Industrial Revenue Bonds can offer attractive financing for certain manufacturing and industrial projects, but eligibility is much narrower than the name suggests.

A property being zoned industrial does not automatically make it eligible. A warehouse is not necessarily eligible. A distribution facility is not necessarily eligible. Even a manufacturing project may only qualify for tax-exempt financing on certain portions of its total cost.

For sponsors, the first question is therefore not, “Can we issue bonds?”

It is: What activity actually occurs at the property, and which project costs qualify under the applicable bond program?

Start With the Project Activity, Not the Building Type

Industrial Revenue Bonds, often structured as Industrial Development Bonds, are generally used to finance qualifying manufacturing or processing facilities.

That distinction matters.

A manufacturing facility that converts raw materials into finished products may qualify. A facility used only to store and distribute those finished products may not.

Examples of potentially qualifying uses can include:

The underwriting begins with what the company actually does inside the facility.

A sponsor developing a 300,000-square-foot industrial building should therefore not assume eligibility simply because the asset resembles other manufacturing properties. The operating use determines the financing opportunity.

Warehouses Can Be More Complicated

Warehouse space becomes particularly important because many modern industrial projects combine manufacturing, storage, office and distribution functions.

A standalone logistics facility used primarily for fulfillment, storage and shipping may not qualify under the same rules as a manufacturing plant.

However, warehouse space that is ancillary to an eligible manufacturing operation may potentially be included within certain limitations.

The same issue applies to office space.

Sponsors should separate the project into its actual uses:

This allows the financing team to determine what portion of the total development cost may actually be bond eligible.

Planning a manufacturing or processing development? Lever Capital Partners can help evaluate whether bond financing deserves to be considered before the construction capital stack is finalized.

Not Every Project Cost Is Eligible

Even when the underlying project qualifies, bond proceeds may not finance every dollar in the development budget.

Potential eligible uses can include qualifying real estate, construction costs, manufacturing equipment and certain related project expenses.

Other costs may be restricted or excluded.

Working capital and inventory, for example, generally require different financing. Land, warehouse components and office space can also be subject to limitations depending on the program.

This makes the sources-and-uses analysis one of the most important steps in evaluating an Industrial Revenue Bond structure.

A $20 million manufacturing development does not necessarily support $20 million of tax-exempt financing.

The relevant question is how much of the cost basis qualifies.

Qualification Does Not Mean the Project Is Financeable

One of the most common misconceptions is that the government entity issuing the bonds is effectively lending the money.

In many Industrial Revenue Bond transactions, the municipality or governmental authority acts as a conduit issuer. The private borrower remains responsible for repayment.

That means there are really two separate approvals.

First, the project must qualify for the bond program.

Second, the borrower and collateral must be acceptable to the bank, bond purchaser or investor providing the capital.

A technically eligible project can still face challenges if the sponsor's balance sheet is weak, leverage is too aggressive or project economics do not support the debt.

Credit Enhancement Can Become Part of the Structure

Some bond financings may require additional credit support.

Depending on the transaction, that could involve:

The appropriate structure depends on the sponsor, project and investor requirements.

This can materially affect the final cost of capital.

A tax-exempt interest rate may appear highly attractive, but sponsors should compare it against the fees associated with the overall structure.

If a project appears eligible, Lever can help compare the bond execution against conventional construction or permanent debt so the decision is based on total economics, not simply the quoted tax-exempt rate.

Tax-Exempt Does Not Automatically Mean Cheapest

Industrial Revenue Bonds can provide meaningful interest savings, especially for larger projects with significant qualifying costs and longer expected hold periods.

But the transaction can also include costs that do not exist in a conventional bank loan.

Potential expenses may include:

For a sufficiently large financing, the interest savings may justify the additional complexity.

For a smaller project, those transaction costs can materially reduce the benefit.

This is why sponsors should compare financing on an all-in basis.

Timing Can Also Determine Whether the Structure Works

Bond financing typically involves more parties and approvals than conventional lending.

Depending on the jurisdiction, the sponsor may need to coordinate:

If the acquisition or construction closing must happen quickly, execution timing can become a major consideration.

The financing strategy should therefore be evaluated early rather than introduced late in the closing process.

How Lever Capital Partners Can Help

Lever Capital Partners can help sponsors determine whether a project should be evaluated for Industrial Development Bonds, other qualified private activity bonds or conventional financing.

That includes identifying potential capital providers, comparing eligible and noneligible project costs, evaluating credit enhancement requirements and comparing the bond structure against bank, bridge or permanent financing alternatives.

Industrial Revenue Bonds can be an effective financing tool, but only when the project fits the eligibility rules and the economics justify the additional structure.

For sponsors, the objective is not simply to qualify.

It is to determine whether bond financing produces a better capital solution than the alternatives already available in the market.