Wisconsin Department of Commerce Newsletter
May 2004
Industrial Revenue Bonds An Option for Communities

Wisconsin manufacturers considering expanding operations can look to cities, villages, and towns to issue Industrial Revenue Bonds for financial assistance. The proceeds from the sale of the bonds are loaned to the manufacturing business to finance capital investment projects. IRBs can be used to finance the acquisition of land, construction of a new facility or expansion of an existing one, and the purchase of new equipment.

Unlike most conventional loans, IRBs can offer businesses a lower cost, long-term financing package. One of the main advantages of IRBs is that the interest earned by the bondholders is exempt from federal income taxes. As a result, the bondholders are willing to accept a lower interest rate for the borrower in exchange for the tax-free income. Typically, IRB interest rates may be from 1.5 to 2.5% lower than the rates for more conventional financing.

A common misconception about IRBs is that the municipality is responsible for the debt if the business defaults on the loan. Even though IRBs are generally municipal bonds, they are not general obligations of the municipality that issues them. The municipality lends its name, but not its credit, to the bond issue.

The federal tax code imposes a number of restrictions on IRBs. For example, the code defines "manufacturing" as nearly every type of processing that result in a change in the condition of tangible property. If a company purchased unfinished fishing lures, paints them, adds feathers, and then imprints its trade name on them, the IRS has determined that manufacturing has taken place. However, if the company simply purchases the finished lures and adds its name, no manufacturing has taken place. Manufacturing does not include the provision of recreational services, or wholesaling, retailing, or repair services.

The code also requires that for IRBs exceeding $1.0 million, capital expenditures, at the business' location(s) in the municipality where the project is located, can't exceed $10 million during three years before and three years after the date the bonds are issued. Prospective IRB users need to consult with bond counsel on project eligibility, the use of bond proceeds, and other restrictions.

In addition to the business, there are generally four other main players in the IRB process:

  • the municipality, which has to approve issuing the bonds on behalf of the business
  • the bond counsel, who makes sure that all of the legal procedures are followed to maintain the tax-exemption of the bonds
  • the lender, which either purchases the bonds or issues a letter of credit
  • Department of Commerce, which allocates the volume cap or bonding authority for the IRB financing.

Federal tax law limits the amount of tax-exempt bonds that can be issued in each state each year to non-government persons or businesses. These bonds, called Private Activity Bonds, include IRBs, and the limit is known as the unified volume cap. The total allocation of volume cap for Commerce in 2004 is approximately $196 million, so there is plenty available for manufacturers looking for low cost financing to expand.

Since 1997, Commerce has allocated more than $730 million in volume cap for 254 projects with a total capital investment of over $1.7 billion. IRB projects in 2003 included:

  • W.S. Darley in Chippewa Falls, a manufacturer of fire fighting equipment
  • Baker Cheese in Fond du Lac County, one of the largest producers of string cheese in the U.S.
  • Select Trusses & Lumber in West Salem, which specializes in wood roof and floor trusses for homes, businesses and farms.

For more information on IRBs, contact Steve Sabatke at 608/267-0762.

-- Steve Sabatke

The newsletter is issued electronically every other month.

Please send comments or questions to Barbro McGinn, editor.

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