Industrial Development Revenue Bonds
Tax-exempt financing issued through the Port of Port Townsend’s Industrial Development Corporation (IDC) is available to qualifying companies. These Industrial Development Revenue Bonds (IDRB’s) offer manufacturing and processing companies below-market interest rates for eligible uses (see below), such as purchasing land /equipment, constructing buildings, and/or upgrading existing facilities.
Why should you consider IDRB financing?
Using an IDRB to finance projects cuts the financing costs. Usually, the interest rate is two to three percentage points lower than the current bank prime lending rate.
What projects can be financed with an IDRB?
Projects can include the cost of building or refurbishing a manufacturing or processing plant, or setting up a utility facility. The project must either create new jobs or retain jobs that would have been lost if the project was not done. Specifically, an IDRB can be used to pay for:
- Land acquisition (up to 20% of amount financed)
- New construction
- Purchase or renovation of existing facilities
- Purchase of new machinery and equipment
What limits are there on IDRB financing?
For a non-utility project, bond amounts range from $1 million to $10 million. Note that for small projects, the interest savings may not cover the higher setup costs. There are other limits:
- At least 95 percent of the amount financed must be spent on the qualifying project
- No more than 2% of the amount financed may be spent on bond issuance costs
- No more than 3% of the amount financed may be used for related non-capital expenses
- No more than 20% of the amount financed may be used for land acquisition
- Expenses must not be incurred before 60 days prior to the IDC’s Inducement Resolution that starts the bond issuance process
What are the borrower’s responsibilities when using IDRB financing?
The borrower is fully responsible for repaying the loan that is secured by the IDRB. The borrower must make the arrangements to obtain an irrevocable letter of credit from a qualifying bank that will be used to pay the bondholders in the event the borrower is not able to pay. The borrower must also hire their own legal counsel, arrange for an underwriter if the bonds are sold to the public, and hire other professional financial advisors if necessary .
How long does the funding process take?
The process can take as little as two months but may take longer depending on the complexity of the project.
How does the process of obtaining IDRB financing work?
The first step is to consult with a financial advisor and legal counsel to determine if the project qualifies for IDRB financing and whether the interest savings justify the higher initial costs of the borrower’s proposed financing. If the project makes sense for IDRB financing, the borrower completes an application to the Port of Port Townsend IDC. After acceptance, the IDC issues an Inducement Resolution, and the bond issuance process begins. The bank performs the credit work, attorneys craft the bond agreement, the State of Washington allocates bonding authority from the state pool, and, when all is ready, the IDC issues the bonds, Typically, the underwriter purchases the bonds from the IDC and then sells to the public or institutional buyers. After the bond sale, the proceeds are made available to the borrower. The IDC is not involved in administering a bond issue after funds go out.
Is there a subsidy associated with IDRB financing?
No. The only benefit of IDRB financing is the interest savings over commercial loan funds. No governmental financial support, direct or indirect, can be provided to the borrower under the law.
What costs are involved?
The IDC charges $1,000 application fee plus an annual fee 1/10 of 1 percent of the outstanding principal balance of the bonds per year for the life of the bonds, payable at the time of issuing the bonds. Other costs include: bond counsel, underwriting, legal notice, printing, trustee, and other fees depending on the financing arrangement. The borrower is responsible for the payment of all costs associated with financing. Costs of up to three percent of the face amount of the bond can be paid from bond proceeds.
What assistance does the Port of Port Townsend IDC provide?
The IDC provides:
- Detailed explanation of the IDRB program
- Advice on projects eligibility
- Guidance throughout the application process
- Assistance and advice on documentation
- Lender, bond counsel, and other professional service referrals