Industrial Revenue Bonds

What They Are. Industrial revenue bonds (IRBs) are financing instruments issued by designated local industrial development boards (IDBs) or other issuers authorized by state law. Since 1949, IRBs have been a preferred method of financing used by industries locating to and expanding in Alabama. Often, financial institutions and other inter- mediaries participate by providing letters of credit backing the bonds. Thus, the company seeking the bonds must be considered creditworthy by the financial institution.

How They Are Used. IRBs provide financing for land, building and equipment for new and expanding manufac- turing plants. Certain expenses such as architectural, engineering, legal and administrative fees associated with the sale of the bonds can be paid from the bond proceeds (subject to the limitations of Internal Revenue Service regulations).

How IRBs Work. The political subdivision issuing the IRB retains ownership of the bond-financed facility and leases it back to the company at a rate sufficient to pay the principal and interest on the bonds as they mature. When the user leases the property back, there may be several tax advantages such as exemption from sales tax on con- struction materials, use tax on the purchase of equipment, as well as mortgage deed tax and ad valorem tax for a term limited to ten years. Local sales and use taxes and all ad valorem taxes which are levied for school purposes are not eligible for exemption.

Taxable Bonds. Taxable IRBs will continue as one of the mainstays of industrial finance because they may be issued with fewer restrictions and in unlimited amounts while the user maintains tax savings. The company may buy its own bonds and still be eligible for significant tax savings. Interest rates are generally higher than on tax-exempt bonds.

Tax Exempt Bonds. Tax-exempt IRBs are issued at rates lower than conventional sources because the interest paid on the bonds is exempt from both federal and state income tax. No more than $10 million in bonds may be issued in a single locality and no company can have more than $40 million outstanding. Companies using an IRB may not invest more than $10 million in one location, regardless of fund sources, for a period of three years prior to the issue and three years after it. Companies may choose to lease all or part of their equipment and therefore eliminate that portion from the $10 million limit. IRBs are not generally cost-effective for amounts under $1 million because of the fees involved in issuing a bond. To be eligible, the company must obtain a letter of inducement from the local industrial development board before any monies are expended on a project. In the case of tax-exempt IRBs, the Internal Revenue Code requires that land acquisition cost must be less than twenty-five percent (25%) of the total bond issue. If the bond proceeds are used to finance the acquisition of an existing building, at least fifteen percent (15%) of the proceeds must be spent on renovation of the building within two years. Bond proceeds may not be used to purchase used equipment except in limited situations. There are a number of other requirements, including a public hearing and volume cap allocation. With this type of financing, competent legal counsel should be obtained early in the project.

Source: Alabama Development Office