Industrial Revenue Bond Rules for Borrowers
The following is a general summary of tax laws applicable to tax-exempt IRBs under the Internal Revenue Code of 1986 (the “1986 Code”).
Proceeds – The proceeds of the bond issue must be spent for the acquisition, construction, improvement, reconstruction or refinancing of a “manufacturing facility”. A manufacturing facility under the 1986 Code means any facility that is used in the manufacture or production of tangible personal property. The proceeds of the bond issue must be spent on a project in the jurisdiction within 10 miles of the issuer. 95% or more of the net proceeds of the bonds must be used to acquire, construct reconstruct or improve land or depreciable property. Generally, the purchase of existing property may not be financed with bond proceeds. However, existing facilities may be financed if rehabilitation expenditures made with bond proceeds are equal to or exceed 15% of the cost of acquiring the building and equipment.
Costs – Costs of issuance paid from bond proceeds in new money financings may not exceed 2% of the face amount of the bonds. Costs of issuance may not be paid out of bond proceeds in re-financings. Any costs incurred by the borrower may not be reimbursed out of bond proceeds if such expenditures are made more than 60 days prior to the adoption of an inducement resolution or a similar official action taken by the issuer. All new money issues must receive an allocation of volume cap. Not more than 5% of the bond proceeds may be used to finance current expenses such as working capital, interest following construction or inventory. This 5% includes the 2% which may be used to pay issuance costs.
Bond – The face amount of an IRB issue may not exceed $10 million; however, equipment expenditures in excess of $10 million may be financed with a tax lease where the borrower does not take depreciation and cannot purchase the equipment at less than fair market value. Capital expenditures made within the same municipality as the facility and equipment being financed by an IRB may not exceed $10 million for three years before and three years after the date of the bond issue. The aggregate amount of facilities financed for the benefit of one borrower may not exceed $40 million nationwide. Each project financed must be approved by the governmental unit issuing the bonds and the governmental unit having jurisdiction over the area in which the facility is located (if different). New money financings are subject to the alternative minimum tax for investors buying the bonds. The bonds must be issued no later than one year after the date the facility is placed in service, i.e., when the facility is 90% occupied or operating at 90% capacity. All of the bond proceeds must be spent within three years of the date of issuance of the bonds. Not more than 25% of the net proceeds of a bond issue may be used for the acquisition of land. When a building is purchased, an allocation of the purchase price between the land and the building must be made to determine compliance with this requirement.