The Handbook of Municipal Bonds

CHAPTER 51

Land-Secured Bonds

Ronald L. Mintz, CFA Principal The Vanguard Group

 

 

 

Land-secured bonds—sometimes known as dirt deals—finance the public infrastructure costs related to new development, including residential, commercial, industrial, and mixed-use projects. The vast majority of land-secured bonds are, at initial issuance, nonrated. They are generally part of the high-yield portion of the tax-exempt bond market and, within that, they are a part of the real estate segment. This segment also includes tax increment bonds, multifamily housing revenue bonds, mobile home park revenue bonds, and other types of transactions. This chapter focuses solely on land-secured bonds and emphasizes an investor’s viewpoint of these credits.

ADVANTAGES OF LAND-SECURED BONDS

From the investor’s perspective, the advantage of land-secured bonds compared with other high-yield issues is that, if the development proceeds as planned, their credit quality tends to improve relatively quickly. Depending on the size of the underlying development project, these bonds can potentially move from noninvestment-grade status to a lower investment-grade position when a critical mass of development and a variety of taxpayers are in place. Even if the size or other characteristics of the project are such that the bonds will not qualify for investment-grade status, there still may be significant credit appreciation as the project reaches build-out. This possibility of appreciation differentiates land-secured ...