How does the bond work?
How does the math work?
What Is An Improvement District Bond (ID)?
A public bond program created by the States in the early 1990s and governed by state statutes to benefit Cities/Counties. It is a special tax district over a specific area of acreage within a City or County where property owners (residential & commercial) pay additional property taxes to fund development/construction/infrastructure/rehab within this district.
State statues grant Cities and Counties the authority to levy assessments against properties in their district to fund new construction. This program is designed to help the municipality create new development by enticing you to build there.
How Does The Bond Work?
Inner Mechanics
Consider the bond the equity piece or the developer’s down payment money into the project. There is no debt from bond proceeds.
What we are doing is creating a special tax district, blanketing the deed, and increasing the property tax rate by 1.5%, in order to use the future property tax revenue to generate a large upfront amount of bond proceeds.
This allows us to avoid placing a mortgage lien on the property, which means the bond keeps the property free & clear! Because the land remains free & clear this Bond works with any Lenders, Grants, or other Bond programs. When a Senior Lender is involved that Lender will have a 1st lien position.
Payback Method
Typically, the bond covers around 20% – 25% of total project costs. The bonds are repaid from an increased rate in property tax (1.5%) over the next 25 years.
Not from selling or refinancing the project, which is how the free equity piece is created. The annual bond payments come from the property tax payments for that current year, which are typically twice a year and based on the current assessed value of the project for that year.
Which means during development your cost of capital is extremely cheap and will slowly increase as more value becomes created through construction. Once the project is fully built and the City/County has re-assessed it as a “completed project”, the 1.5% additional tax rate will represent a 4% – 6% cost of capital.
Bond Process
1. Petition the City/County for Improvement District. (Day 1)
2. City Makes Resolution “Approval”. (2 – 6 Weeks)
3. Complete All Bond Requirements. (1 – 2 Weeks)
4. City/County Attorney sells bonds via private placement. Then we close. (30 Days)
From start to finish the average closing time is 60 – 90 days, day 1 starting once we submit the petition. The City/County has the power to cut this timeline down substantially, by simply not procrastinating!
Bond Costs
– $70,000 Retainer: To Ambro’s Legal Department for them to…. Petition the City, write up bond structure, handle any bond objections with the City, and obtain resolution.
– City Fee: 1% of Bond Amount Submitted to City Escrow After Approval. (City Requirement)
– For projects in CA & NY the retainer is double, equaling a $140K.
– 5% Commission: Due at bond closing for Ambro & Ambro’s Legal Department. Financed in and paid out from bond proceeds.
At Closing all bond costs are reimbursed from bond proceeds.
**Warning** The first expense paid by the developer post bond closing must be to payout commissions since those are counted as a cost of forming the district and agreed to be paid at closing. Failure to payout commissions post bond closing will force the City to flag the project into default and fraud under misuse of funds for not paying out closing costs (commissions).
Property Types the Bond Qualifies For
– 10 Acre+ Projects
– Project Must Be A Benefit To The Community
Allowed – Residential & Commercial. Multifamily, Office, Industrial, Retail, Special Use, and any unique or weird property types.
Now Allowed – Stand Alone Hotels & Self Storage. Unless they are part of a bigger master plan.