Private Activity Bonds
Private Activity Bonds (PABs) are a form of tax-exempt financing in which the City acts as the conduit issuer, but assumes no debt responsibility. PABs are authorized to allow counties and municipalities a financial opportunity to promote industry and develop trade or other economic activity by inducing profit and non-profit entities to locate, expand or remain in the community. Borrowers typically receive lower interest rates since bonds are exempt from federal and state income tax.
Each year, the City of Colorado Springs receives a PAB allocation from the State of Colorado and has until September 15 to determine how the annual PAB allocation will be used. The City has three options: use the allocation, assign the unused PAB allocation to El Paso County, or return the unused portion of the allocation to the State of Colorado. Historically, in late August or early September, City Council assigns any unused portion of the City PAB allocation to El Paso County in order to retain the benefits of PABs in our area and to avoid returning the allocation to the State. The County also has until September 15 of each year to declare a use for the allocation, otherwise the allocation is recaptured by the State for use elsewhere in Colorado. However, if a different use is identified after September, the County can amend its declaration.
Nationally, the most frequent uses of the PAB allocation are for single-family housing bonds, student loans, and multi-family housing projects. In Colorado counties and municipalities, housing and industrial development projects are minimal, and small issue or manufacturing uses are much less frequent.
Eligible uses of the PAB program within the City allocation include:
- Single-family Home Mortgage Bonds or Credit Certificates: these bonds fund mortgage loans to finance owner-occupied residential property
- Qualified Redevelopment Bonds: these bonds finance certain acquisition, clearance, rehabilitation and relocation activities for redevelopment purposes by a governmental entity in designated blighted areas. Qualified redevelopment bonds are payable from general taxes or from tax increment revenue.
- Student Loan Bonds: these bonds finance student loans for attendance at higher education institutions
- Exempt Facility Bonds: these bonds finance manufacturing facilities. Qualified small issue bonds may be issued on a tax-exempt basis in an amount up to $1 million, taking into account certain prior issues, or an amount up to $20 million, taking into account certain capital expenditures incurred during the three years prior and the three years following the issuance of such bonds.
The City primarily issues PABs to not-for-profit organizations outside the allocation. Eligible uses of the PAB program outside the City allocation include:
- Qualified 501(c)(3) Bonds: These bonds are issued to finance a facility owned and utilized by a 501(c)(3) organization or a governmental unit. The net proceeds of these bonds must be used to finance property owned by the exempt organization or governmental unit and may be used to provide working capital or intangible property for the exempt organization. Certain arbitrage rules specifically apply to bonds issued to finance working capital.
The City targets using its PAB allocation as an economic development incentive offered to new or expanding manufacturing projects. Industrial Revenue Bonds (IRB), a form of PABs, are authorized to allow counties and municipalities to promote industry, develop trade or other economic activity by inducing for-profit and not-for-profit enterprises to locate, expand or remain in their communities.
City Business Development Division staff serves as a liaison throughout the entire PAB process. A prospective borrower is required to demonstrate the financial soundness of the business and the project, similar to the requirements for securing a privately-funded loan. Pro-forma balance sheets, income statements, audited financial statements, and cash flow projections are examples of the types of documents required.
The borrower pays fees to the City associated with the issuance of PAB financing. There are non-refundable fees of $1,000 and $5,000 for application and inducement resolution, respectively. In addition, the borrower also pays all City Attorney expenses related to the bond issuance, and bond services fees of up to .5% / $1,000 of bonds issued.