Industrial Revenue Bonds: What They Are and How They Work

Key takeaways

• Industrial revenue bonds (IRBs) are municipal bonds issued by a state or local government on behalf of a private company to finance industrial projects.
• IRBs are a type of private activity revenue bond; bondholders are repaid from the revenues generated by the financed project.
• Interest on most IRBs is exempt from federal and, often, state income taxes, which typically produces lower nominal yields than taxable debt.
• Tax-exempt IRBs must meet strict limits on issuance size, use of proceeds, maturities, and qualifying project costs.

What is an IRB?

An industrial revenue bond (IRB) is a municipal debt security issued by a governmental issuer to help a private, for‑profit company finance the acquisition, construction, expansion, or improvement of manufacturing facilities or related equipment. Although issued by a government entity, the private company generally operates the project and makes payments that support the bond service.

IRBs fall under the broader category of private activity bonds (PABs): municipal bonds issued for projects that benefit the public but are carried out by private entities.

How IRBs work

• Issuance: A municipality issues the bond on behalf of a private company to provide financing that the company might otherwise be unable or unwilling to obtain.
• Use of proceeds: Bond proceeds fund capital costs tied to qualifying industrial activities—commonly manufacturing, waste disposal/recovery, and wastewater treatment.
• Repayment: The private borrower reimburses the issuer; interest and principal are paid from revenues generated by the project (not from the issuer’s general tax revenues).
• Security and remedies: If the company defaults, a bond trustee can foreclose on and sell project assets to repay bondholders.

Key qualifying rules and limits

To qualify for tax‑exempt treatment and meet PAB rules, IRBs must satisfy several federal requirements, including limits on size, use, and maturity:
* Maximum issuable/outstanding amount per bond issue: typically $10 million.
* At least 95% of proceeds must be spent on qualifying project costs.
* No more than 2% of proceeds may be used for bond issuance costs.
* Total IRBs outstanding for a single company are generally limited (commonly cited as $40 million).
* Weighted‑average maturity cannot exceed 120% of the average economic life of the financed facilities.
* Proceeds generally cannot be used to acquire used equipment except when part of acquiring an entire facility.
* No more than 25% of proceeds may be used to acquire land.
These rules mean IRBs are often small‑issue, project‑specific manufacturing bonds.

Note: Many IRBs have been issued as variable rate demand obligations (VRDOs) and may be secured by bank letters of credit with investment‑grade credit ratings.

Tax treatment

• Interest: Most IRBs pay interest that is exempt from federal income tax and often from state and local taxes if the investor resides in the issuing state.
• Property and tax status: Because the project is structured as government‑owned for the financing, the financed property can receive tax exemptions (notably property tax relief) for the life of the bonds.
• Default consequences: If the borrower fails to make required lease or debt payments, the trustee may foreclose on the property and sell assets to satisfy bondholders.

Taxable IRBs and large projects

Some jurisdictions issue taxable industrial revenue bonds when projects exceed the limits for tax‑exempt financing or when different financing objectives apply. Taxable IRBs do not provide the tax-advantaged interest to investors but can enable financing of very large projects or provide other policy or tax benefits to the borrower.

How investors access IRBs

Direct purchases of individual municipal bonds frequently require large minimum investments and specialized brokerage access. Retail investors seeking exposure to industrial revenue bonds typically do so through:
* Municipal bond mutual funds
* Exchange‑traded funds (ETFs) that hold municipal revenue securities
* Money market funds that include municipal short‑term paper

These pooled vehicles provide diversification and lower minimums than buying individual municipal issues.

Bottom line

Industrial revenue bonds are municipal financings arranged to support private industrial projects that serve public purposes—most commonly manufacturing and environmental treatment facilities. They are repaid from project revenues, often enjoy tax‑exempt interest for investors, and must meet strict federal limits to qualify for that status. Retail investors can gain exposure through funds rather than direct purchase of most individual IRB issues.