Industrial Revenue Bonds

Use of an Industrial Revenue Bond (IRB) for larger industrial projects effectively allows qualifying businesses to purchase plant and process equipment free of gross receipts or compensating tax, and with a full or partial exemption from property tax on project property for up to thirty years.

Technically, an IRB is a loan from the bond purchaser to a company where the loan proceeds and repayment flow through a county or municipal issuer ('issuer'). Bond funds are used by a business to buy land and equipment as agents for the government entity. A company enters into a lease with the government entity to use the property in its operations. The agreement provides the company will lease the facility from the issuer and, at the end of the lease, purchase the facility from the issuer for a nominal amount. The government entity does not exercise any control over plant operations and has no interest in doing so. The county or municipality has no financial risk in the arrangement which essentially lets a private business take advantage of the tax exempt status of counties and municipalities.

IRBs in Metro New Mexico have advantages, conditions, and cautions.

• A city council or county commission must vote to 'induce' an IRB.
• The company must secure its own lender (purchaser) or have the IRBs bought by a related entity.
• The loan proceeds and repayment flow through a governmental issuer.
• Tax-free IRBs are limited to manufacturing companies with a maximum project size of $10M. Taxable IRBs have no size limit.
• A remaining property tax exemption may be passed on to new owner or flow through a lease to a new user.
• Benefit of remaining property tax exemption can, in some cases, be passed on to new project owner or flow through a lease in the event of sale or lease to new user.
• Some communities impose termination penalties (“claw back provisions”).
• Some communities require payments in lieu of property taxes (“PILOT payments”).
• Clients considering the use of IRBs should not commit to legally binding contracts for the purchase of equipment, facilities or land involving substantial expenditures, except on a contingent basis, until the city or county that will issue the IRB approves an inducement or ordinance. Transactions of this type, made before an IRB has been induced or authorized, should have a provision that clearly states that the offer is contingent upon IRBs being issued.
• The rationale behind this approach is to allow the client to have sufficient flexibility in regard to the transaction prior to the time that official action is taken, and not to take steps that could be perceived as assuring the development of a project regardless of the decision of the city or county.

For more information or a free custom analysis of tax incentives for your company, call 800-226-2935 or email us .

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