Land-secured municipal bonds are an essential financial tool for financing public infrastructure projects. These bonds provide municipalities and local governments the necessary capital to develop critical infrastructure such as roads, schools, utilities, and parks without placing an immediate strain on public budgets. For investors, land-secured bonds offer a unique opportunity to earn stable, tax-exempt income while supporting the growth and development of local communities.
At Bear Atlantic Group, we recognize the immense potential of land-secured bonds as both a financial instrument and a tool for regional development. Our team helps investors navigate the intricacies of these bonds, particularly in states like California, Colorado, Florida, and Texas, where population growth and infrastructure demands have led to significant bond issuance. This guide provides a comprehensive overview of how land-secured municipal bonds work, why they are an attractive investment, and how each state’s market varies.
Land-secured bonds stand apart from other municipal bonds because they are backed by assessments on the properties that directly benefit from the infrastructure improvements financed by the bonds. These bonds are most common in areas experiencing rapid development, as municipalities use them to fund infrastructure projects that enhance property values. Investors can benefit from steady returns and tax advantages, making these bonds a compelling addition to any diversified portfolio.
How Land-Secured Municipal Bonds Work
Land-secured municipal bonds are issued by local governments or special taxing districts, such as Community Facilities Districts (CFDs) in California and Public Improvement Districts (PIDs) in Texas. These bonds are designed to fund infrastructure projects in designated areas, such as residential or commercial developments. The primary aim is to finance public improvements that enhance the value and functionality of properties within the district. This often includes roads, utilities, schools, and public spaces.
The repayment of these bonds is secured through special assessments or property taxes levied on the landowners within the development area. This direct link between the bond’s repayment and the property owners benefiting from the improvements creates a reliable revenue stream for bondholders. These bonds are typically issued for long periods, ranging from 20 to 30 years, providing investors with stable, long-term income.
For developers and municipalities, land-secured bonds offer a way to finance large-scale infrastructure projects without immediately drawing on general funds or issuing general obligation bonds. In areas experiencing rapid growth, these bonds help ensure that infrastructure keeps pace with development, benefiting both property owners and the local economy.
In regions like California, Colorado, Florida, and Texas, the use of land-secured bonds has become increasingly popular due to the need for infrastructure in growing communities. As more residents move into these areas, municipalities turn to land-secured bonds to finance the necessary improvements. For investors, the key appeal lies in the stable, tax-exempt returns generated by the assessments on properties benefiting from these projects.
California: Stability and Growth
California has long been a leader in utilizing land-secured municipal bonds to finance infrastructure projects, primarily through the use of CFDs. Established under the Mello-Roos Community Facilities Act of 1982, CFDs allow local governments to issue bonds for public improvements such as roads, schools, and utilities. The bondholders are repaid through special assessments on properties that benefit from the improvements.
As of 2023, California had approximately $10.7 billion in outstanding land-secured bonds, with only 3% classified as distressed. The state’s long history of using CFDs, along with stringent underwriting standards, has contributed to the stability of its land-secured bond market. One key requirement in California is the 3:1 value-to-lien ratio for new bonds, which mandates that the appraised value of properties within a CFD must be at least three times the amount of debt being issued. This conservative approach has helped protect bondholders by ensuring there is significant collateral backing the bonds.
In 2023, California saw an uptick in bond issuance, totaling $2.1 billion. This increase was largely driven by the ongoing housing shortage in the state, particularly in inland areas like Irvine and Roseville, where demand for new homes continues to outpace supply. Large-scale projects, such as “The Great Park” in Irvine, have been instrumental in driving bond issuance, as developers work to meet the growing need for residential infrastructure.
California’s competitive housing market, where the median price for a single-family home reached $908,000 in May 2023, has created a strong demand for infrastructure financing. With the state’s economy continuing to grow, particularly in inland areas with more available land, land-secured bonds will remain a vital tool for financing public improvements.
Colorado: Steady Growth with Volatility
Colorado’s land-secured bonds are predominantly issued through Metropolitan Districts (MDs), which use property taxes to finance public improvements in residential and commercial developments. From 2018 to 2021, Colorado experienced significant growth in land-secured bond issuance, peaking at $2 billion in 2021. However, rising interest rates in 2023 led to a decline in issuance, with only $314 million in new bonds issued in the first half of 2024.
Despite this slowdown, Colorado’s bond market remains strong due to the state’s steady population growth, particularly along the Front Range. Cities like Denver, Boulder, and Colorado Springs continue to attract new residents, driving demand for housing and infrastructure. The state’s population grew by 16% between 2010 and 2023, and while the growth rate has slowed slightly, Colorado still ranks in the top 10 for numeric population growth.
Colorado’s housing market has been resilient despite volatility in mortgage rates. The S&P CoreLogic Case-Shiller Denver Home Price Index rose 68% from 2018 to 2022 before seeing a brief decline in 2023. However, the market rebounded in 2024, with home prices increasing by 6% in the first half of the year. This recovery, combined with ongoing population growth, supports the credit quality of MD bonds, making them attractive to investors.
