Bonds are loans that represent debt a government or corporation must repay to an investor. An industrial revenue bond (IRB) is a special type of bond that is used to finance the construction of manufacturing or commercial facilities for a private user. These bonds can provide financing for land, buildings, and equipment for new or expanding companies. Architectural, engineering, legal, and administrative fees associated with the sale of the bonds can also be paid from the bond proceeds.
Generally, a bond ensures that the bondholder will be paid a fixed amount of interest at regular intervals for a fixed amount of time. Industrial revenue bonds are usually tax-exempt obligations and are issued by political subdivisions, local municipalities, or county governmental bodies for the benefit of private companies. The debt service or interest payment on the bond is paid solely by the borrowing company. Interest paid to a bondholder may be exempt from federal income tax as well as the state and local taxes of the issuing governmental body.
Industrial revenue bonds tend to be popular with companies because the bonds can help them save money. In many instances, the governmental body owns the title to the project and the company is exempt from having to pay property taxes on land, buildings, and equipment that were paid for with the funds raised from the bonds. A company may also receive gross receipts and compensating tax exemptions on initial purchases of equipment made with bond proceeds. Industrial revenue bonds are typically used for large capital projects that cost several million US Dollars (USD). Also, using IRBs to finance projects can cut the financing costs because the interest rate is typically two to three percentage points lower than the current bank prime lending rate.
Bonds in general are considered lower-risk investments. As a result, the rate of return on bonds is usually lower than it is for other types of financing instruments. IRBs impose few direct costs upon the issuing governmental body while the perceived benefits to both companies and communities can be substantial.
There are, however, important social costs that are associated with the use of industrial revenue bonds. Generally, they include reduced federal tax revenues, dilution of the municipal bond market, and in some cases, IRB investments may not be directed toward high unemployment areas. The jobs they created may also not yield direct benefits to the low-income segments of the issuing jurisdiction.