n innovative method of financing certain types of capital assets or improvements at a borrowing cost below that of convention financing is the Tax-Exempt Industrial Revenue Bond Program (IRB) available from the Industrial Development Authority of St. Charles County (IDA).
The IDA issues tax exempt revenue bonds for long-term, fixed-asset financing at below-market interest rates to finance manufacturing facilities, multi-family housing, and non-profit development projects in St. Charles County.
Benefits of a Tax Exempt Bond:
- Tax-exempt bonds are typically one of the lowest-cost forms of financing
- Interest rate savings are usually one and a half to two percent compared to conventional financing
- Financing that fits a variety of project sizes from $500,000 to $3 million for the IDA’s Mini Bond Program and $3 to $10 million for larger IRB projects.
Additional benefits for non-profit 501(c)3 include:
- Few tax limits, no volume cap allocation or capital expenditure limits
Parameters and Conditions
The following is a general list of parameters and conditions that apply to all tax-exempt industrial development bonds:
- Tax-exempt industrial revenue bonds (IRBs) can only be used for items subject to an allowance for depreciation (i.e., capital expenditures). In addition, assets financed with tax-exempt bonds must be used with respect to a manufacturing facility.
- A manufacturing facility is any facility which is used in the manufacture or production of tangible personal property (including the processing resulting in a change in the condition of such property). As a rule, a facility can qualify if the activity that occurs at the site involves taking two or more components and combining or assembling them to create something new.
- 95% of the Net Bond Proceeds (par less any bond reserve amount) must be used for the acquisition, construction, reconstruction, equipping, or improvement of land or property which is subject to an allowance for depreciation as provided in the tax code.
- Not more than 25% of the Net Bond Proceeds may be used for acquisition of land.
- Not more than 25% of the Net Bond Proceeds may be used for ancillary manufacturing purposes. These include the cost of areas such as materials storage, R & D labs, show rooms, employee parking lots,
non-manufacturing related office space, and other similar areas.
- When purchasing an existing facility, amounts spent on rehabilitation or renovation must equal at least 15% of the cost of the bond-financed portion of the building. The borrower must spend this amount within two years of acquiring the facility.
- Costs of issuance paid from Bond Proceeds are limited to 2% of par. Any costs above 2% must be paid from available cash on hand or taxable borrowing.
Project Minimum and Maximum Size
- There is no statutory minimum project or IRB size. Due to the costs associated with underwriting bonds, however, it is not practical as a general rule to use bonds to finance projects less than $1 million unless the bonds are to be purchased by a bank. (See Mini-Bond Program)
- Regarding the bond maximum, the borrower must represent it will not spend more than $10 million (including the face amount of the IDB under consideration) for capital improvements within its local jurisdiction during the prior three year period and during the subsequent three year period. A second representation is required that not more than $40 million (including the IDB under consideration) in tax-exempt financing will occur in the aggregate, regardless of location, during the three year period subsequent to the later of a) date this facility is placed in service, or b) the issuance of the Bonds.
- Fees due to the Authority at Time of Initial 1st Authority Issuance of Bonds: One-half of one percent
(1/2 of 1%) of the face amount of the bonds
- Fees due to the Authority at Time of Second Authority Issuance of Bonds: One-fourth of one percent
(1/4 of 1%) of the face amount of the bonds
- Fees due to the Authority at Time of Any Subsequent Authority Issuance of Bonds: One-fourth of one percent (1/4 of 1%) of the face amount of the bonds
Fees due to the Authority at the time of application for initial bond issue: $1,000 non-refundable application fee
Legal Fees and Other Expenses
All legal fees and other expenses incurred by the Authority are the responsibility of the bond obligor, In the event there is no issuance of bonds, applicant shall be required to pay for all expenses incurred by the Authority for work done on behalf of the applicant.