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The ProblemIn the next few years, a significant minority of land-secured municipal bonds—approx. 200 bond issues totaling some $5 billion—are projected to default as a result of high delinquency rates in the special taxes or assessments used to pay bond debt service. |
In the last decade local governments issued over $30 billion in land-secured municipal bonds to finance public infrastructure projects needed to build new communities in many of the nation's fastest growing states. Notable among these are the states of: California, Florida, Illinois and Connecticut.
As shown in the graph below, when $50 million in bonds were sold in 2006 to build infrastructure for a planned 2,500 home development, property in the bond district was appraised at $150 million. The capital stack for the project also included a $45 million construction loan. Four years later, the property was upside down: bond, tax and bank liabilities had increased to more than $100 million…and property value had dropped to $40 million. This bond issue defaulted in 2010.
Housing market stress in recent years has resulted in a sharp decline in the value of developing land and the ability and/or willingness of some real estate developers and homebuilders to pay property taxes. Uncured developer delinquencies lead to foreclosure by bond issuing entities (and bank lenders) and often to other litigation and/or bankruptcy. While bond reserve funds and payments from other taxpayers may delay a bond payment default, delinquencies by large land owners are recognized by bondholders as a sign of potential trouble. Depending on their respective views of a specific credit, and their broader portfolio needs, bondholders may decide—or be forced—to sell bonds into a thinly-traded market at a substantial discount.
