Industrial Revenue Bonds - Financing

General

Under Kansas law (K.S.A. 12-1740 et seq.) Kansas cities and counties are authorized to issue industrial development bonds, commonly referred to as industrial revenue bonds or "IRBs", for the purpose of "paying all or part of the cost of purchasing, acquiring, constructing, reconstructing, improving, equipping, furnishing, repairing, enlarging or remodeling facilities for agricultural, commercial, hospital, industrial, natural resources, recreational development and manufacturing purposes." This financing authority is designed to provide a financing vehicle whereby local governments can assist private companies, individuals, partnerships and other entities with economic development in their community. In the typical IRB issue, a city or county (the "Issuer") issues industrial revenue bonds, the proceeds of which are used to acquire land and construct and potentially equip a facility to be used for one of the purposes previously described. The facility is owned by the Issuer and leased to the private company, individual, partnership, etc. (the "Borrower"). The lease payments made by the Borrower are sufficient to pay the principal and interest payments on the bonds as they become due. During the term of the lease the Borrower functions, in most respects, as the true owner of the facility and operates the facility free of any involvement by the Issuer provided lease payments are made on a timely basis. The Issuer is obligated to use the rent it receives from the Borrowers to repay the bonds and has no obligation to use any other resources or funds of the city or county to repay the debt. When the bonds have been paid in full, the Borrower may exercise its purchase option to buy the facility at a nominal price, e.g., $100.

Advantages Associated with IRBs

The types of projects that qualify for industrial revenue bond financing are also the types of projects that would typically be financed with a conventional loan from a bank or other financial institution. The advantage to the Borrower to pursing the IRB option vary depending on the type of project being financed, the Issuer, the Borrower and other factors. The primary advantages to IRB financing are the following:

1. Tax-exempt interest on the borrowing. Certain types of projects such as manufacturing, multifamily housing, solid waste disposal and others as well as certain types of Borrowers such as not-for-profit companies with 501(C)(3) status may qualify for a federal tax-exemption on the interest on the bonds issued to pay for such types of projects or for projects used by such types of Borrowers. The difference in the interest rate between a taxable and tax-exempt varies but generally is about 1% to 2%. Over time, the interest cost savings for the Borrower for tax-exempt debt can be substantial. Whether or not an issue qualifies for the federal tax-exemption, all industrial revenue bonds issued in Kansas are exempt from Kansas income taxation.

2. Tax abatement on the Facility being Financed. Kansas law permits the Issuers to apply to the Kansas Board of Tax Appeals for an exemption from personal property and ad valorem taxes for property purchased with the proceeds of industrial revenue bonds. (This tax exemption is commonly referred to as a tax abatement.) If an exemption is permitted by the Borrower it begins in the year following the issuance of the bonds and may extend for up to ten years. The practice varies among issuers as to whether any property tax exemption is granted and, if it is granted, what the amount of the tax exemption is. Before an Issue can apply for a property tax abatement, it must prepare a cost benefit analysis using information that, in part, is provided by the Borrower, and the Issuer must conduct a public hearing on the proposed abatement.

3. Sales Tax Exemption on Property Financed with Bond Proceeds. Kansas law also permits the Issuer to apply to the Kansas Department of Revenue for an exemption from sales tax on items purchased with industrial revenue bond proceeds. The exemption request is typically filed by Issuers after the Issuer passes a resolution indicating its intent to issue bonds for a project but before the bonds have actually been issued and before the Borrower begins making any purchases. After the filing, the Issuer provides the Borrower with a sales tax exemption certificate number that the Borrower, in turn, can provide to its vendors so they do not charge sales tax on items to be used in the bond financed project. If for any reason the bonds are not issued, the Borrower is obligated to repay the sales tax.

