The primary means by which the Economic Development Corporation (EDC) assists qualified businesses and non-profit organizations is through the issuance of Industrial Development Revenue Bonds. The Internal Revenue Code authorizes the issuance of qualified small issue bonds for manufacturing facilities. Thus, it is possible for private borrowers to have tax exempt industrial revenue bonds (IRBs) issued to pay the capital costs associated with their manufacturing activities. These bonds effectively permit the borrower to borrow at rates that are lower than taxable financing.  

The EDC lends the sale proceeds of the bonds to the borrower for whose benefit the bonds are issued pursuant to a loan agreement, and uses the pledged loan repayments to make the payments of principal and interest on the bonds.

Bond Usages


The rules of the road generally state: At least 95% of the proceeds of the IRBs must be spent to acquire or construct manufacturing facilities. For this purpose, manufacturing generally means a process that modifies the condition of personal property.

In addition to what would conventionally be thought of as manufacturing, activities such as printing, food processing, metal treatment, and certain assembly count as manufacturing for this purpose.

Ancillary Purposes

Of the bond proceeds, at least 70% must be spent for core manufacturing facilities (e.g, that is property used in the manufacturing process itself), and the remaining 25% of bond proceeds (other than 5% usable for issuance and certain other costs) may be used for related and ancillary purposes (storage facilities, office space, test labs, etc.).

Issuance Costs

No more than 2% of bond proceeds may be used to pay issuance costs of bonds, however, most credit enhancement fees (e.g, letter of credit fees) may be financed without regard to this limitation.


If an issue is over $1,000,000, the capital expenditures of the borrower, any principal users (e.g, lessee) of the bond financed facilities and persons related to such users, which are made in the municipality in which the bond financed facilities are located, may not exceed $10,000,000 during the six year period beginning three years before the date of issuance of the IRBs and ending three years after the issuance of the IRBs. Prior outstanding IRBs may count as well. A potential problem with respect to the capital expenditure limitation is that tooling purchased by the borrower’s customers and retained and used by the borrower may have to be counted as capital expenditures toward the $10,000,000 limit. This rule may be of particular concern to auto suppliers.

No more than 25% of the proceeds of the IRBs may be used for the acquisition of land and no proceeds of the bonds may be used to purchase used property unless, in the case of a used facility including a building (and in certain cases, the equipment therefore), rehabilitation expenditures are made in an amount not less than 15% of the costs of the used facility.

There is a $40,000,000 limit for the total amount of IRBs outstanding for each user during a three-year period. This limitation was added a number of years ago to limit the use of IRBs by national entities.


A trade-off for the use of IRBs to finance a manufacturing facility is that generally the borrower must use straight-line depreciation for the bond financed facilities over a somewhat extended life. Nevertheless, in most cases the borrower determines that the savings in interest cost will offset the tax cost of slower capital write-offs.


If the bond proceeds are not spent within six months of the date of issuance of the bonds or invested in tax exempt bonds, any arbitrage profit (i.e, the excess of actual earnings on bond proceeds over the amount that would have been realized if the proceeds had been invested at a yield equal to the yield on the bonds) must be rebated to the United States government.

Changes in use of a bond financed facility to a non-qualified use may result in the IRBs losing their tax exempt status or the inability of the borrower to deduct its interest payments for tax purposes.

Inducement Requirement

There is an inducement requirement associated with IRBs. This means that no more than 60 days after a borrower incurs an expenditure to be financed with IRBs, the bond issuer (i.e. EDC) must adopt an “inducement” resolution with respect to the proposed financing.

The amount of IRBs that can be issued annually in each state is limited by a formula based on population ($50 per capita). In order for the financing to go forward, the state must provide for the issue of a portion of such annual allocation. Michigan has approximately $600,000,000 of total allocation per year and has dedicated a substantial portion to manufacturing facility IRBs in each recent year.