 million.
- The total outstanding number of IDBs by any one company nationwide may not exceed $40 million.
Q6. What if part of my project does not qualify for tax-exempt industrial revenue bond financing?
A6. If part of your project does not qualify for tax-exempt financing, then we can finance that part with a taxable industrial revenue bond financing.
Q7. What are the interest rates for industrial revenue bonds?
A7. The tax-exempt industrial revenue bond interest rate is a variable rate that has averaged approximately 5% over the last 5 years. Rates are currently at approximately 3.50%.
Q8. Would I be able to get a fixed interest rate if I feel uncomfortable with the variable rate?
A8. Yes, after the bonds are issued the rate can be fixed.
Q9. Who are the primary members of the finance team?
A9. The primary members of the finance team are the underwriter, the letter of credit provider (bank), and bond counsel. The underwriter works with the company to structure the financing for the borrower. The underwriter also places the bonds in the tax-exempt marketplace. The bank provides credit enhancement on the issue in the form of a letter of credit to make the bonds marketable. The bond counsel prepares the legal documentation for the issue and issues an opinion that gives the bonds their tax-exempt status.
Q10. What is the minimum size financing that can be done?
A10. The minimum size financing is $1.5 million for buildings and equipment.
Q11. What are the cost involved with this type of financing?
A11. The costs are typically 3% to 4% of the amount of bonds issued which is usually recovered in 1 to 1½ years because of the interest rate differential between tax-exempt vs. conventional financing. 2% of the funds from the financing can also be used to help pay the financing costs.
Q12. Where can I get more information on Tax-Exempt Industrial Revenue Bonds?
A12. Contact Robert DeMonbrun at (303) 794-9692.
