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Resolving Land-Secured Bond Defaults: Lessons Learned from the Last Recession

This article explores the lessons learned from land-secured bond defaults during the last recession, including the volatility of unimproved land values and the increased liabilities when property values go underwater. It also discusses the challenges and complexities in resolving defaulted bond issues and the importance of effective solutions for the development of communities, creating jobs, and ensuring full repayment to bondholders.

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Resolving Land-Secured Bond Defaults: Lessons Learned from the Last Recession

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  1. National Federation of Municipal Analysts January 26, 2012 Denver, Colorado Resolving Land-Secured Bond Defaults:Lessons Learned from the Last Recession L. William Huck Managing Director and CEO Common Bond Capital Partners, LLC

  2. Land-Secured Bond Volume and Default Rates Source: Bloomberg L.P. 2012

  3. CA: Historical Land-Secured Bond Defaults vs. Residential Building Permits

  4. Underwriting Standard: the 3 to 1 RatioAsset Value vs. Liabilities at Bond Issuance

  5. Lessons Learned • The value of unimprovedland can be volatile • Mid-2000’s: Exhilarating increases • Last 4 years: Devastating decreases

  6. Unimproved Land Values areMore Volatile than Home Prices Amounts per Lot Value Declining Over Time

  7. Lessons Learned • With recurring bond and tax delinquencies, • property liabilities can increase quickly • Penalties & Interest • Gresham’s Law • (as applied to some bond districts) • Accruals on bank or other loans

  8. With Recurring Delinquencies, Liabilities Can Increase Quickly

  9. When Property Values Go Underwater

  10. Lessons Learned • Once stuck, a defaulted bond issue can take several years to unstick • Difficult decisions take time • Complexity increases exponentially • with the number of parties • Foreclosure remedies are slow • (especially if judicial) • Foreclosure remedies may be ineffective

  11. Lessons Learned • Once stuck, a defaulted bond issue can take several years to unstick • Entitlements lapse • Physical improvements deteriorate • Other creditors: cooperation or conflict? • Bankruptcy – • What lessons from Fiddler’s Creek?

  12. Will Banks Step In? Finished Lot Paper Lot

  13. A Defaulted Bond Issue May Take Years to Resolve

  14. Lessons Learned • From 7 years as a U.S. Navy Pilot • Runway ahead of you is more valuable than runway behind you • Make sure you understand the instructions of Air Traffic Control • Don’t forget you can silence • the Fire Warning Horn

  15. Lessons Learned • Effective Solutions result in: • Development of a nice community • Jobs • Tax Revenues • Full repayment to bondholders

  16. Lessons Learned • Effective Solutions require: • Increases in Property Value, and/or • Decreases in Liabilities on Property • Time

  17. Lessons Learned • Effective Solutions must be: • Legally possible • Politically acceptable • Economically sound

  18. Lessons Learned • Effective Solutions need: • Know-how • Capital • Leadership

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