Federal tax law generally provides that tax-exempt bonds can only be issued to finance property for governmental or public use. If the property to be financed with bonds would be privately used, i.e., in a trade or business, the interest generated from the bonds will be included as income for federal income tax purposes. However, there are a few exceptions for certain non-profit corporations and other facilities that, although privately owned and operated, provide enough of a public benefit to qualify for the exception. Small issue manufacturing bonds, also known as Industrial Development Bonds (IDBs), are such an exception.
Manufacturing facilities include any facility used in the manufacture or production of tangible personal property, including processing that results in a change in the condition of such property. It also includes facilities that are directly and ancillary to the core manufacturing facility if they are located on the same site and not more than 25% of net bond proceeds are used for such ancillary facilities, i.e., office facilities.
IDBs may be issued in two amounts:
(1) Up to $1 million. This limit includes the outstanding amount of prior small issues with the same principal user or related person. However, capital expenditures are not taken into account.
(2) Up to $10 million. This limit includes prior small issue bonds and capital expenditures paid or incurred during the six-year period surrounding the bond issue with the same principal user or related person. The capital expenditures limit is $20 million minus the amount of the proposed bonds. Capital expenditures include (a) any expenditure chargeable to the capital account of any person (except to replace property due to catastrophic loss), (b) moved equipment that is acquired within the six-year measurement period, and (c) certain governmental expenditures that solely benefit the principal user or related person. Leased equipment can be excluded if leased from a manufacturer or leasing company.
These issues are subject to an outstanding limit of $40 million, which includes all exempt facility bonds, other small issue bonds, and qualified redevelopment bonds that are issued for the same substantial user.
There are a number of rules that govern the issuance of such bonds:
(1) The bonds are subject to state volume cap and must be allocated to the project by the Governor’s office.
(2) 95% of the proceeds must be used to provide the facility.
(3) Not more than 2% of the proceeds may be used for costs of issuance.
(4) Costs to be reimbursed include expenditures paid within 60 days prior to the adoption of an official intent resolution to issue the bonds.
(5) All costs must be reimbursed not more than 18 months after the facility is placed in service or 3 years after the allocation of bond proceeds to the expenditure, whichever is earlier.
(6) The weighted average maturity of the bonds cannot exceed 120% of the average economic life of the facilities to be financed.
(7) Not more than 25% of the bond proceeds may be used to acquire land.
(8) There must be a TEFRA hearing for public comment.
(9) A substantial user or related party cannot purchase the bonds.
Bonds issued under this exception cannot be used to finance working capital or inventory and may only be used to finance property or items that are capital in nature, i.e., depreciable under Section 167. IDB bond proceeds may be used to finance existing facilities and used equipment if:
(1) For a structure other than a building, an amount equal to at least 100% of the acquisition price is spent on rehabilitation of the structure.
(2) For an integrated building with equipment, an amount equal to at least 15% of the acquisition price is used for rehabilitation.
There are a number of Louisiana statutes that address industrial development and create conduit issuers. La. R.S. 51:1151, et seq. authorizes the incorporation of industrial development boards as private corporations of municipalities or parishes. These boards are authorized to issue revenue bonds, which require approval by the State Bond Commission and the Department of Economic Development. La. R.S. 51:1157; La. R.S. 51:1157.1. La. R.S. 51:1789 authorizes the issuance of revenue bonds in enterprise zones for business or industry. La. R.S. 39:551.1 authorizes parishes and municipalities to issue bonds to encourage the location or expansion of industrial facilities. La. R.S. 39:551.2 authorizes the creation of industrial districts, and La. R.S. 39:551.3 authorizes the creation of industrial parks. La. R.S. 39:991 authorizes the issuance of bonds to acquire plant sites and industrial plant buildings.
The procedure to issue an IDB is fairly straightforward:
(1) Apply to conduit issuer to issue bonds for the project.
(2) Complete conduit issuer’s preliminary approval process.
(3) Apply to State Bond Commission (and Department of Economic Development, as applicable) for preliminary approval.
(4) Complete SBC’s preliminary approval process.
(5) Conduct public hearings.
(6) Obtain final approval from conduit issuer.
(7) Obtain final approval from SBC (and DED, as applicable).
(8) Price and issue bonds.
The process takes about 90 – 120 days to complete.