The Company Avoids Real Estate and Personal Property Taxes and the City Gains Jobs
Most states and many local governments offer industrial revenue bonds (IRB) as a way to encourage relocations and expansions of companies that provide jobs and expand economic opportunities for residents and the community. IRBs are an incentive to encourage a company to invest locally.
What is an IRB?
An IRB is a loan to a company to build or buy a facility or buy land and/or equipment.
How do they work?
The city issues the bonds but is not making the loan. The investor - usually an institution, like a bank or life insurance company - buying the bond makes the loan. The company must find its own bond purchaser. It can also buy its own IRBs. The city technically owns title to the facility built with IRBs and leases it to the company for up to 20 years. At the end of the term, title is transferred to the company.
Here’s an example: Company X wants to build a $15 million plant and buy $20 million in equipment. The city issues a $35 million bond for 20 years. During this period the company will repay the bond. The company gets a break on property taxes for land of $4.3 million over 20 years and a break on equipment property taxes of $1.15 million over 7 years. It’s not correct to say the company is getting $35 million in tax breaks. The $35 million represents the amount of money the company will invest in our community
Do IRBs affect the city’s credit ratings?
No. Since the city is not responsible for the loan, the IRB does not have an impact on the city’s credit rating.
Why is an IRB desirable to a company?
IRBs help companies save money in two ways: Because the city owns the title to the project, it’s exempt, for up to 20 years, from 95 percent of property taxes on land, buildings, and equipment. Also, a company may receive gross receipts and compensating tax exemptions on initial purchases of equipment made with bond proceeds.
Can a small business use an IRB?
Because of financing costs, IRBs are typically used for larger capital projects. They are generally not recommended for projects less than $2 million.
Do companies still have to pay taxes?
The company must still pay a portion of property taxes, as well as all corporate taxes. In most cases companies will pay gross receipts taxes on the services or goods they produce and sell. In addition, a company’s employees are paying income taxes and gross receipts taxes on their purchases.
What are the steps to apply for an IRB?
- After a company identifies a site, its representatives meet with the City’s Economic Development Department and the City's economic development corporation to get support and identify concerns.
- The company identifies a purchaser for the bonds.
- The company prepares a project description and calculates potential employment and submits an application, which includes the company’s financial information, to the City's Economic Development Department.
- The EDD prepares a staff analysis for review by the Municipal Development Commission, the Administration and the City Council.
- The Municipal Development Commission holds a public hearing and makes a recommendation to the city to issue the IRBs.
- A city councilor, usually the one in whose district the project will be, sponsors an inducement resolution and/or bond ordinance to the City Council.
- After passage of the ordinance, attorneys prepare closing documents covering the transaction.
- At closing the bond purchaser buys the bonds.
If your company would like help placing these bonds, please call George Blackburne at 574-360-2486 or email him at george@blackburne.com. In the Subject line, please type, "Industrial Revenue Bonds."
