Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Land-Secured Bonds

Land-secured bonds, or “dirt” bonds, are a local infrastructure financing method used to fund real estate improvements and infrastructure projects for both new and existing communities. The proceeds from the bonds fund many types of projects in residential, commercial, or industrial developments, with eligibility varying from state to state. Projects can include but are not limited to water and wastewater systems, irrigation, drainage and flood control, solid waste collection and disposal, utility lines, sidewalks, streets, parks, landscaping, and recreational facilities. The colloquialism “dirt bond” comes from the fact that the bonds are often issued to finance projects to be built on raw land.

Local governments have a broad mandate to provide infrastructure to their citizens. However, most are constrained and do not have sufficient resources to extend services and resources, as new infrastructure requires large upfront capital costs. Additionally, many states have constitutional or statutory debt limitations and voter approval requirements on tax-supported debt. These restrictions serve to insulate general obligation pledges, but make it difficult to finance the needed infrastructure because, even though new development will likely increase land values and the tax base of the locality, the resulting revenue to pay for the ongoing costs of providing public services to the new development will not be generated until after it is up and running. Dirt bonds provide ...