Funding a Project w/ a Municipal Bond?

Question

Hi all -- I was at a networking event and I met a guy that is a broker for Muni Bond real estate project funding.

Curious if anyone has done this or has any knowledge on it? Apparently it' not well known, but effective.

The way he explained it, you get a municipality to issue a bond to fund your commercial deal (either building or improving apartment complexes for example). You supposedly get tax advantages and lower than market interest rates. He puts the deal together and lines up private equity that will immediately purchase the bond after it closes.

The cons I could think of were:

- Slow/no "pre-apporval" so you'd have to have the deal tied up long enough to get the funding and close it

- Seems like there are heavy fee structures built in

Anyone every do this or have any experience?

- Peter

Matt Devincenzo · Answer

The ones I worked on as an enginneer were 100% affordable, but I know there are multiple 'levels'. In the development world it's an industry of its own, and like you said is very fee heavy from what I've seen. A couple local developers I'm familiar with are Chelsea Investment and Amcal Housing. As a developer they either buy an 'affordable' site that was part of a regular builder's entitlements, or buy and entitle their own.

The objective on their own entitlements is to then apply for local affordable grants and bond funding to build. On the one I worked on the project was delayed 18 months waiting for the grants to be available. So it is a big up front cost to then pursue the financing needed.

From what I've seen these are generally 50+ unit projects, because small projects don't offset the higher fees sufficiently.

Peter Ricca · Answer

@Matt Devincenzo Yes I believe 20% of the units have to be affordable housing

Matt Devincenzo · Answer

Are these bonds related to providing affordable housing units? Or to site improvement and public facilities like roads, water, sewer etc?

Those are the two types of bonds available to private real estate projects that I am aware of. I don't know much about them really, but my office does support the improvement cost estimates for the public facility type projects. The driver is usually that an area is planned for development but whovever goes first has a huge improvement cost budget. Doing this allows the developer to finance the costs and once they are in other developers will come in and use the improvements as well. It eliminates the waiting game of the City paying for the improvements sometime when it works for their budget.

The affordable project bonds are also something I've seen but am not very familiar with. The way I understand it is the developer gets extremely low cost bond financing, and the bond buyer's benefit is a low or no income tax on the interest income.