Industrial Revenue Bonds: Frequently asked questions
- How do I qualify?
- Who chooses bond counsel?
- What is an inducement agreement?
- Does the state guarantee the bonds?
- What does it cost to issue IRBs?
- How much can I finance?
- How large does an issue have to be?
- How long does it take to do an issue?
- What are the interest rates?
- What may be financed?
- Can land be included?
- Can I finance an existing building?
- Can I finance used equipment?
- What is "rehabilitation"?
- Can I finance an acquisition?
- Must I close the bond issue right away if interest rates are unfavorable?
- Can a builder or realtor finance a building with IRBs and lease it to my company?
- Can bond proceeds be used to refinance existing debt or as venture capital?
- Is there any negative aspect to using IRBs?
- What is the purpose of the pre-application conference?
- What are the most common mistakes?
- How has the state volume cap affected North Carolina?
- Who should I contact?
1. How do I qualify?
- Must be a manufacturing facility.
- Get local support for the project (inducement).
- Obtain the required environmental permits.
- Save or create enough jobs to have a measurable impact on the area.
- Show that the financing will not result in the company closing another North Carolina facility.
2. Who chooses bond counsel?
Each financing authority chooses bond counsel with the concurrence of the State Treasurer's Office.
3. What is an inducement agreement?
Also known as a memorandum of agreement, the inducement is a letter of intent signed by the company and the county financing authority. It establishes official action for IRS purposes. Money spent on the project after the date of inducement can generally be recovered from bond proceeds. Neither party is obligated by inducement to complete the financing.
4. Does the state guarantee the bonds?
No unit of government guarantees IRBs in North Carolina. Bonds are secured only by the credit of the company.
5. What does it cost to issue IRBs?
All of the line items and figures below are estimates and are intended only as a guideline.
| County authority expense | $500 - $3,000 |
| Authority counsel | $1,500 - $5,000 |
| Bond counsel (private placement) | $20,000 - $25,000 |
| Trustee | $1,000 - $3,000 |
| State Treasurer's fee | $1,000 |
| Borrower's counsel | $5,000 - $15,000 |
| Letter of credit bond counsel | $7,500 - $15,000 |
| Underwriters counsel | $7,500 - $12,500 |
- Attorney's fees will vary with complexity of project.
- Placement fee is a percentage of issue, usually 1%.
- Letter of credit fees vary, approximately 1% per year.
- Upfront costs totaling 2% of the bond amount plus the letter of credit fee can be paid out of bond proceeds
Federal tax law and regulations impose a limit on the size of tax exempt bonds issued for manufacturing facilities. Bond counsel makes the ultimate determination. The maximum bond amount for any particular company is $10 million for projects in any given jurisdiction. The sum of the face amount of the bonds ($10 million) and all other capital expenditures of the company within that jurisdiction during a six year period beginning three years before the bonds are issued until three years after the bonds are issued cannot exceed $20 million. There are also limits on other capital expenditures by the owner and operator in the same jurisdiction. Bond counsel can assist to comply with these limits.
Each company is limited to an outstanding maximum of $40 million of IRBs aggregate nationwide.
7. How large does an issue have to be?
Generally, an issue should be at least $1.5 million to be cost effective.
8. How long does it take to do an issue?
Eight to ten weeks is typical. If environmental permits are required - 60 to 90 days.
9. What are the interest rates?
Interest rates are negotiated between the company's agent (bank or placement agent) and the bond buyer. Rates are based on the company credit or the credit enhancement associated with the issue, usually a letter of credit. The rate may be variable or fixed. Typically IRBs have an interest rate that can be approximately 70-80% of the prevailing prime rate. Cost of issuing bonds can be spread out over the term of the bond issue.
10. What may be financed?
- Capital Expenditures: Fixed assets, land, building, new equipment, existing equipment (in place and installed as part of an integrated production line), architects and engineer's fees and issuance costs.
- Costs which cannot be included: Rolling stock, aircraft, inventory, working capital, relocation expenses, accounts receivable, good will.
Note: State and federal regulations require that bonds be used solely for the financing of manufacturing or industrial facilities and pollution control facilities for industry and/or related new equipment.
11. Can land be included?
Yes, up to a total of 25% of project cost
12. Can I finance an existing building?
Yes, if an amount equal to 15% of the cost of purchase (including equipment) is spent on rehabilitation of the building within 24 months of closing or beneficial occupancy. Federal tax law makes a well-defined distinction between rehabilitation and upfit. Individual examples should be referred to a bond or tax attorney.
13. Can I finance used equipment?
The purchase of used equipment cannot be financed unless it is an integrated existing production line within a building that is also being purchased. An amount equal to at least 15% of the purchase price of the building (and equipment therein) financed out of bond proceeds must be spent on rehabilitating the building and equipment.
Any new equipment purchases, which replace existing equipment, can be counted toward the 15% rehabilitation. A different rule applies to the purchase of a used structure (such as a water tower), and requires rehabilitation expenses equal to 100% of the purchase price.
Note: If the company purchases used equipment with its own funds, it may use bond proceeds to rehabilitate and install that equipment, but not to finance the purchase price. Federal tax law is very specific about used equipment. Individual examples should be referred to a bond or tax attorney.
14. What is "rehabilitation"?
Rehabilitation is expenditures made to enhance the property, which are permitted by the IRS and will be capitalized and depreciated. Those expenditures must be made within 24 months from the date of beneficial occupancy.
15. Can I finance an acquisition?
Yes, if the jobs involved are in jeopardy because the facility is otherwise to be closed. Jeopardy might include a public announcement or letter written by the current operator that the plant is to be closed. An acquisition must be structured as a purchase only of fixed assets and must meet the used building and equipment requirements.
16. Must I close the bond issue right away if interest rates are unfavorable?
No. Closing may occur up to one year from the date of Department of Commerce certificate of approval, if the project is unchanged. The company may also take up to three years to spend bond proceeds.
17. Can a builder or realtor finance a building with IRBs and lease it to my company?
Yes, the builder is considered the obligor and the lease is considered the operator. The obligor must prove commitment of operator at time of application with the Department of Commerce and must commit to continue to meet requirements of federal and state statues, even if the lessee changes.
18. Can bond proceeds be used to refinance existing debt or as venture capital?
No. The Internal Revenue Service prohibits the use of bond proceeds for these purposes.
19. Is there any negative aspect to using IRBs?
Yes. IRB-financed assets must take straight line depreciation over ACRS (Accelerated Cost Recovery System) schedule.
20. What is the purpose of the pre-application conference?
- Establish communication among parties to the financing.
- Review application materials.
- Identify any areas of concern regarding eligibility and structure of the project.
- Set timetable and assign responsibilities.
21. What are the most common mistakes?
- Waiting too late to consult the state agencies involved. Confidentiality can be maintained until public notice.
22. How has the state volume cap affected North Carolina?
North Carolina is one of the few states virtually unaffected by the state volume cap.
23. Who should I contact?
- Bond Counsel
- County Industrial Facilities and Pollution Control Financing Authority
- North Carolina Department of Commerce - Commerce Finance Center (919) 733-5297
Questions relating Industrial Revenue Bonds should be directed to:
Mary M. Johnson
(919) 733-0886
mmjohnson@nccommerce.com
Susan Rather
(919) 733-3735
srather@nccommerce.com
