What do business leaders need to know about the bond application process and dealing with government entities?
First, it’s not as difficult as people believe. Depending on the structure, you can actually have a deal close within a 60-day window, which is much quicker than people anticipate.
Another key is making sure you surround yourself with a good team of professionals. A supportive bank and an experienced bond attorney are critical to the success of the offering.
Establishing contact with a municipal body that will issue the bonds on your behalf is another important early step. These are municipal bonds for the benefit of private activity, so you need a municipality to issue them — city, county or authorities such as the Illinois Finance Authority. This entity has the ability to issue a certain amount of bonds every year throughout the state.
Every state has a similar authority. An inducement resolution needs to be passed by the authority in which your project is recognized by a municipal body.
Once that’s complete, any money spent 60 days prior to the inducement and going forward three years from that point will qualify for the tax-exempt project that you want to finance.
What is the cost of IRBs?
It varies on a deal-by-deal basis. For example, in a normal setting, a standard bond will be somewhere in the low to moderate five figures. While this seems like a large figure, the bulk of this cost is wrapped into the bond, so the actual cash outlay is very small. That being said, this type of financing only makes sense if you’re talking about bigger projects that exceed $2.5 million to $3 million.
If you’re going to move forward with the project and it fits the tax rules, you can make up the cost of the bond, in most cases, within two years based on the interest savings over conventional financing. That really helps you determine whether it makes sense to apply for an industrial revenue bond.
What are the benefits and drawbacks of IRBs?
IRBs have lower rates relative to conventional financing. It used to be quite costly to go through this process and issue debt, but the process has become easier over the years.
It’s always cheaper to pay a tax-exempt rate, but the greatest obstacle remains qualifying your project.
John Sassaris is senior vice president, commercial division head with MB Financial Bank. Reach him at (847) 653-1848 or [email protected].