What are industrial revenue bonds (IRBs)?
Industrial revenue bonds (IRBs) are municipal debt securities that the government issues on behalf of a private business. The money from these bonds is used to build or buy factories or other heavy machinery and tools.
Industrial Development Bonds (IDBs) used to be the name of IRBs.
How to Understand Industrial Revenue Bonds (IRBs)
States, cities, or counties issue municipal bonds, or “munis,” to raise money for major projects such as building schools or roads. These debt obligations are not taxed.
Investors expect to get interest payments on these bonds on time and regularly, and when the bonds mature, they expect to get their capital back. If the muni bond is a general obligation or revenue bond, the money used to pay the capital and interest comes from a different source.
The issuer of a general obligation bond pays back the bond with general funds from the municipality. The issuer backs the bond with full faith and credit, meaning the municipality can raise taxes to meet its payment responsibilities.
A city bond backs a revenue bond, which uses money generated from a specific project or a related source, such as the tolls collected from a new highway.
The city or town gives out the private activity bond (PAB) as a revenue bond for private groups (for-profit or non-profit) to pay for specific projects.
The project is a hospital, airport, or sports stadium that will somehow help the community, even though a private company is doing it.
An industrial revenue bond (IRB) is a type of PAB that the state or local government gives to a business for profit. The municipality wants to improve the region’s economy and job market, and through the IRB, it is ready to help fund a project and give tax breaks to the group that does it.
How IRBs (Industrial Revenue Bonds) Work
Municipalities provide IRBs to enterprises that can’t get the money for their industrial project or don’t want to undertake it themselves. Land for manufacturing or equipment is bought, built, expanded, or improved with bond proceeds. The for-profit corporation borrowing IRB money agrees to repay the issuer. The issuer only pays interest and principal on projects the borrower’s profit from.
A private company must have an IRB if its initiative involves manufacturing, recycling, or wastewater treatment.
To qualify, the project site must spend $20 million or less in capital investment three years before and after the bonds were issued.
Other IRB rules:
The maximum note issue or holding is $10 million.
At least 95% of the bond proceeds must cover eligible costs.
The bond’s issue price can’t exceed 2% of the raised funds.
The corporation can’t have more than 40 million IRBs.
The weighted average maturity of bonds can’t exceed 120% of the average economic life of supported facilities.
Bond money can only be used to buy old machinery as part of a building.
The money can only buy land 25% of the time.
These guidelines show that IRBs are mainly small manufacturing bonds.
Many IDBs are offered as VRDOs. Bank letters of credit have at least A3 long-term credit ratings from Moody’s Investors Service, Standard & Poor’s, or Fitch.
How do they tax IRBs?
Like the interest paid on other municipal bonds, the interest IRBs pay is not taxed at the federal or state level. Because of this, the nominal interest rates on these bonds are lower than those on similar conventional debt obligations.
IRBs have to follow IRS laws. However, because a government body officially owns the project, The company working on it becomes like a state or local government for this project. This means that there are many taxes, especially property taxes. You don’t have to pay them on the land. Even if it is still developing until the bonds mature, the bond trustee seizes and sells the business’s assets if the business doesn’t make the lease payments. This is to pay back the creditors.
Conclusion
- Industrial revenue bonds, or IRBs, are a type of city bond. These are state or local government grants given to a private company for a specific project.
- An IRB is a type of revenue bond that is a private activity bond.
- Investors in regional businesses (IRBs) raise money to build a factory or buy equipment that will help the whole community. Bondholders get their money back from the money the project makes.
- Like other municipal bonds, IRB interest income is exempt from tax.