Some industrial revenue bond issues qualify for all of the advantages previously identified, but many only qualify for one or two of the advantages. The economic benefits from tax-exempt interest, property tax abatement and sales tax exemption can be qualified fairly easily once a Borrower knows what the approximate cost of the proposed project is.
Disadvantages Associated with IRBs

The value of the advantages associated with industrial revenue bond financing should be weighed against the disadvantages to determine if this type of financing is best for a Borrower. The primary disadvantages to IRB financing are the following:

1. Costs of Issuance of the Bonds. There are numerous costs associated with the issuance of industrial revenue bonds that would not be typical for conventional financing. These additional costs include the fees for (a) bond counsel who will prepare the bond documents and render a legal opinion to the Borrower, the Issuer and the purchaser of the Bonds as to the validity of the bonds and their tax-exempt status, (b) a trustee bank that will administer the bond issue once it is completed including handling the payments sent to bond owners, investment of bond proceeds and other matters, (c) a bond underwriter, who arranges for the sale of the bonds and may prepare offering material if appropriate, (d) other attorney fees such as the Issuer's attorney and the Borrower's counsel, and (e) other bond related expenses for certain required publications of the Issuer, bond printing, the printing of bond offering material, etc. The costs of issuance vary depending on the size of the bond issue, the structure of the bond issue and many other factors. Not all costs mentioned above are required for all bond issues. The Borrower can normally obtain an estimate of these costs through bond counsel or an underwriter before beginning the bond issuance process.

2. Timing and Complexity. The typical bond issue normally requires about 90 days to complete although issues may be completed in a shorter time frame or may take considerably longer. Issues vary significantly in their complexity. There are many variables in the way in which an issue may be structured and there are many requirements that must be followed precisely, particularly those relating to the federal tax exemption on the interest on the bonds. Borrowers may consult with bond counsel to familiarize themselves with procedures required for their bond issue and the ongoing requirements that apply to the Borrower while the bonds are outstanding.
Bond Issuance Procedure

Below is a list of the basic steps necessary to complete the typical industrial revenue bond issue. This is not intended to be a comprehensive list of all items but is merely intended to provide an overview of the process. All steps may not apply to all transactions.

1. Borrower contacts the Issuer to request a pre-application conference with the Issuer. (Optional)
2. Borrower submits application to Issuer.
3. Issuer reviews application and requests any other appropriate information.
4. Borrower completes Borrower's Questionnaire provided by Bond Counsel and submits it to Bond Counsel.
5. Issuer provides notice of public hearing for the following, if applicable: a. If the interest on the bonds is to be exempt from federal income taxation (publish two weeks before the public hearing). b. If taxes are to be abated on the project under state law (publish one week before the public hearing and send to county and unified school district).
6. Issuer meets with Borrower at Borrower's proposed or existing project location for an on-site tour if applicable.
7. Governing body holds public hearing, if applicable.
8. Governing body adopts resolution of intent.
9. Bond Counsel files Issuer's application for State allocation of funds, if applicable.
10. Bond Counsel drafts documents necessary for transaction including ordinance, lease, trust indenture, etc. Underwriter or underwriter's counsel drafts official statement and bond purchase agreement, if applicable.
11. Bond Counsel arranges for printing of bonds, if applicable, and orders CUSIP numbers for bonds.
12. Bond Counsel files Issuer's information statement with the Kansas Board of Tax Appeals.
13. Bond Counsel, underwriter's counsel and others distribute final drafts of documents.
14. Borrower or Borrower's underwriter markets bonds.
15. Governing body passes ordinance or resolution authorizing the issuance of bonds.
16. Issuer (if city) publishes ordinance authorizing the issuance of the bonds.
17. Borrower's underwriter prints final official statement, if applicable.
18. Bond Counsel drafts closing documents and the underwriter or Bond Counsel arranges closing details including delivery of bonds and payment.
19. All parties close transaction including making all necessary UCC filings, recordings and transfers and pay closing costs.
20. Bond Counsel files Issuer's certificate evidencing closing with the State.
21. Bond Counsel files Issuer's form 8038 with Internal Revenue Service, if applicable.

The above procedure normally requires 90 days. The time required may be more or less depending on the complexity of the transaction, availability or participants and other factors.

A source for additional information on industrial revenue bond issues in Kansas contact Dotty Riley or Mary Carson of Logan, Riley, Carson and Kaup, Attorneys at Law at 913-661-0399.

For more information and to make an application contact:
Leavenworth County Development Corporation mail@LVCountyED.org
or
City of Basehor - (913) 724-1370
City of Lansing - (913) 727-3036
City of Leavenworth - (913) 682-9201
City of Tonganoxie - (913) 845-2620