Jean publishes a blog called the Enterprise Corner. It features articles on entrepreneurship, local industry trends, manufacturing news and periodic ‘toolbox’ articles showcasing assistance, incentives and other resources for local businesses.
Industrial revenue bonds can offer established manufacturers attractive financing for capital expansion projects. Interest rates on bonds are typically lower than traditional bank loans because the bonds carry a tax exempt status. Terms on bonds may also be longer than conventional loans.
IRB financing is limited to $10 million and $2 million is a practical minimum. Most banks packaging bond financing require companies to obtain a letter of credit to support the IRB. As a result borrowers must typically be well established and strong financially.
Here are pertinent questions and answers regarding IRBs:
What are Industrial Revenue Bonds (IRBs)? These are bonds to provide funds to construct, improve or enlarge manufacturing facilities.
Who can use IRBs? Revenue bonds are typically used by manufacturers (including food processors). Farms can also tap bonds for investments in pollution control equipment (ex dairies).
Who issues IRBs? In Washington State, cities, towns, counties or port districts create public corporations to act as financial conduits for issuing IRBs.
Is the local government or the public corporation financing a business venture when it issues bonds? No. In effect, the local government, through the public corporation, is simply lending its name to confer tax-exempt status on the bonds. The funds come from private lenders and must be repaid by the company for which the manufacturing facilities are financed and built.
Is the local government or public corporation lending its credit to the private IRB user? No. No government unit (neither local government, public corporation nor state government) pledges its credit to repayment of the bonds.
Does the local government, public corporation or the state incur any liability in issuing IRBs? No. In case of default, the bondholders' only recourse is to the private company involved and any collateral set up as security for the bonds.
Do IRBs reduce a local government's general obligation bonding ability? No. IRBs are not an obligation of the local government and do not affect or reduce its bonding capacity.
Whose credit reputation and credit strength is examined to determine marketability of IRBs? The local government, or public corporation or the private company? Only the credit worthiness of the private company is considered when marketing IRBs. Since IRBs are not an obligation of the local government or its public corporation their credit standing in immaterial.
Who pays back the bonds? Payments are made by the private company for whom the manufacturing facility is built.
Does tax-exempt status exempt the manufacturing facility from property tax? No. Taxes are the same as any comparable property; there is no loss of tax revenues to the local government.
What project costs are eligible for financing with IRBs?
What is the maximum amount for which IRBs can be issued for a single project? "Small issues" for manufacturing facilities:
a) $2 million limit: the amount of the IRB is limited to $1 million, with no limit on other capital investment involved in the project.
b) $10 million limit: the amount of the IRB is limited to $10 million; provided that capital expenditures (from all sources) at the project location for a period of 3 years prior to and 3 years after the IRB is issued do not exceed $20 million. If the $20 million limit is exceeded, the bonds lose their tax-exempt status.
What is the advantage of using IRBs to finance a project? The main advantage is the tax-exempt status of the bonds. In other words, the bond purchaser does not have to pay federal income tax on the interest earned on the bonds and is thus likely to accept a significantly lower interest rate.
Can smaller companies secure IRBs? The size of the company is not as important as its credit rating and/or the strength of project's revenue-generating ability.
Can IRBs be issued for a small amount of funds? For example $250,000? Issuing costs of IRB financing are high - it is doubtful that an issue of less than $2 million would be cost/effective for the borrowing company.