Industrial Revenue Bond Financing

General Overview of Industrial Revenue Bond Financing in Virginia
Look through a general overview of industrial revenue bond financing including an introduction, major steps, federal and state regulations, and other types of tax exempt financing.

Companies seeking to finance new manufacturing plants or improvements to existing manufacturing plants and other local support facilities can obtain long-term financing at favorable interest rates through the use of industrial revenue bonds (IRBs). The Economic Development Authority (EDA) assists in the application and issuance of these IRBs by the Virginia Small Business Financing Authority (VSBFA). Here are just some of the benefits that can be realized by your company with IRBs:
  • Sub-prime pricing - Since interest earned on IRBs is exempt from federal and state income taxes, IRBs provide lower interest rates than conventional financing.
  • 100% project financing - IRBs enable companies to finance virtually all of the costs of a facility, including site preparation, capitalized interest during construction and most issuance costs, up to $10,000,000 (assuming there are no other captial expenditures in the locality).
  • Low floaters - IRBs located with a commercial bank’s letter of credit can (1) carry the bank’s credit rating and (2) be “remarketed” on a 7-day “put” basis.
Major Steps
The following is a brief outline of the procedural steps for industrial revenue bond financing in Virginia.
  1. Application - Submit an accurately completed EDA’s Application Statement for the issuance of the bonds before the scheduled initial meeting date to consider the bond issue.
  2. Closed meeting - When there has been no previous announcement of a company’s intent to locate into a locality, we can have the issuer meet in a closed meeting, meaning the public is not allowed to observe, and free your company to enter into real estate contracts, order machinery, and otherwise advance its plans for industrial development bond financing without having its name appear in public records.
  3. Public notice - A notice must be published once a week for two successive weeks before the public hearing date.
  4. Public hearing - A public hearing regarding the IRB application will be held at the end of the notice period. Someone from your company should attend. At the end of this hearing the EDA shall vote on the application. A resolution summarizing findings and recommending acceptance by the City Council of Manassas will be prepared for all EDA approved applications.
  5. Public approval - The City Council shall vote on the proposed project within 60 days from the public hearing. Someone from your company may be asked to attend.
  6. Document preparation - The company will work with the VSBFA to complete the agency’s required documents in order to obtain project approval and issuance of IRBs.
  7. Allocation - Once a financial commitment has been received by the company to back the bond issue, bond allocation is requested by VSBFA for the project. If funds are available to be allocated to the project under the state volume cap, allocation is confirmed in writing, which typically is good for a period of 90 days or until December 15 of the current calendar year, whichever first occurs.
  8. Closing - Bond counsel distributes closing documents for comment. Bond preclosing and closing
Standard time to complete this process with the VSBFA is anywhere between 60 to 120 days.

Federal and State Regulations for IRB Financing Under the Current Tax Act
Some of the major requirements of industrial revenue bond financing are as follows:
  • Type of facility - The facility must be a manufacturing facility. No more than 25% of the bond proceeds can be used for ancillary office, warehouse, or other space located on the site of the manufacturing facility.
  • Qualifying costs - At least 95% of the bond proceeds must be spent on land, the building and equipment, and other depreciable property.
  • Land - No more than 25% of the bond proceeds can be used to acquire land.
  • Issuance costs - No more than 2% of the bond proceeds can be used for issuance costs such as placement fees, legal fees, and other issuance costs.
  • Maturity - The average maturity of the bonds cannot exceed 120% of the average economic life of the facilities financed.
  • No working capital or inventory - Bond proceeds cannot be used to finance working capital or inventory.
  • $10,000,000 limitation - The capital expenditures for the facility, when added to capital expenditures in the three years immediately preceding and three years following the closing of the financing of the facility in the jurisdiction where the facility is located, cannot exceed $10,000,000. Facilities in the aggregate amount of $1,000,000 or less in a jurisdiction can be issued without complying with this capital expenditure test.
  • Acquisition of used property - The acquisition of used property can be financed if used buildings are rehabbed with at least 15% of the portion of the bond amount, and structures other than buildings can be financed if at least 100% of the portion of the bond proceeds used to purchase the structures is spent on their rehabilitation.
  • $40,000,000 aggregate limitation - A company may not be the beneficiary of more than $40,000,000 of certain tax-exempt bonds regardless of the location of the facilities during a three-year period after the facility being financed is placed in service.
  • Administrative costs - There is a wide range of administrative costs charged by local issuers. Montgomery County, for instance, has a substantial administrative cost it uses to finance that county’s economic development effort. The City of Manassas, charges an application fee, based on the bond’s issue amount, between $250 and $1,000. A fee of 1/10 of 1%, of the outstanding principle, is due at closing and at the annual anniversary of the bonds issuance. The City of Manassas also requires companies to indemnify it for loss and to pay its proportionate part of ongoing administrative expenses, such as audit and staff fees.
Other Types of Tax-Exempt Financings
IRBs may also be used to refinance existing IRBs. Some of the requirements and procedures outlined above may not be applicable for IRB refundings. Non-IRB tax-exempt financing may also be available for facilities of all kinds for nonprofit organizations like hospitals and schools. Finally, in the event that the company cannot qualify under the federal requirements, it may be possible and economically advantageous to issue bonds that are state tax-exempt but not federally tax-exempt commonly referred to as taxable bonds.