how industrial revenue bonds irbs work
municipalities issue irbs to assist a company that might otherwise be unable to obtain financing for its industrial venture or unwilling to undertake the project on its own the proceeds from the bond are used to fund the acquisition construction reconstruction expansion or improvement of property that qualifies as a manufacturing facility or equipment as with pabs in general the irb s underlying borrower the for profit company agrees to reimburse the issuer which pays the interest and principal on the securities solely from the revenue stream of the borrowers projects a private company s project qualifies for an irb if it involves manufacturing waste disposal recovery or wastewater treatment also to qualify total capital expenditures at the project site for the three years prior and subsequent to the issuance of the bonds must be 20 million or less other irb provisions include as these provisions suggest irbs tend to be small issue manufacturing bonds many idbs are sold as variable rate demand obligation bonds vrdo secured by a bank letter of credit with a long term credit rating of at least a3 from moody s investors service or an a from standard poor s or fitch ratings tax treatment of industrial revenue bonds irbsas with other munis the interest irbs pay is exempt from both federal and state income taxes as a result these bonds carry lower nominal interest rates than comparable conventional debt obligations irbs are subject to irs statutes since the project is legally owned by a governmental entity however the company developing the project obtains the status of a state or local government for this project the property being developed thus becomes exempt from many taxes especially property taxes until the bonds mature if the company defaults on the lease payments the bond trustee forecloses and sells the company s assets to repay bondholders 