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A private activity bond or PAB is a type of bond that is issued by a municipality, but is designed for use by a private company. This creates a scenario in which the municipality is securing the debt for the investor even though a private organization is in charge of much of the process.
Requirements
In order to qualify as a private activity bonds, the bond has to meet a few requirements. The first way that a bond can qualify as a private activity bond is if at least 10% of the proceeds from the bond issue are used for private purposes. At least 10% of the repayment of the bond has to be secured by private property as well.
Another way that a bond can qualify as a private activity bond is if more than 5% of the money that is generated from the bond is used to loan to a private entity. This also has a dollar cap of $5 million. If the loan exceeds $5 million or 5%, it will qualify as a private activity bonds.
This type of bond has been used successfully by many municipalities in order to complete projects that private companies are more qualified to do.
