Industrial Revenue Bond Financing

Outstanding Industrial Revenue Bond Issuances


Companies seeking to finance new manufacturing plants or improvements to existing manufacturing plants can obtain long-term financing at favorable interest rates through the use of industrial revenue bonds (IRBs). An IRB is usually issued by a local industrial development authority (an “Issuer”) to finance the acquisition, construction and/or equipping of a facility.

Some of the benefits of IRBs are:

  1. Sub-prime pricing. Since interest earned on IRBs is exempt from federal and state income taxes, IRBs provide lower interest rates than conventional financing.
  2. 100% project financing. IRBs enable companies to finance virtually all of the costs of a facility, including site preparation, capitalized interest during construction and most issuance costs, up to $10,000,000 (assuming there are no other capital expenditures in the locality).
  3. Low Floaters. IRBs located with a commercial bank’s letter of credit can 1 carry the bank’s credit rating and 2 be “remarketed” on a 7-day “put” basis.

Federal and State Regulations

Some of the major requirements of industrial revenue bond financing are as follows:

  1. Type of Facility – the facility must be a manufacturing facility. No more than 25% of the bond proceeds can be used for ancillary office, warehouse or other space located on the site of the manufacturing facility.
  2. Qualifying Costs – at least 95% of the bond proceeds must be spent on land, the building and equipment and other depreciable property.
  3. Land – no more than 25% of the bond proceeds can be used to acquire land.
  4. Issuance Costs – no more than 2% of the bond proceeds can be used for issuance costs such as placement fees, legal fees and other issuance costs.
  5. Maturity – the average maturity of the bonds cannot exceed 120% of the average economic life of the facilities financed.
  6. No Working Capital or Inventory – bond proceeds cannot be used to finance working capital or inventory.
  7. $10,000,000 Limitation – the capital expenditures for the facility, when added to capital expenditures in the 3 years immediately preceding and 3 years following the closing of the financing of the facility in the jurisdiction where the facility is located, cannot exceed $10,000,000. Facilities in the aggregate amount of $1,000,000 or less in a jurisdiction can be issued without complying with this capital expenditure test.
  8. Acquisition of Used Property – the acquisition of used property can be financed if used buildings are rehabbed with at least 15% of the portion of the bond amount, and structures other than buildings can be financed if at least 100% of the portion of the bond proceeds used to purchase the structures is spent on their rehabilitation.
  9. $40,000,000 Aggregate Limitation – a company may not be the beneficiary of more than $40,000,000 of certain tax-exempt bonds regardless of the location of the facilities during a 3-year period after the facility being financed is placed in service.
  10. Administrative Costs – there is a wide range of administrative costs charged by local issuers. Montgomery County, for instance, has a substantial administrative cost it uses to finance that county’s economic development effort. The City of Roanoke, for instance, charges a $1,750 application fee and a closing fee of 1 mil (1%) of the principal amount of the bond, with a minimum closing fee of $1,000 and a maximum closing fee of $10,000. The City of Roanoke also requires companies to indemnify it for loss and to pay its proportionate part of ongoing administrative expenses, such as audit and staff fees.

Major Steps

The following is a brief outline of the procedural steps for industrial revenue bond financing in Virginia:

  1. Application – submit a formal written application for the issuance of the bonds before the scheduled initial meeting date to consider the bond issue.
  2. Public Notice – a notice must be published once a week for 2 successive weeks before the public hearing date.
  3. Public Hearing – a public hearing is held by the Issuer. Someone from your company should attend.
  4. NB – Closed Meeting – when there has been no previous announcement of a company’s intent to locate into a locality, we can have the Issuer meet in a “closed meeting,” meaning the public is not allowed to observe, and adopt an inducement resolution to free your company to enter into real estate contracts, order machinery and otherwise advance its plans for industrial development bond financing without having its name appear in public records.
  5. Public Approval – the elected governing body approves the issuance of the bonds within 60 days of the public hearing. Someone from your company may be asked to attend.
  6. Allocation – the completed application for bond allocation is submitted to the Department of Housing and Community Development. Applications cannot be filed until the hearing and approval process, outlined above, are completed. The Department, among other things, requires a firm commitment letter from a financial institution before the allocation is granted. If funds are available to be allocated to the project under the state volume cap, the Division immediately confirms (usually by overnight delivery) the allocation in writing, normally good for a period of 90 days or until the end of the current calendar year, whichever first occurs.
  7. Document Preparation – bond counsel distributes drafts of bond documents for review and comment and bank (and placement agent) counsel distributes drafts of bank (and placement) documents for review.
  8. Closing – bond pre-closing and closing.

Standard time to complete Steps 1 to 8 is 90 to 120 days.

Other Types of Tax-Exempt Financing

IRBs may also be used to refinance existing IRBs. Some of the requirements and procedures outlined above may not be applicable for IRB refundings. Non-IRB tax-exempt financing may also be available for facilities of all kinds for nonprofit organizations like hospitals and schools. Finally, in the event that the company cannot qualify under the Federal requirements, it may be possible and economically advantageous to issue bonds that are state tax-exempt but not federally tax-exempt (commonly referred to as “Taxable Bonds”).