Table of Contents
- What Are Industrial Revenue Bonds (IRBs)?
- Understanding Industrial Revenue Bonds (IRBs)
- How Industrial Revenue Bonds (IRBs) Work
- Tax Treatment of Industrial Revenue Bonds (IRBs)
- How Do You Buy Industrial Revenue Bonds?
- Are Industrial Revenue Bonds Tax Exempt?
- What Are the Requirements for Revenue Bonds?
- The Bottom Line
What Are Industrial Revenue Bonds (IRBs)?
Let me explain what industrial revenue bonds, or IRBs, really are. These are municipal debt securities that a government agency issues on behalf of a private sector company, specifically to build or acquire factories, heavy equipment, or tools. You might have heard them called industrial development bonds, or IDBs, in the past—that's what they used to be known as.
Understanding Industrial Revenue Bonds (IRBs)
Municipal bonds, often just called munis, are tax-exempt debt obligations that states, cities, or counties issue to fund big capital projects like infrastructure or new schools. As an investor, you can expect regular interest payments and your principal back at maturity. The money for these payments comes from different sources depending on the bond type—general obligation or revenue bonds.
A general obligation bond draws from the issuer's general funds and is backed by their full faith and credit, meaning they might raise taxes to pay you. On the other hand, a revenue bond relies on income from a specific project, like tolls from a new highway.
Within revenue bonds, there's the private activity bond, or PAB, which municipalities issue for private organizations—either for-profit or non-profit—to finance projects that benefit the community, such as hospitals, airports, or stadiums.
An IRB is a specific kind of PAB, issued by the government for a for-profit company. The goal here is to boost the local economy and jobs, so the municipality funds the project and offers tax breaks to the company involved.
How Industrial Revenue Bonds (IRBs) Work
Municipalities issue IRBs to help companies that couldn't otherwise get financing or wouldn't take on the project alone. The bond proceeds go toward acquiring, building, expanding, or improving property that qualifies as a manufacturing facility or equipment. Just like with other PABs, the private company borrower agrees to repay the issuer using revenue from the project, and that's what covers your interest and principal as a bondholder.
For a project to qualify for an IRB, it has to involve manufacturing, waste disposal or recovery, or wastewater treatment. Also, total capital spending at the site must be $20 million or less for the three years before and after the bond issuance.
Other IRB Provisions
- The maximum amount of bonds that may be issued or outstanding is $10 million.
- At least 95% of the bond proceeds must be spent on qualifying costs.
- Not more than 2% of the proceeds may be used for costs of issuance.
- Total IRBs outstanding at the company may not exceed $40 million.
- The weighted average maturity of the bonds cannot exceed 120% of the average economic life of the facilities to be financed.
- Bond proceeds cannot be used to acquire used equipment, except as part of the acquisition of an entire facility.
- No more than 25% of the proceeds can be used to acquire land.
Tax Treatment of Industrial Revenue Bonds (IRBs)
Like other municipal bonds, the interest from IRBs is exempt from federal and state income taxes, which means they offer lower interest rates than similar conventional debts. These bonds follow IRS rules, but since the project is owned by a government entity, the company gets treated like a state or local government for that project. This makes the property exempt from many taxes, especially property taxes, until the bonds mature. If the company defaults, the bond trustee can foreclose and sell assets to repay you as a bondholder.
How Do You Buy Industrial Revenue Bonds?
Municipal bonds often require large investments, which can keep average retail investors out. But you can still get exposure to revenue bonds, including IRBs, through mutual funds or money market funds that invest in them.
Are Industrial Revenue Bonds Tax Exempt?
Most IRBs are tax-exempt, but some places issue taxable versions to go beyond the $10 million limit for exempt bonds. For instance, New Mexico has issued billions in taxable revenue bonds for companies like Intel. These aren't for low-cost financing but help the borrower skip standard property taxes.
What Are the Requirements for Revenue Bonds?
To get tax-exempt status, revenue bonds like IRBs must follow strict rules on raising and spending money. They can't raise more than $10 million, and 95% of the funds must go to qualifying projects. No company can have more than $40 million in outstanding IRBs, and issuance costs can't exceed 2% of the capital. There are also limits on using proceeds for land or used equipment.
The Bottom Line
In summary, industrial revenue bonds are municipal bonds issued for private companies to fund public-benefit projects, repaid from the company's revenues. They're usually tax-exempt but must meet tight limits to qualify.
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