How do industrial revenue bonds work

As a result, each issuing entity ends up with what is known as a volume cap. Some states get around the ceilings by offering IRBs that are not tax-exempt. New Mexico, for example, has issued billions of dollars in such bonds for Intel Corp. Taxable IRBs are not designed to provide low-cost financing. Instead, they are a device to allow a company to avoid paying standard property taxes. This is accomplished by putting the ownership of the factory in the name of a public entity.

The bonds issued by the entity to finance construction are all purchased by the company that will occupy the factory. The lease payments made by the company go to pay off the bonds, so that the firm is essentially borrowing money from itself. Another category of tax-exempt private-activity bonds are c 3 bonds. IRBs fall into this category.

There are two provisions in the law that regulate the calculation of the AMT for corporations. The first provision is identical to that for individuals for bonds issued after August 8, Corporations are subject to the AMT on all tax-exempt interest income on a formula basis.

A meeting is scheduled for the issuer to approve a preliminary inducement resolution. This resolution should be approved early, because the rules permit a company to reimburse itself for capital expenditures up to 60 days prior to the inducement resolution. The borrower may fold in certain soft expenses such as survey work, architectural and engineering fees up to a limit.

The resolution does not bind the borrower to anything. It just establishes that the Issuer, in good faith, is willing to issue the bonds and the borrower, in good faith, will look for a buyer of the bonds. It includes a kick-off discussion of the financial structure of the bonds, the timetable for review of documents and closing on the bonds.

The source of funds used for interest payments and principal depends on whether the muni bond is a general obligation bond or a revenue bond. One type of revenue bond is the private activity bond PAB , which is issued by the municipality on behalf of private organizations either for-profit or non-profit to finance particular projects.

Although a private entity is doing the work, the project is one that will benefit the community in some way: a hospital, airport, or sports stadium. An industrial revenue bond IRB is a variety of PAB—one issued by the state or local government on behalf of a for-profit company. The municipality's aim is to improve the economic and employment conditions of its region, and, via the IRB, is willing to help fund a project and issue to tax breaks to the entity undertaking it.

Municipalities issue IRBs to assist a company that might otherwise be unable to obtain financing for its industrial venture or unwilling to undertake the project on its own. As with PABs in general, the IRB's underlying borrower—the for-profit company—agrees to reimburse the issuer, which pays the interest and principal on the securities solely from the revenue stream of the borrowers' projects.

Other IRB provisions include:. As these provisions suggest, IRBs tend to be small-issue manufacturing bonds. As with other munis, the interest IRBs pay is exempt from both federal and state income taxes. As a result, these bonds carry lower nominal interest rates than comparable conventional debt obligations.

Since the project is legally owned by a governmental entity, however, the company developing the project obtains the status of a state or local government for this project. The property being developed thus becomes exempt from many taxes, especially property taxes , until the bonds mature. Municipal Bonds.

Finra Exams. The municipalities and counties sell the IRBs and loan the proceeds to eligible businesses undertaking eligible projects. Download the full program guidelines.