Industrial Revenue Bond Question??

Question

So, I spent the morning with a genius, Investor/Hotelier. During this meeting discussed the use of Industrial Revenue Bonds.

I have placed Industrial Revenue Bonds for local Industrial clients, but never
	heard of using them in the manner that was explained to me this morning.

My client said they have used the Industrial Revenue Bonds with their own
	funds, in essence they put up, let’s say $10,000,000.00 cash through a shell
	entity.

Those funds are used to setup the bond that is then borrowed by a second
	entity (the developer) then the interest associated with the Bond is tax free.

Here is the interesting/confusing part, the development entity then defaults
	on the bond which then triggers a default rate of 18% which accumulates as tax free interest.

Has anyone here had any experience with this? I should have asked more questions, but like most investors he was speaking in a “matter of fact” manner, and I just nodded and took it all in.

I plan on asking more about this when we meet again, to look at a development parcel, but before I do I would like to be more informed.

Thanks in advance!

Jay

Karen Margrave · Answer

Bill Gulley  I knew I could count on you!

Bill Gulley · Answer

Jay, I didn't see your post as I was typing. That commissioner is correct, issuing bad paper regardless where funds come from is a black eye. I can tell you that FDIC can basically black list any entity that has a history of writing bad paper, while a bank is not be involved in that deal, it's likely that someday a bank could be involved or involved in some other issue, but they won't be if they conduct such business.

It may be lawful in FL, is it ethical, prudent and good business practice? I don't see it, run! :)

Wayne Brooks · Answer

Sounds more like a scam shell game, where you supposedly are transferring money (18% rate) tax free from one entity to another.  But IRB's have to be issued by a governmental agency I believe, so it sounds fishy, at best.

Jay H. · Answer

Thanks Bill Gulley

I will look into Section 42. I personally don't have the resources to play at this level, but the process is so interesting.

Jay H. · Answer

Bill Gulley

Wow.... Great explanation!

I will inquire more next week to see if I am missing something in the process. He has done this on three separate projects (He Claims). I cant see how he could have pulled it off three time without any recourse. His partner also did a solar project that somehow was subsidized at 105%, and within the subsidy he was able to collect a 20% developer fee. That's a whole other thread, but it seems the deep pocketed developers play on a completely different field.

Karen Margrave · Answer

Sounds fishy to me too, but let's get Bill Gulley

in on the conversation, and maybe @Bryan Hancock

Bill Gulley · Answer

Look into Section 42 Tax Credit bond issues, not what you explained above but they allow developer's fees as you mentioned and could be purchased by one investor, but default you'll lose the tax exempt status for the bond holder and in housing there are many ways to default in performance with low-mod housing projects with mixed use.

With energy tax credits, grants, govt funny money loans with disappearing principal, low rate loans, through several agencies piggy backing on one enterprise like a solar farm, no doubt you can get more than you really need and then need a way to expense it. The issues arise as to cash flow and profitability and public benefit.

I suggest you call your state economic development office and the dept. of finance and run these schemes by them, if they are good to go, they should tell you so, if not, they should certainly tell you so. :)

Bill Gulley · Answer

Tax exempt IRB must be issued/underwritten by a govt. entity which holds title to or liens on the assets financed or purchased until the bond is fully paid. The govt is not obligated to pay the bond but the private enterprise is and in any default the govt can seize the security. With the bond being privately placed with one investor, which can be done, but there is no advantage, if they are related, as the developer pays a higher default rate. An intentional default seems skirting on fraud as you may lose the tax exempt status and/or the govt issuer may have its credit issuing authority and standing at risk as their ability to issue is not an open door into some vault or as a conduit for private enterprise at any dollar amount. In other words, I'd think you have to mislead the issuer in the deal if a default were planned and it would  effect the govt issuer as well. Simply put, the city, county or state has a reputation in issuing bonds, throwing them out there even to one agreeing investor is not good business for them. Smells to me.

Jay H. · Answer

@Wayne Brooks @Karen Margrave  It did to me too, but he said it is a strategy that is legal. He has openly done it on 3 projects in Florida. Personally I don't understand the structure, and may be leaving out an important part. He said one of the county commissioners complained because it "looked" (his words) as if it negatively effected the county's bond rating, but since the original funds were not actually from an institution it was no effect to the county except for the positive effect of jobs/growth.

I would love it if someone could educate me on the structure of this. If not, when I see him next week, I will pry further and take notes, and report back.

Industrial Revenue Bond Question??

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