Municipal Bonds

Across the street from my office sits an old brick industrial building that was supposed to be turned into a major townhouse/condo development. Unfortunately, the developers borrowed $15 million but sold only one condominium, and now the property sits in foreclosure, owned by a very unhappy bank. So the park district, whose land presses right up against the foreclosed property, would like to use the building for offices, conference rooms, exercise rooms, and also some green space after tearing down the back part of the massive and outdated structure. They need $6 million to acquire and re-hab the property and, therefore, want to raise that amount by issuing municipal bonds. So in a recent election, a majority of Forest Parkers voted to allow the park district to raise property taxes slightly in order to create the funds needed to pay off a $6 million bond issue. At this point, the park district is still in negotiations with the bank sitting on the foreclosed property. But, assuming they can work out the price, the park district will end up buying the property and issuing $6 million worth of general obligation bonds in order to finance the project. The bonds will pay investors tax-exempt interest at the federal level. Illinois residents will also escape income tax on the bond interest, which is why I might just buy a few bonds, myself. The bonds will be offered by a group of broker-dealers who form a temporary syndicate just long enough to get the bonds sold to investors, give the park district its $6 million and keep a percentage as their profit or spread. And then most investors will probably hold the bonds until maturity, collecting tax-exempt interest checks every six months along the way. Meanwhile, some investors may want to turn those bonds into cash before maturity; if so, their broker-dealer will either find a buyer on the secondary market and charge a commission to complete the sale, or the firm will buy the bonds themselves and make a markdown when acting in a principal capacity.