Land Secured Muni Bonds
Tax (Photo credit: 401(K) 2012)
Municipal securities in general have suffered losses recently due to investors' fears about the finances of state and local governments. Â The recent bankruptcies of California cities (Stockton, Mammoth Lakes and San Bernardino) have not helped investor confidence.
One interesting type of municipal security is land-secured bonds. Â These are bonds issued by local agencies, such as cities or school districts for the improvement of real property (construction of infrastructure, schools, etc.). Â The bonds are typically secured by a property tax lien on the land benefiting from the improvements. Â The property tax lien is senior to any mortgage that can be placed on the property and so provides the owner of the bond with a strong probability that the principal will be repaid. Â Where the land is largely undeveloped, these types of bonds can be risky. Â However, where the land is developed or undergoing steady development and land values are stable or increasing (select sub-markets of Southern California, for example), these can be very good investments particularly as general market conditions have driven-up yields across the board. Â Sometimes, these types of bonds are not rated by the rating agencies (Moody's, Fitch or Standard and Poors). Â You need to read the "Official Statement" that accompanies each municipal bond deal to learn more about the potential risks. Â One key factor is the "Lien to Value Ratio" which is an indicator of how much all the tax liens on the property ("Direct and Overlapping Debt") are as a percentage of the assessed value of the property. Â The lower the lien to value ratio, the better.
A major advantage is that many municipal bonds are exempt from Federal taxes (including the Federal Alternative Minimum Tax) and may also be exempt from state taxes. Â For example, for someone who lives in California, with $150,000 of taxable income, a 7% municipal bond yield is equivalent to a 10.75% taxable yield.
If you are interested in these types of investments, Stone and Youngberg is a good source of information.  They are a major trader and underwriter of municipal bond deals and they also offer trading accounts for individual investors (you may have to meet suitability qualifications first).
Related articles
