Industrial revenue bonds, also known as IRB, are the bond issued by a local county or state on behalf of a private-sector corporation to raise funds for building a factory, acquiring capital equipment, or just pay for running expenses.
The industrial revenue bonds are also known as Industrial Development Bonds or IDB. The industrial revenue bonds are also known as Municipality bonds.
How industrial revenue bonds work?
The industrial revenue bonds are a form of government backed loans with a sovereign guarantee from a local county or government.
The Local municipalities issue industrial revenue bonds to attract investment and create jobs. The IRBs allow the government of the local municipalities to share the cost of a new industrial project.
The industrial revenue bond is backed by the taxes the local government collects. A part of the tax revenue is used to pay back the industrial revenue bonds.
It is the thinking by lowering the cost of a new industrial project; the local governments can attract new industries from other localities.
Sometimes, the Industrial revenue bond may be an issue to help an old company invest in new projects while also helping them survive in a recession.
For example, recently, Edgerton City in Kansas issued a local industrial revenue bond for new warehouse development. This warehouse development is expected to create jobs and economic activity.
Characteristics of an Industrial Revenue bond
The main characteristics of an Industrial revenue bond are as follows:
i) The maximum amount allowable under the United State law is ten million U.S. Dollars.
ii) The maximum amount for the cost of issuance of bond can be no more than two percent.
iii) At most about twenty five percent of the revenue bond must be used to acquire land.
iv) The total industrial revenue bonds for a particular private company issued at the behest of the municipality cannot exceed forty million U.S. Dollars.
v) The minimum amount that must be spent on qualifying project issue should be at least ninety five percent.
The tax advantages of an Industrial revenue bond
There are numerous tax advantages of industrial revenue bonds. The main tax advantages are as follows:
i) The municipalities or Industrial revenue bonds are completely tax-free. It means you are not charged taxes on the profits you earn on the Industrial revenue bonds.
ii) The industrial revenue bonds are exempt from state and federal taxes.
iii) If the industrial revenue bonds are used for property development, then that properly is also exempt from taxes.
Main Types of Industrial revenue bonds
There are two main types of industrial revenue bonds. Each bond is issued at a specific time when it meets specific needs. Both types of industrial revenue bonds are shown in figure 1 below:
Figure 1: Main types of Industrial revenue bonds
The two industrial bonds shown in figure one is small issue industrial revenue bonds and exempt facility industrial revenue bonds.
Each type has its advantage and disadvantage. The details of both types of bonds are given below:
1) Small Issue Industrial Revenue Bonds
According to Federal law in the United States of America, small issue industrial revenue bonds are issued for a small-time industrial project in a local municipality.
The maximum limit for which small Issue Industrial Revenue Bonds are allowed to be issued is ten million U.S. Dollars. These bonds like all municipal bonds are also tax-exempt.
Sometimes, many industry players are too small in local municipalities and they cannot pay for industrial expansion or maintenance so to preserve jobs and tax revenues and also expand economic activity.
There are some limits imposed on the local and state governments on the number of Industrial revenue bonds they can issue. This is written in the federal law to protect the local and state municipalities against any unforeseen loss which they would or could not be able to absorb.
Furthermore, there are also limits on the number of industrial revenue bonds issued that a state or municipality can issue for a local company. This limit is usually fixed at about forty million U.S. Dollars.
2) Exempt Facility Industrial Revenue bonds
These types of industrial revenue bonds have a no-issuance limit under the United States federal law. But, they can only be issued for specific types of Projects. The projects that they can be issued for are mainly infrastructure projects.
The local municipalities can also issue exempt facility industrial revenue bonds for specific types of housing projects.
The infrastructure projects for which an Exempt facility Industrial revenue bond can be issued for are roads, electricity or gas pipelines.
The bridges and tools are also allowed. Before the Exempt facility, Industrial revenue bonds could be issued for parking lots and stadiums but now local municipalities are not allowed to issue the bonds for these infrastructure projects.
The reason is that many local governments started issuing bonds to construct new stadiums for the local team which put an extraordinary amount of burden on taxes of local municipalities.
Main advantages of an Industrial revenue bond
The main advantages of industrial revenue bonds are as follows:
i) These bonds profits are tax free.
ii) It allows local municipalities to provide better infrastructure and attract investments.
iii) New jobs are created.
iv) Local governments would collect tax revenues in the future from these projects.
Main disadvantages of an Industrial revenue bond
As there are advantages of an industrial revenue bond, there are also some very clear disadvantages. The disadvantages are stated as follows:
i) The local municipalities have to bear the debt burden.
ii) The project may not be able to meet the financial projections. It may also not be able to provide the stated financial benefits.
Industrial revenue bonds are a great way for local and state governments to raise revenue for critical projects which will provide jobs and employment to the local population of the area.