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A PAB
is a private activity bond.
In today's capital markets, PABs offer developers with the opportunity
(in some cases) to obtain low-interest rate tax-exempt financing for the development,
construction and/or permanent financing requirements of a for-profit
business that meets certain threshold criteria the state may have.
In disaster areas, PABs are a blessing designed to jump-start new
business development and create jobs. Most states have
requirements for private activity bond financing that include:
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Job
creation goals. The more jobs, the more likely your inducement
resolution will garner the preliminary approval from the state bond
commission.
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Feasibility
due diligence. You need to provide solid due diligence
documentation - market feasibility and financial feasibility.
We hope you will turn to RMC for these needs, but "the
need" must be fulfilled with an arm's-length approach in most
cases. The project must demonstrate sufficient market and
financial capacity to retire the bonds and provide an additional
level of profitability (the debt service coverage ratio) necessary
to give the investment bankers relief from heartburn.
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Size
of issue. Overly large and overly small projects are not going
to typically be approved. On the one hand the concern is
lending risk concentration while on the other hand the concern is
whether or not the financing represents a cost-effective solution.
If
your development project has a budget of greater than $7.5 million, then
the private activity bond route may be the most cost-efficient financing
alternative available to you because:
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Private
Activity Bonds represent a "right-of title" funding
approach that means if the project meets the requirements of title,
the odds are you can get the bond financing. You need to
follow all the rules and you need a good investment banker to create
a bond sale syndication and be the syndicate leader because the
approval is not the same as closing on the financing. Once you
have the approval the bonds still have to be sold into the capital
markets and that means you need to carefully document all aspects of
your proposed transaction to optimize your chances of success.
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Private
Activity Bonds can be done in as little as 90 days. Once you
have preliminary approval, you may be able to garner additional
pre-construction phase investment dollars by using the bonds as a
take-out. Check with RMC on whether this will work for your
purposes before you sail off.
So,
whether you are trying to finance a condo-hotel, shopping center or
mixed-use project, you need to give consideration to private activity
bonds because they may be your only route to success due to the
collateral requirements most commercial banks would require (150% to as
much as 350%) before funding consideration is even seriously
contemplated.
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