Public sector financing can support private development projects that will fuel economic growth in communities. The lower interest rates and longer payment terms characteristic of programs such as tax-exempt Industrial Revenue Bonds (IRBs) can be used to finance a significant part of an industrial project. Because these projects tend to be larger in scope and the potential exists for them to create jobs and expand a community’s tax base, manufacturers frequently receive these funds. However, many companies often do not pursue government-issued loans due to the increased complexity of the application and approval process.
Smart Business talked to Rob Thomas of PNC’s capital markets group about IRBs and how manufacturers who are thinking about expansion can benefit from this low-cost, flexible financing solution.
What are Industrial Revenue Bonds and when are they typically used?
Industrial Revenue Bonds are tax-exempt loans issued by state or local governments to finance a private company’s expansion, construction or acquisition of manufacturing facilities and equipment. Local and state governments support these projects because they can improve the economic well-being of a community.
IRBs are issued at rates lower than conventional loans because interest paid on the bonds is 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 10 for typical bank loans.
What are some of the criteria for qualifying?
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.
Most public sector loan programs have specific goals that must be addressed if a company is to obtain financing. You will have to put together a project description and outline how the community can benefit from your project whether it be through the creation or retention of jobs, increasing the tax base or attracting other businesses to the area.
What are the steps to apply for an IRB?
The process will vary from state to state, but there are some general steps you must take in order to obtain a bond.
- Retain legal counsel experienced in the area of IRBs to initiate the process with the government agency and provide legal documentation.
- Discuss the project with your lender to help you to identify what financing structures are best suited to your company and project. An underwriter may also be necessary to include at this point if the bonds will eventually be purchased for public resale.
- Contact the government, corporation or agency legally authorized to issue bonds and start the application process. Depending on the state, this can be an independent authority, a city or a county.
- The application procedure for IRB financing typically requires 30 days. The local agency will approve the project. From this point, any expenditure incurred less than 60 days prior to that date can be included in the project. The overall process from application to funding can take 90 to 120 days. You can use interim bridge financing if you need to proceed more quickly.
What are other considerations for companies who are thinking about IRB financing?
First, there are some upfront costs associated with issuing an IRB. These include ancillary costs like underwriter fees and additional legal fees. Second, any assets financed with tax-exempt IRBs must be depreciated on a straight-line basis. Lastly, the process to issue an IRB can be complicated; however, the right selection of experienced counsel and financial partners will make the process go more smoothly. And, in most cases, the benefits gained from 20 years of interest savings significantly outweigh these issues.
This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance on this information is solely and exclusively at your own risk.