Oftentimes, real estate developers need to buy their own bonds, which increases the equity needed at the close of construction. However, there is a more cost-effective way of doing this.
Selling the bonds at the close of construction financing allows a developer to contribute less equity into a project, borrow less debt from a senior lender on the project, or a combination of both. In many cases, selling the TIF (tax increment financing) bonds allows a developer to generate more returns to the project.
For developers looking to monetize their secondary market bonds after the project is completed, the liquidity generated from the sale can be used towards a future project, thus requiring less equity into a future deal.
Additionally, developers who would buy their own bonds have traditionally used construction or bank financing to support the purchase. However, in rising rate environments, owning a fixed rate asset would mean a development project would take on additional interest rate risk, beyond what was intended. Selling the TIF bonds pushes that risk to an investor and allows for a more efficient placement of risk and capital.
The Process to Sell TIF Bonds
Most sale processes will involve the developer engaging an investor for the purchase of their TIF bonds. Throughout that process, a developer will:
Negotiate With the Investor
The developer negotiates with investors on acceptable terms and pricing levels. This is typically the time where an investor will bring up covenants specific to them and give a framework for pricing.
A Due Diligence Period
This involves analyzing the real estate, the taxing authority, and history of taxes. On any projects prior to construction completion, there won’t be much history of taxes, so an investor is taking on development risk, and the risk the project may not get complete.
Memorialize the Necessary Documents
Memorializing the necessary documents to complete the transaction may vary from state to state, and transaction to transaction.
Close and Fund on a Specific Date
Typically, for primary market transactions, the funding date will be on the day the construction loan is closing.
On a pre-construction completion TIF, the developer will typically work with the municipality in conjunction with the purchaser to issue the security directly to the purchaser. Some developers may elect to work with placement agents and investment banks to find investors for their transaction
For developer’s looking to sell TIF bonds or notes on projects that have already been built, the bulk of the process to sell the bonds will be driven by the investor. Much like the process outlined above, secondary market bonds carry some additional risk to investors in that it’s a transaction that may have not been structured with the ultimate bond holder in mind.
Timeframes and Fine Details
A few items to be aware of:
- These are unrated bond transactions, and depending on how much due diligence an investor will require, the closing timeline can be extended.
- Most deals on a pre-completion project will involve governmental approvals, which may take longer than anticipated. While the bond investor may be ready to close and fund, the municipality may still be going through its approval process.
- Typically, a shorter deal turnaround will be around 30 days – these transactions are complicated, and each real estate project is slightly different, thus, long lead-time is not uncommon.
Contact Hageman Capital for More Information About Selling TIF Bonds
TIF is a powerful tool for both municipalities and developers to start projects that may have not been commercially viable without it. It has been one of the most impactful tools for economic development across the country.
By purchasing TIF Bonds, Hageman Capital can provide real value for real estate developers and our communities. We partner with the public and developers to purchase TIF bonds and maximize cash proceeds available for investment into the projects. If you have more questions about the TIF purchasing process, don’t hesitate to contact Hageman Capital today.Contact Us