What are Industrial Development Bonds?
Industrial Development Bonds (IDBs) are tax-exempt securities issued up to $10 million by a governmental entity to provide money for the acquisition, construction, rehabilitation and equipping of manufacturing and processing facilities for private companies. IDBs can be issued by AIDEA.
General Eligibility Requirements
The use of IDBs is governed by both federal and state laws and regulations. The following are some of the key requirements:
- Manufacturing Facility. The project financed by the bonds must be a facility used for the manufacturing, production or processing of tangible property (including the processing resulting in the change of such property). No more than 25% of the bond proceeds can be applied to ancillary office, warehouse or other space.
- Qualifying Costs. At least 95% of the bond proceeds must be spent on qualifying costs. Qualifying costs are generally capital expenditures such as land, building and equipment and other depreciable property (and can also include capitalized interest during construction).
- Land. No more than 25% of the bond proceeds can be used to acquire land.
- Acquisition of Existing Manufacturing Facilities. The acquisition of an existing facility can be financed if at least 15% of the portion of the bond amount used to purchase the facility is spent on rehabilitation of the building within a two-year period.
- Used Equipment. If bond proceeds are used to acquire used equipment, 100% of the cost must be spent on rehabilitation of the equipment within a two-year period.
- Maturity. The average maturity of the bonds cannot exceed 120% of the average economic life of the assets financed.
- No Working Capital or Inventory. Bond proceeds cannot be used to finance working capital or inventory.
- $20,000,000 Capital Expenditure Limitation. The capital expenditures for the project, when added to the company's other capital expenditures in the same public jurisdiction as the project for the three years immediately preceding and three years following the closing of the financing of the project, cannot exceed $20,000,000.
- $40,000,000 Aggregate Limitation. A borrower and certain users may not be the beneficiary of more than $40,000,000 of certain tax-exempt bonds regardless of the location of the projects, during a three year period after the facility being financed is placed in service.
- Public Benefits. The project financed by the bonds must meet certain public benefit criteria which include, among other things, the creation or retention of jobs.
- Prevailing Wage. The prevailing wage must be paid to workers involved in the construction or renovation of a facility financed with IDBs.
Benefits of IDB Financing
- Low Interest Rates - generally 20% to 30% below comparable commercial alternatives.
- Long-Term Financing - longer than conventional financing, often up to 30 years.
- Comprehensive Funding - funds can be used for construction and take-out financing for land, buildings and equipment.
- Assumable - the bonds are assumable if the business is sold to an entity engaged in a qualified use.
- No Prepayment Penalty.