Private Activity Bonds

What is a Private Activity Bond?

Private Activity Bonds (PABs) are a financing mechanism used to attract private investment for projects that have some public benefit, such as affordable rental housing and economic development activities.  The main advantage of financing projects with PABs is the lower interest cost generally realized as compared to that obtainable through private commercial financing. This is a result of the tax-exempt status of certain PABs. Interest paid to bond purchasers is not subject to federal income taxes. Since bond purchasers receive tax-free interest income, they can accept a lower interest rate from the applicant when lending their capital. The Redevelopment Authority , as a public authority, is authorized to issue PABs.  The Authority will assure that proper standards are met to maintain the tax exempt status of the bonds.

Past Project(s)

On January 31, 2012, the Redevelopment Authority closed the largest single affordable housing transaction in the organization’s history. On that day the Authority issued an $18.9 million tax-exempt multifamily housing bond for the benefit of Housing Development Corporation (HDC) to finance the renovation of 376 units of affordable housing in seven developments spread across three counties. By using the multifamily bond vehicle, HDC qualified for an allocation of 4% Low Income Housing Tax Credits, thus bringing much needed equity to the project. The properties involved include:

PropertyLocation
Aster Place (Bloomfield) ApartmentsLancaster County
Franklin Street ApartmentsLancaster County
King Theater ApartmentsLancaster County
Oak Bottom Village II ApartmentsLancaster County
Umbrella Works ApartmentsLancaster City
Highspire School ApartmentsDauphin County
Penn's Common Court ApartmentsBerks County

 

Eligible Types of Bonds

Multi-family Bonds

PABs can be used to finance qualified residential rental facilities that are subject to the limitations imposed through the statewide unified private activity bond cap (Volume Cap). The Pennsylvania Department of Community and Economic Development (DCED) provides for the allocation of Volume Cap to issue PABs among the various qualified issuers in Pennsylvania. Each year, DCED provides an allocation of Volume Cap to the Pennsylvania Housing Finance Agency (PHFA) for the issuance of PABs for certain types of housing activities. RACL can issue bonds using Volume Cap allocated by PHFA.

PABs can be used to finance the construction of new affordable rental housing units or preservation and rehabilitation of existing affordable rental housing units.

PABs may also be used to finance mixed income rental housing projects subject to certain restrictions.

Developments financed through the issuance of tax-exempt bonds are eligible for 4% Low Income Housing Tax Credits.

501(c)(3) Bonds

PABs can be used to finance the acquisition, construction, installation, improvement, expansion or rehabilitation of real and/or personal property owned or to be owned by a nonprofit organization which has been granted an exemption from paying federal income tax by the Internal Revenue Service because of the organization’s purposes or activities.

Bonds for Economic Development

This category represents bonds for which a state or local government allows a private entity to benefit from the government’s status as a tax-exempt entity and its ability to issue debt obligations at tax-exempt rates to support economic development. As the ultimate recipient of the proceeds of the bonds, the private user benefits because the interest on the obligations is tax-exempt and therefore bears a lower interest rate than comparable taxable financing.

PABs can be issued for commercial or industrial projects including: manufacturing, processing, production, assembly, warehousing, recreation, office, research and development, and energy. The economic development bonds will be used for costs for buildings, land, equipment, furnishings, and costs of operation; as well as architectural, engineering and other professional costs.

Industrial Development Bonds (IDBs) can be issued through the RACL’s Private Activity Bond Program (PAB). For these types of bonds, the RACL works closely with the Economic Development Company of Lancaster County (EDC). Businesses interested in this financing should start their inquiry by contacting Lyle Hosler, Project Manager for EDC, at (717) 397-4046. EDC will review the project and its financing needs and will help bundle IDBs with other public and private funding sources to create the financing structure best suited to the client’s needs. If bond financing is indicated, the RACL will act as the conduit issuer.

Other Types of PABs

The Redevelopment Authority may issue any other type of PAB available now or created in the future to the extent authorized under the Authority’s charter.

The Redevelopment Authority can also be the conduit issuer for taxable bonds used in conjunction with tax-exempt bonds.