As published in Scotsman Guide's Commercial Edition, October 2005.
Each state has its own rules and regulations regarding the issuance of public debt for private purposes. But some characteristics cross jurisdictions and can help you seek larger and more-profitable transactions.
By understanding how public finance integrates with commercial finance, mortgage brokers can make more money.
Typically, there are two types of public debt: general-obligation bonds and revenue-backed debt. General obligations are secured by the good faith and credit of the issuing agency. Revenue debt, on the other hand, is backed by supporting revenue from a specific project, such as a sewer-revenue bond, or the individual property-owner’s payment of taxes, such as a road-assessment district. The collateral for something similar to a road-assessment district is strictly the underlying value of the improved land.
A great deal of the public revenue debt in California, for example, is issued by special districts. Special districts are issuing agencies that are created for the sole purpose of issuing debt for the underlying project. One such district could be a community facilities district created to install roads, sewers or other infrastructure for a new development.
By recognizing that a developer could get public assistance for backbone infrastructure, projects that previously seemed unworkable can start to make economic sense. Once developers discover that they could receive municipal assistance, they can not only move forward with planning the project, but also they might be able to secure more-favorable terms on their conventional financing. This is, in part, because lenders know they will be paid back after the municipal debt is issued.
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