05 Oct 2013

The skinny on industrial development bonds

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Industrial Development Bonds
A Tool for Economic Development

Misunderstandings and inaccurate information about industrial development bonds (IDBs) are common. Even the term can be confusing, as it is often used interchangeably with industrial revenue bonds (IRBs).

Regardless of the name used to describe this financial tool, the term industrial development bond is technically correct. This mechanism is an economic development tool local governments can use to encourage business growth in their community and create new jobs for citizens.

Misconception #1

The most common misunderstanding that I have found by the general public is that the government entity issuing these bonds, typically a city or county, is lending money or somehow guaranteeing the repayment of the business that is the benefactor of the bond issuance. This is not true and never has been.

How IDBs Work

The relationship that exists between the government and the business is similar to a tenant/landlord relationship. The local government is the landlord, and an economic base business is the tenant. An economic base business is typically a manufacturing or service business with more than 51 percent of its revenue coming from customers outside the state. Service businesses include wholesale, distribution, warehousing and inbound customer service centers.

The business leases the land, building and/or equipment for a period of years, typically 10 to 30 years, from the local government. During the lease period, the business makes payments and has the use of the real and personal property. At the end of the lease, the company can execute a purchase of the property from the landlord.

IDB Benefits

Paseo del Norte interchange funded with industrial revenue bondsOne of the benefits to the business during the lease period, which coincides with the bond period, is that it pays a reduced amount of property taxes. The duration and percentage of the property tax exclusion are set by the government entity.

The logic behind such an arrangement is that the creation of new jobs by this growing company will stimulate the local economy with additional income tax and gross receipts tax revenue. The expectation is that this additional tax revenue will more than offset the reduced property taxes, while the community continues to increase its employment level. The local government will usually have an economic impact study done on the project to ensure that the tradeoff between reduced property taxes and increased state gross receipts taxes will be in the government’s favor.

Misconception #2

Another common misconception is that only large businesses and those in specific industries can get IDBs. The size of the bond issuance needs to be large enough to justify the costs for attorneys, administration and banking fees, but there are no size or industry type requirements related to the business.

IDB Expertise

The general rule of thumb is that the project needs to be at least $3 million. Small manufacturing companies that have used IDBs in the Albuquerque metro area to expand and create jobs include CVI Laser, Ktech, PolyFlow, Sennheiser, MCT Industries (MIOX and Wonik) and Vitality Works.

Dennis Houston, CMAWhen I was the chief financial officer at General Technology Corp., we did a $4.1 million small manufacturer’s tax-exempt industrial development bond in 1999 with the city of Albuquerque. It enabled us to purchase seven acres of land and build a 71,000-square-foot electronics manufacturing facility in the Renaissance Industrial Park near Montano and Interstate 25.

We promptly added more than 30 jobs in less than two years, which was a 25 percent increase in the employment of the manufacturing side of our business. Bank of America provided a letter of credit that protected the bond investors, and the bank also served as placement and remarketing agent. Because the GTC bonds were tax-exempt, the investors buying the bonds didn’t pay income tax on their interest income. The benefit to GTC was a lower interest rate than conventional mortgage financing. Our interest rate when we closed in April 1999 was 3.3 percent.

A conventional mortgage would have been in the 7.5 percent to 8 percent range. Even with the added cost of the bank letter of credit fee, the borrowing cost for GTC was substantially reduced. The repayment amortization period on the bond was 20 years. Tax-exempt bonds require approval and allocation from the New Mexico State Board of Finance in addition to approval from the local government entity.

Economic Development Tool

As a citizen and taxpayer, I have experienced the benefits of job creation and community prosperity made possible by IDBs and encourage others to be supportive of their use when appropriate. I would like to thank our elected officials at the city of Albuquerque, Bernalillo County, Sandoval County, Santa Fe County, Valencia County and other cities and counties around the state for their judicious and wise use of this economic development and job-creation tool.

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