Bonds issued by municipalties, such as states, cities and counties where the money raised to pay off the bonds comes from a non-tax revenue source, are called revenue bonds.
Municipal issuers could include transportation entities and others. Revenue bonds are rated and yield based on their own merit.
REVENUE BONDS are issued to obtain funds to construct bridges, tunnels, streets and
infrastructure, rapid transit, harbors, and parks.
Principal and interest for revenue bonds are paid from fees imposed on the users of
the facility for which the bond was issued.
A feasibility study is conducted before
a revenue bond is issued to determine
whether a project is necessary and
whether it can pay for itself.
In a specific municipality, a revenue bond is more risky than a GO bond, and thus
has a higher coupon because the only source of
payments for principal and interest is
the revenues of the facility
Investing in these municipal securities is normally based on the location of the issue, the tax bracket of the investor (for greater tax free yield), maturity and rating.
Types of Revenue Issues
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Fees charged for water and sewer usage pay off USER FEE REVENUE BONDS.
Fees charged for the usage of highways, toll bridges, airports, and other projects pay off
TOLLS AND FEES BONDS.
SPECIAL TAX BONDS are issued for specific purposes, such as building or renewing
roads or rapid transit systems.
SPECIAL ASSESSMENT BONDS are issued to
generate money either to purchase
specific property or to construct facilities, such
as infrastructure in new housing areas, for
a specific group of users.
INDUSTRIAL DEVELOPMENT BONDS (IDBs) or
INDUSTRIAL DEVELOPMENT REVENUE BONDS (IDRs) are issued by a
municipality for a corporation for financing construction of such projects as pollution
control facilities, industrial parks, sports stadiums, airports, or educational facilities.
DOUBLE-BARRELED BONDS are
issued to generate funds to pay for a specific
facility. A double-barreled bond is both a revenue bond and a general obligation bond.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state, federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
G.O Bonds are generally more secure because they are secured by taxes. Some municipalities will use a mix of taxes and revenue from a generating course.
Industrial Revenue Bonds Overview
By Paul Nicolosi
Industrial Revenue Bonds have a variety of names and purposes, but there are three basic types of bond issuances as follows:
Tax Exempt - (Small Issue IDB's) Because the income derived by the bond holder is not subject to federal income tax, the maximum bond amount is $10 million in any given jurisdiction. According to federal regulations, the $10 million total includes the bond amount and capital expenditures over a six year period going both backwards and forwards three years. The maximum any company may have is $40 million nationwide outstanding at any given period.
Taxable - They are not exempt from federal tax. The essential difference is that the Taxable bond rate is more costly to the borrower and not being subject to the federal volume cap, may exceed $10 million in bond amount.
Exempt Facility/Solid Waste Disposal Bond - These bonds are subject to volume cap although there is no restriction on amount and the interest on these bonds is federally tax exempt.
These types of bonds are issued frequently by municipalities for a variety of industrial projects, including the construction, rebuilding, improvements, remodeling, etc. of the industrial project. The purpose of such bonds, according to 445/3, is to "encourage the increase of industry and commerce in the State." The Illinois Municipal Handbook states that the issuance of such bonds is subject to many federal statutes and regulations and they recommend seeking advice of bond counsel.
In order to pursue this, a resolution authorizing such would need to be adopted. The bonds may be issued in series and must mature within 40 years from their dates. Nonetheless, there is no liability on the interest or principal of the authority issuing those bonds. Municipalities would also be responsible for establishing, collecting, and revising revenues for the purpose. Finally, these bonds may be sold at a private sale and issued without a referendum.
Nicolosi & Associates - Attorneys at Law Since 1948. Skilled in the law. Experienced in business. http://www.nicolosilaw.com
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