The city of Santa Fe is considering the issue of industrial revenue bonds for two separate projects: one to El Castillo Retirement Residences for a new transitional housing development for seniors, and the other to New Mexico Fresh Foods for a high pressure processing facility in the heart of Midtown.
Public hearings on both projects are around the corner. The El Castillo project is on the City Council agenda Sept. 11, and the New Mexico Fresh Foods project is set to be heard on Sept. 25.
Yet, even after a series of City Council and County Commission board meetings and numerous articles by all the regional papers about these projects, the confusion among our governing bodies as to how industrial revenue bonds work and why they matter has left the rest of us wondering: WTF is an IRB?
We sat down with the city of Santa Fe's Office for Business Growth Manager Fabian Trujillo to clarify the basics.
What is an Industrial Revenue Bond?
Industrial revenue bonds (IRBs) are "conduit" bonds issued by the city on behalf of a company or organization in an amount equal to or less than the cost of a proposed project. Unlike most other kinds of bonds which are used to pay for things like roads, the city isn't lending any of its own money or borrowing any money to loan to the company, Trujillo explains. And the city isn't responsible for paying back the investors who purchase the bonds either. Rather, the debt is taken against the company's future revenue and repayments to investors come from the company.
When an IRB is issued, the company is freed from paying property taxes to the city or the county. The title of the property is transferred to the city, though the city can't sell or make any improvements on the property itself, and also isn't responsible for any of the liabilities. Because the city doesn't pay taxes on its own property, this allows the project property to be taken off of the tax roll. The company is then technically leasing the project from the city.
During the repayment period, however, the company still has to make payments in lieu of taxes to Santa Fe Public Schools and the Santa Fe Community College. After the IRB is paid, the title is transferred back to the company and is once again subject to taxes.
How do IRBs benefit the city?
IRBs benefit the city by bringing in large development projects that otherwise would not get built at all or would get built somewhere else, but for an IRB to be issued, says Trujillo, "the overall public benefits they provide have to be greater than the costs."
New Mexico Fresh Foods, for example, will be able to abate $785,450 in property taxes over the next 10 years, but the city will collect approximately $21 million in gross receipts taxes, revenues and other fees.
El Castillo, on the other hand, will provide 1,000 construction jobs, 22 permanent jobs in the healthcare industry and needed housing for seniors, says Trujillo.
If the company still has to make payments in lieu of taxes, how do IRB’s benefit the company?
It depends on whether the IRB is issued for a 501c3 nonprofit company, such as El Castillo, or a for-profit company, such as New Mexico Fresh Foods.
Trujillo tells SFR, "For El Castillo, their biggest benefit is they will be able to sell the bonds on the financial markets for very low interest rates and finance their project accordingly."
IRBs for nonprofits may be issued for health centers, senior centers, hospitals, private educational institutions, but not for charter schools.
For New Mexico Fresh Foods, the biggest benefit is the abatement of property taxes and exemptions on compensating taxes and gross receipts taxes on the purchase of equipment. While the debt behind the IRB is usually assumed by an affiliate of the company, Trujillo explains that IRBs issued to for-profit companies are primarily designed as incentives for large manufacturing projects that would otherwise have to pay 5.2% of the cost of equipment and machinery in compensating taxes.
What is the maximum dollar amount of an IRB?
The most that a company can ask for is the total cost of the project, including the price of purchasing property, equipment and architectural costs. The City Council may decide to issue an IRB for less than the amount requested, but not for more.
Is there a limit to how many IRBs can the city issue?
The city is prohibited from issuing so many IRBs that it significantly erodes the tax base, but Trujillo says in Santa Fe we "are barely scratching the surface" of how many IRBs could possibly be issued by the city.
Who is eligible for an IRB?
Private-sector capital projects must be capital intensive and must clearly demonstrate long term positive economic and community impact to qualify for IRBs.
Trujillo says New Mexico Fresh Foods is an example of the "ideal project" for an IRB because the facility project will pay an average wage of $43,000 and be located in economically disadvantaged area where the current average wage is $19,000 with an unemployment rate of 11%, and the facility will have minimal environmental impact. "They are a homegrown business that we would like to keep here as they grow and they are going to be simulating a whole new innovative food industry and creating opportunities for new entrepreneurs," says Trujillo, mentioning that the project is estimated to generate $2.5 billion in food projects.