Jolene Graham Deputy City Adminstrator
p. 316.722.7561
10100 W Grady Ave.P.O. Box 245 Maize, KS 67101
Industrial Revenue Bonds (IRB's) are among the most popular and cost-efficient methods of financing up to 100 percent of a growing business' land, building, and equipment. IRB's are securities issued by cities, counties, and the Kansas Development Finance Authority (KDFA). Proceeds from the sale of the bonds to private investors are made available to enable creditworthy companies to purchase land and pay the costs of constructing and equipping new facilities or the costs of acquiring, remodeling, and expanding existing facilities. If IRB's are used to finance certain types of facilities, interest payable to the owners of the bonds is exempt from federal income tax. This type of IRB is generally called a tax-exempt bond. Interest payable on bonds issued to finance other types of commercial facilities or to finance non-qualifying portions of an eligible facility, is subject to federal income taxation. This type of IRB is generally called a taxable bond. Interest payable on all IRB's is exempt from Kansas income taxation. IRB's, in many cases, afford long-term, fixed-rate financing not otherwise available for a business' capital investments. Adjustable rate financing is also available, allowing a business willing to take the risk to obtain lower borrowing costs. In IRB financing, the bond issuer acquires ownership of the property financed and leases it to the business. The lease rentals are used to repay the bonds with interest. Typically, the business is given an option to purchase the property at the end of the lease term for a nominal sum. Proceeds from the sale of the bonds are placed in escrow with a bank and used as directed by the business to pay the costs of constructing, acquiring, and installing the facilities. The business may have up to three years to spend the proceeds of tax exempt bonds on eligible property. Other benefits of an IRB include eligibility for a property tax exemption for the financed facilities of up to 100 percent for up to ten years and a sales tax exemption for labor and materials purchased for new facilities. These benefits and the structure of the financing are the same for all IRB's, whether tax-exempt or taxable.
Because interest received by owners of tax-exempt IRB's is not subject to federal income taxation, the resulting "cost of money" to finance a qualifying project can be as much as two percent to 2.5 percent (average annual interest cost) below interest rates charged for a comparable conventional loan. Since 1986, commercial facilities qualifying for tax-exempt IRB's have been restricted to manufacturing facilities. In 1993, the U.S. Congress indefinitely extended the authority of state and local governments to issue tax-exempt IRB's for such facilities. However, the use of tax-exempt bonds for manufacturing continues to be subject to restrictions as to the size of the financing, what may be purchased with the bond proceeds, and the amount of issuance costs that may be paid from bond proceeds.
Under current law, specific projects eligible for tax-exempt financing include manufacturing facilities; airports, docks, and wharves; mass commuting facilities; certain facilities for furnishing water, sewage, and solid waste disposal; qualified residential projects; local district heating and cooling facilities; facilities furnishing electricity or gas on a local basis; high-speed intercity rail facilities; and certain hazardous waste disposal facilities.
Under a typical IRB, a company enters into a lease of the facility from the bond issuer (the Kansas city or county where your facility is located). Then, the rent payments are used to pay the principal and interest to the bondholders. When all bonds have been paid, the company may exercise an option to purchase the project for a nominal price, such as $100. The bonds are not general obligations of the issuer, payable from taxation, rather, they are sold on the strength of the company's ability to pay principal and interest when due (i.e., your financial strength). The basic security agreement for bondholders is a net-net lease. The lease is a company's unconditional obligation to pay the bonds and interest through specified payments throughout the term of the lease. Because the financing is lease/purchase, the company can take advantage of applicable depreciation guidelines, receive available tax credits, and deduct interest payments as a business expense. The bond issuer does not exercise control over any aspect of the building's construction or the company's operations. During the term of the bond issue and within specified limits, a company may make structural changes to the building, replace equipment and machinery, and even sell portions of the land no longer needed for future expansion. Most bonds are structured to be repaid over ten to 15 years. Principal repayment terms are flexible and can be structured to meet your company's specific cash flow needs. The bonds are usually not callable (subject to repayment prior to maturity) before the third or fourth year.
Whether your property is financed through tax-exempt or taxable IRB's, Kansas law (K.S.A. 79-201a) permits exemptions for your project from ad valorem (real and personal) property taxation for up to ten years, commencing with the year after the year the bonds are issued. Issuers can require that all or a portion of the abated taxes be made available to local taxing jurisdictions in the form of payments in lieu of taxes. Nearly every IRB issuer will also provide property tax abatements to your company as an additional incentive to locate in the community. Statute K.S.A. 79-3606 exempts the cost of building material and labor, as well as fixed items of machinery and equipment, from state and local sales taxes.
The bond issuance process can take as few as 60 days and generally follows these steps:
A bond issue can provide a company with up to $1 million of tax-exempt bonds for a qualifying project, regardless of project size. A maximum of $10 million of tax-exempt IRB's can be issued for a manufacturing project, as long as a company's total capital expenditures at the project location does not exceed $10 million for a period of three years before and after the bond issue, including the amount of the bonds issued. If the $10 million limit is exceeded during the total six-year time frame, the tax-exempt status is forfeited and the company must redeem the bonds at a premium. Despite the size restrictions on IRB-financed projects, advantages may still accrue to projects exceeding $10 million. For example, a $15 million project could combine a $1 million tax-exempt bond issue with a $14 million taxable bond issue. Congress has placed an annual limit on the amount of tax-exempt IRB's that each state can issue. This limitation is called a "volume cap." An allocation of volume cap must be obtained for bonds for most privately owned, qualifying facilities. In Kansas, volume cap is allocated by the Secretary of Commerce & Housing. Bonds for government-owned solid waste disposal facilities, airports, docks, or wharves are not subject to the state volume cap. For calendar year 2002, the State of Kansas has $225 million of volume cap to allocate to its eligible projects. A company may not have more than $40 million of tax-exempt IRB's outstanding, nationwide, at any one time. For this purpose, a company is defined as that entity that ultimately benefits from the tax-exempt bonds.
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