INDUSTRIAL REVENUE BONDS
The purpose of Industrial Revenue Bonds (IRB’s) is to function as an incentive for the creation or expansion of industrial facilities (including capital equipment) in the United States. IRB’s exist as authorized by Congress. The State of Tennessee is allotted a certain total dollar amount of IRB’s each fiscal year. The amount which may be issued on behalf of any company for any given year is limited to $10,000,000.
IRB’s function in the following way: The local Industrial Board issues a letter of Inducement to the company before any financial commitments are made involving the project, saying that it will issue IRB’s if the company will pursue the project in its locality. The company negotiates with its intended lender as it would for conventional financing. The creditworthiness of the transaction and the borrower are considered as they would be for a normal loan (the full faith and credit of the local government are NOT involved in the transaction). Instead of drafting conventional mortgages, however, IRB’s are issued and purchased by the lender.
The advantage of IRB’s is that the lender is not required to pay federal income tax on the interest earned on them. Thus, the lender is typically willing to negotiate a lower rate of interest on the transaction than would otherwise be the case. At present lending rates, this could mean a savings of 2% or more. Not all lenders are in a tax position to benefit from holding IRB’s.
Because of the additional paperwork and legal fees involved in issuing IRB’s as opposed to closing costs for a conventional mortgage and loan, we are advised that IRB’s save money for deals of about $1 million or more in present financial markets.
IRB’s also raise the possibility that title to the project can be held in the name of the issuing Industrial Board for the life of the issue, with title reverting to the company at the end for an agreed sum. Since property so held would not be subject to local property taxes, payments in lieu of property taxes are a possibility, at a rate equal to the amount which otherwise would be due, or as negotiated between the parties.