IRBs can provide path to economic growth

Harold W. Lavender Jr. | Albuquerque Journal — Industrial revenue bonds are a form of public-private partnership – a tool that governments can use to stimulate economic development, allowing them to offer tax subsidies for new or expanding businesses that create jobs and improve communities.

Subsidies may include a property tax exemption; a gross receipts tax deduction and compensating tax exemption if certain equipment is purchased with bond proceeds; an exemption for bond interest from New Mexico income tax; and, in some cases, an exemption of bond interest from federal income tax.

These types of bond issues have been popular as a way to help New Mexico cities and towns compete – without assuming financial liability – for capital-intensive projects by extending tax subsidies to reduce the risks and costs for a company to move here. New Mexico cities and counties are authorized to issue IRBs.

To be eligible for IRB financing in New Mexico, a project must encourage manufacturers and commercial businesses to move or expand here, or to promote the state’s agricultural products or natural resources. IRB candidates include factories, assembly plants, warehouse and distribution hubs, nonprofit enterprises, health care services, research facilities, industrial parks and corporate offices.

In an IRB transaction, a company deeds its real estate or other property – land, buildings, furniture, fixtures and equipment – to a government body, which issues low-interest bonds. The bond issuer simultaneously leases the property back to the company (the lease payments are the source for repayment of the bonds) until the bonds mature, when the company buys the property at a nominal prearranged price.

Since the project is legally owned by a governmental entity, the company developing the project obtains the status of a state or local government with respect to the property. The property being developed thus becomes exempt from many taxes, especially property taxes, until the bonds mature – typically in 20 years.

Approval and issuance of IRBs does not guarantee the success of a project. The company is responsible for finding investors to buy the bonds, which are secured by a mortgage on the company’s property. While IRBs may offer some tax incentives to bond holders, finding investors may prove no easier than finding a conventional lender.

Taxpayers are not legally responsible for repayment of the bonds and are legally prohibited from incurring any liability for repayment of the bonds. The proceeds from the sale of the bonds are the source of a loan from the bond buyer to the company. Finding a buyer for the bonds is thus an essential early hurdle that the project developer must overcome in a successful transaction.

The first step in an IRB transaction is finding a governmental entity to issue the bonds. The approval process is public, which may become political, and success in finding an issuer may depend on the nature of the project or the community. Thus, developers are advised to secure the services of experienced counsel and bond counsel early in the planning process.

Loss of property revenue affects local governments – especially schools and counties, which rely on this funding source – but advocates argue that IRBs are used only when the alternative is no development at all. Those opposed to IRBs are more skeptical, arguing that the expected benefits will not justify the cost in lost tax revenues.

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