Practices: Municipal Bonds / Public Finance

South Carolina law provides several methods to finance the costs of capital improvements associated with residential, commercial, industrial, and mixed-use developments. Often called “public-private partnerships” these financings require the cooperation of local governments with private developers or industries in order to achieve mutually beneficial goals for the public sector and the private sector. Our lawyers have served as bond counsel to communities and developers across the South in financing infrastructure, such as roads, streets, storm water drainage, water and sewer lines, other utilities, parks and playgrounds, and public parking with special assessments.

Special assessment bonds are secured by special assessments imposed on property located in Community Development Districts (“CDD”) also known as Municipal Improvement Districts (“MIDs”) or Residential Improvement Districts (“RIDs”). The special assessment is generally levied in relation to the benefit a property receives from an improvement project. Because the assessment is usually not based on the actual value of the property, debt burdens as a percent of the market value of a parcel can vary greatly from parcel to parcel. Because annual assessment payments are usually fixed and cannot be raised to cover the delinquency of any other assessment payer, our bond attorneys know that attention must be given to the exposure due to the weakest properties, even if overall average property value to debt ratios are strong districtwide.

The assessments may be based upon assessed value, front footage, area, per parcel basis, the value of improvements to be constructed within the district, or a combination of them. Careful structuring by bond counsel can provide that an assessment imposed upon real property remains valid and enforceable even if there is a later subdivision and transfer of the property or a part of it.

It is the experience of the bond lawyers at Howell Linkous & Nettles that special assessments on undeveloped land can create burdensome assessment payments for those properties. Undeveloped land typically carries property value-to-debt ratios of 3:1 or less, whilst developed properties are generally closer to 20:1. To have a strong deal, our bond attorneys believe a sensitivity analysis should be done on a multi-year delinquency by the 2 to 5 largest assessment payers. In addition, a sensitivity analysis should also look at a permanent delinquency by all assessment payers with under a 5:1 value-to-overlapping debt ratio. Excess cash, held in a debt service reserve fund or through excess cash flow, should be available to cover a delinquency by at least the 2 to 5 largest assessment payers. A CDD or MID that is largely undeveloped or concentrated in one type of industry is a risky credit. An entirely residential district usually exhibits little concentration of ownership, a very favourable situation, if the district is fully developed or built out. High property value-to-debt ratios, preferably above 7:1, increase the likelihood that assessment payments will be made on a timely basis. Value to lien ratios should be examined on a parcel by parcel basis for the largest assessment payers.

Another deal structure familiar to our bond lawyers is the creation of special tax districts by county council using one of several statutory methods. When the district is created, the maximum amount of the special tax or user charge to be imposed on property located in the district must be established. If the maximum amount provides an adequate cushion in the event of property tax delinquencies by some of the property owners in the district, the deal can be structured along the lines of a California Mello-Roos deal, which generally receives higher ratings than a typical TIF or CDD bond financing.

Whatever the deal structure, our bond attorneys can provide the experienced guidance to the development team in structuring the optimum municipal bond financing for the development.