While the slowdown in bond issuance is linked to rising interest rates, the state’s favorable demographic trends and strong housing demand suggest that Colorado’s land-secured bond market will continue to grow. Investors should keep an eye on the state’s housing market and affordability concerns, as rising mortgage rates could impact bond performance.
Florida: Strong Growth Driven by Residential Expansion
Florida’s land-secured bond market is primarily composed of Community Development District (CDD) bonds, which have seen significant growth in recent years. Between 2019 and 2023, Florida issued more than $5.6 billion in CDD bonds, with a record $1.5 billion in 2023 alone. These bonds are used to finance infrastructure in residential developments, particularly in fast-growing areas like Tampa, Sarasota, and Lakeland.
Florida’s population growth has been a major driver of CDD bond issuance, with in-migration continuing to boost demand for new housing. The state’s low taxes, favorable climate, and growing job market have attracted new residents, leading to increased demand for infrastructure financing. The Tampa area, in particular, has been a hotspot for bond issuance, with counties like Hillsborough and Pasco accounting for over 40% of the state’s land-secured bond issuance since 2011.
Despite signs of a cooling housing market, particularly in terms of home prices and sales velocity, Florida’s bond market remains strong. Homebuilders have managed to maintain demand by offering incentives like price reductions and mortgage rate buy-downs, which have helped make new homes more affordable despite rising interest rates. This has supported the repayment of CDD bonds, ensuring that investors continue to receive stable, tax-exempt returns.
As Florida continues to grow, particularly in areas experiencing rapid residential expansion, the demand for new infrastructure will remain high. This will drive further issuance of CDD bonds, providing investors with opportunities to support public infrastructure projects while earning stable returns.
Texas: Population Growth Fuels the Bond Market
Texas has experienced significant growth in its land-secured bond market, particularly through Public Improvement District (PID) bonds. These bonds are utilized to finance public infrastructure projects in rapidly growing areas, such as the Dallas-Fort Worth (DFW) and Austin metropolitan regions. With Texas being a prime destination for businesses and residents alike, population growth has led to increased demand for housing, utilities, roads, and other critical infrastructure.
In 2023, Texas issued $457.5 million in PID bonds, with a total of over $1.96 billion issued in the last five years. The DFW area alone accounted for 80% of the state’s issuance in 2023. This region’s booming economy and affordable housing options have made it an attractive destination for people relocating from other states. As new residents move in, developers need to build out infrastructure to support this growing population, and PID bonds are a vital financing tool.
The city of Austin has also become a major player in Texas’s land-secured bond market. Known for its tech-driven economy and high quality of life, Austin has seen an influx of new residents. This growth has led to a surge in housing demand and infrastructure needs, with PID bonds providing the necessary capital for these projects. In 2024, Austin’s active housing inventory increased by 41% compared to 2019 levels, further demonstrating the need for public infrastructure investment.
Despite rising mortgage rates, Texas’s housing market remains robust. Homebuilders have maintained demand by offering buyer incentives such as property upgrades and mortgage rate buy-downs. As population growth continues across the state, the need for public improvements will drive further bond issuance. Investors can expect the Texas PID market to remain strong, offering stable returns and the opportunity to support regional development.
Key Considerations for Investors
Investing in land-secured bonds requires careful evaluation of several factors to ensure long-term success. These considerations will help guide investors in making informed decisions:
- Project Viability: The success of the development is key to ensuring the timely repayment of bonds. It’s crucial to evaluate the real estate market in the district, the demand for infrastructure, and the success of other projects in the area.
- Market Stability: The health of the local real estate market is a strong indicator of bond performance. Strong demand in growing regions, such as California, Texas, and Florida, creates a stable base for bond repayments.
- Credit Quality: The creditworthiness of the issuing municipality or district is essential. Municipalities with a solid tax base, effective governance, and a history of sound financial management are safer bets.
- Tax Advantages: One of the main attractions of land-secured bonds is their tax-exempt status. This can provide substantial benefits, particularly for investors seeking to reduce their tax burden while earning consistent returns.
Conclusion
Land-secured municipal bonds offer a unique opportunity for investors to support essential public infrastructure while enjoying stable, tax-exempt returns. The growing demand for infrastructure in states like California, Colorado, Florida, and Texas makes these bonds an attractive investment option, especially in regions experiencing population booms and real estate development.
In Florida, the continued population growth, especially in regions like Miami-Dade County and Tampa, ensures the demand for new infrastructure remains high. Meanwhile, Texas’s PID bond market, driven by strong population growth in areas like Dallas-Fort Worth and Austin, presents a solid opportunity for investors seeking long-term, stable returns.
At Bear Atlantic Group, we specialize in guiding real estate developers and investors through the complexities of land-secured municipal bonds. Our expertise in real estate and public infrastructure development allows us to offer tailored solutions to investors looking to capitalize on these opportunities.
