A plaque remaining from the Big Apple Night Club at West 135th Street and Seventh Avenue in Harlem.

Above, a 1934 plaque from the Big Apple Night Club at West 135th Street and Seventh Avenue in Harlem. Discarded as trash in 2006.

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Entry from August 07, 2011
Dirt Bond

"Diirt bonds” have been popular in California, Florida, Texas, Colorado and Louisiana, helping new developments by financing against the land (or “dirt"). Quasi-governmental district are formed to collect taxes from new homeowners to pay off bondholders. This form of financing has been tax-free and unregulated.

Since the 2007 downturn in real estate, however, many “dirt bond” deals have soured on the investors. The term “dirt bond” has been cited in print since at least 1985, when such bonds were popular in Colorado.


Google News Archive
29 December 1985, Reading (PA) Eagle, “Market boom may be economic drag,” pg. D9, cols. 3-4:
Bonds issued by school districts, counties and municipal governments in the Middle West, fondly nicknamed dirt bonds by dealers who trade them, have historically been regarded as rock-solid credits, making them attractive to investors.

Google News Archive
3 September 1991, Pittsburgh (PA) Press, pg. B2, col. 3:
Be careful of construction bonds where a district is newly formed and debt service will depend on growth. Such “dirt bonds” are as risky as the underlying real estate development.

18 October 1991, San Jose (CA) Mercury News, pg.1A:
‘DIRT’ BOND SHOCK HITS TAXPAYERS
DEVELOPERS TACK COSTS ONTO HOMEOWNERS’ BILL
To the investment bankers and underwriters who sell them, they’re known as “dirt” bonds, because the only thing backing them up is raw land. They are so risky that many banks and pension funds won’t touch them. But some homeowners in California are unwittingly betting their homes on dirt bonds, risking thousands of dollars in deals many of them don’t even realize they’ve made.

Google Books
November 1991, Kiplinger’s Personal Finance Magazine, pg. 74, col. 1:
Colorado and, to a lesser extent, Texas are littered with defaulted “dirt bonds” — public works development debt secured by unrealized revenues from real estate booms that fizzled.

New York (NY) Times
Wall Street; The Fuss Over Nonrated Bonds
By Leslie Wayne
Published: January 24, 1993
(...)
There have been some notable scandals. In 1991, investors got burned by buying Colorado “dirt” bonds, in which real estate developers incorporated as special municipal districts and then issued tax-free bonds to finance construction. After Colorado real estate collapsed, so did these bonds—31 bond issues failed, representing $427 million.

Reuters
Fri Oct 26, 2007 7:58pm EDT
U.S. tax-free bonds fall due to Merrill’s problems
By Anastasija Johnson and Joan Gralla
(...)
Another worrisome factor was the failure of a $150 million Florida “dirt” bond, which did not draw enough buyers on Thursday, a New York trader said. This type of speculative grade debt helps developers pay for new homes before property taxes can be assessed.

Bloomberg.com
Subprime Finds New Victim as Muni Defaults Triple: Joe Mysak
Commentary by Joe Mysak - May 30, 2008 00:01 EDT
(...)
The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren’t repaid.

Wall Street Journal
JULY 20, 2011
Investments Muddy Dirt-Bond Holders
Legal Structure of Deals Places Municipalities’ Special Tax Districts Ahead of Other Creditors; ‘We Don’t Have a Vote’.

By ROBBIE WHELAN
During the boom years, as big housing developments mushroomed throughout the country, developers worked with local governments to raise billions of dollars for roads, sewers and sidewalks through a municipal-debt security known as “dirt bonds.”

Now, as those bonds get tested by the worst housing downturn since the Great Depression, dirt-bond investors are getting a few nasty surprises.
(...)
In typical dirt-bond deals, quasigovernmental districts are established that collect taxes from the new homeowners and use those proceeds to pay off bondholders. California housing developers for decades have been financing infrastructure with dirt bonds, which are typically tax free and unrated by the large credit-ratings firms.

During the boom years, they also became popular in other states, including Florida, Texas, Colorado and Louisiana. 

Posted by Barry Popik
New York CityBanking/Finance/Insurance • (0) Comments • Sunday, August 07, 2011 • Permalink