ARTICLE
INDUSTRIAL BOND FINANCING
AN ATTRACTIVE SOURCE OF FUNDS FOR EXPANSION
Public sector financing can support
private development projects that will
fuel economic growth in communities.
The lower interest rates and longer
payment terms characteristic of
programs such as tax-exempt Industrial
Revenue Bonds (IRBs) can be used to
finance a significant part of an industrial
project. Here are some aspects to
consider:
Because private development projects tend to be
larger in scope and the potential exists for them to
create jobs and expand a community’s tax base, a
variety of businesses find these funds attractive.
However, other companies may not pursue
government-issued loans due to the increased
complexity of the application and approval process.
If you are thinking about expansion, there are many
ways you can benefit from this low-cost, flexible
financing solution.
INDUSTRIAL REVENUE BOND BASICS
Industrial Revenue Bonds (IRBs) are tax-exempt
loans issued by state or local governments
to finance a private company’s expansion,
construction or acquisition of manufacturing
facilities and equipment. Local and state
governments support these projects because
they can improve the economic well-being of a
community.
IRBs are issued at rates lower than conventional
loans because interest paid on the bonds is exempt
from both federal and state income tax. The
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lower interest rate reduces the cost of financing
and makes projects more attractive to pursue.
Additionally, these bonds can mature in 20 to 30
years as compared to five to 10 for typical bank
loans.
HOW YOU CAN QUALIFY
If your project involves manufacturing, waste
disposal/recovery or wastewater treatment then
you probably meet the qualifications for an IRB.
The next step is reviewing capital expenditures
at the project site for the three years prior and
subsequent to the issuance of the bonds, which
must be $20 million or less.
Most public sector loan programs have specific
goals that must be addressed if a company is to
obtain financing. You will have to put together
a project description and outline how the
community can benefit from your project —
whether it be through the creation or retention of
jobs, increasing the tax base or attracting other
businesses to the area.
HOW TO APPLY FOR AN IRB
The process will vary from state to state, but there
are some general steps you must take in order to
obtain a bond:
• Retain legal counsel experienced in the area of
IRBs to initiate the process with the government
agency and provide legal documentation.
• Discuss the project with your lender to help
you to identify what financing structures are
best suited to your company and project. An
underwriter may also be necessary to include
at this point if the bonds will eventually be
purchased for public resale.
Perspective on working capital
• Contact the government, corporation or agency
legally authorized to issue bonds and start the
application process. Depending on the state,
this can be an independent authority, a city or a
county.
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In most cases, the benefits gained from 20 years of
interest savings significantly outweigh the time and
effort involved in getting an IRB.
For more information, contact your relationship
manager or visit pnc.com/cib.
The application procedure for IRB financing
typically requires 30 days. The local agency
will approve the project. From this point, any
expenditure incurred less than 60 days prior to
that date can be included in the project.
The overall process from application to funding
can take 90 to 120 days. You can use interim bridge
financing if you need to proceed more quickly.
IRBs are issued at rates lower than conventional loans
because interest paid on the bonds is exempt from both
federal and state income tax.
COST AND OTHER CONSIDERATIONS
There are some upfront costs associated with
issuing an IRB. These include ancillary costs like
underwriter fees and additional legal fees.
Any assets financed with tax-exempt IRBs must be
depreciated on a straightline basis.
And, the process to issue an IRB can be
complicated; however, the right selection of
experienced counsel and financial partners will
make the process go more smoothly. And, in most
cases, the benefits gained from 20 years of interest
savings significantly outweigh these issues.
This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell securities or to engage in any
specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular trans¬action or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser
regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
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