This is the basic idea: privatize and monetize the public bond market in a slightly different way.
The more complex idea is that more efficient — environmentally and economically — cities and towns produce more wealth than inefficient, and sometimes incoherent, urban environments. In a sense, we can also think of conservation as "savings." Although this does hit a wall in the form of diminishing returns, being able to do more with a gallon of gas or a cubic foot of concrete technically means making more money.
Even if the economic growth in a better designed city is only marginal — say 0.5% higher — that growth compounds pretty significantly over the course of decades: a $100,000,000 worth of assets appreciating at 4% will become $324,339,751.00 while the same $100,000,000 worth of assets appreciating at 3.3% will become $264,855,896.19, which gives us a difference of $59,483,854.81.
The problem with developing better cities is two-parts of the same problem: self-interest in the form of private enterprise and self-interest in the form of government.
To make public investment more successful, cities have to be able to put up more cash upfront to minimize the debt-service load incurred by making large public bonds. In a town of 40,000 people, a $100,000,000 bond will cost a resident about $10 a month in taxes at a debt-service-coverage-ratio of 1.0.
In reality, a DSCR of 1.0 is asking for danger. If we move to a much safer 1.3, the debt load per resident is $13.70. So, for a family of four, that's roughly $657 annually. That's quite a chunk of change considering that would be about 1% of a family's gross annual income.
All lending has regulations whether it is an enterprise zone funded by a local government, a HUD housing development, a real estate development carried out by a regional bank, a non-for-profit community agency or an elaborate scheme carried out by a international investment firm. And many times each of these individual organizations self-interest collides in quite uncomplimentary ways.
To get around this inherent self-interest and to provide a funding platform for communities to actually get productive developments done, there needs to be capital.
This is where the security comes in— if the collateral for these large funds was crowd sourced through small stock purchases, the risk would be spread over possibly hundreds to thousands of investors.
The creation of stock would then serve as a basis for increasing the amount of practical debt that could be taken on to provide the capital for making loans. This funding could, in turn, provide gap or total funding for municipalities looking to make "smarter developments."
If we tie the return rate and therefore interest rate — essentially the rate of new growth in municipalities — of these bonds together, success means higher returns for everyone. Essentially, these adjustable rate bonds would only adjust to higher rates if there's a increase and growth in revenue. The faster the bonds get paid off, the quicker the fund can loan again. And because the buy in is a stock rather than a bond, investors aren't tied to 1-year to 30-year commitments.
By using a combination of Landscape Urbanism and New Urbanism, we could create some fairly simple stipulations regarding how fund money can be used by local governments and community organizations for funding projects — zoning requirements, density minimums, specific archetypes for certain buildings or uses. Lower taxes, higher growth and more financial flexibility would definitely be a selling point for most people.
The stipulations here would separate this fund from the traditional bond markets where stupid decisions and often loud criticism seem to go perpetually unnoticed. And if enough cities and towns benefit from this financially, it would give other cities some motivation to change their habits or face undue suffering by offering lackluster services and environments.
Wouldn't you want to have a stable return for a set period of time? If it is just a standard stock purchase, you incur the risk of losing that investment (although, if you listen to folk like M. Whitney, muni's aren't that safe these days anyway...although we all hope she's very wrong).
Can you elaborate on what you mean with the stock vs. bond? Let's say I am an investor looking for a stable return, how do you convince me that this is safe? If it can go up, it can go down, like any stock, correct?
There is some money being lent out there, some TOD, low income, etc., for multi-family. That's great it is being used.
The big problem isn't money, there's plenty of money out there, the problem is the lending. The restrictions are so great on lending that there just aren't speculative projects being started.
For the zoning, while I fully agree we need TONS more density, good luck getting the votes on that. I've seen TONS of problems locally with this, many, many cases going to court (and even a rezone overturned because the local residents did not want more density, and, they are the ones that re-elect representative's that control the process - a sad round'n'round of stagnation).
Much is just politics. Large moves, large incentives, require a top-down approach (otherwise they will lose the votes), much political wrangling, and tons of lobbying. We are seeing several multi-billion dollar projects starting now that show this approach (and, indeed, there are several of the factors you are mentioning that are part of the projects, part of the marketing, etc.).
if you're using the term "stocks" to mean something like shares (ownership stake) of a business-like entity, then it sounds very anti-democratic and possibly illegal - one person can gain majority of these municipal shares and start dictating how this money is to be used.
I mean more of a mutual fund like an unit investment trust where there is a slight risk and no individual holder, whether majority or not, has little control of the fund. As far as I know, there is no mutual fund that exists solely for public development projects.
@trace, The problem with investing in municipal bonds is two part problem — they lack liquidity being too rigid albeit it too safe and many projects, though required to pay back their bonds, are often shortsighted and don't produce any real growth.
Let's make up an example.
Our example is said find is going to loan money to pre-develop a 800' by 300' downtown (measured from setback line) urban block— this gives us 2200 linear feet of right of way and 240,000 square feet of ground floor space.
If we do a 50/25/25 split for 4 stories of development, we get the following:
Now, we have to estimate two types of tax basins, property and sales (I'll be using universal millage rate of approximately 11.000 {school excluded} and a sales tax of 6.5%; we'll value residential development at $80 a square foot and retail and office at $100 a square foot):
If we dedicate 25% of the general fund tax revenue generated from this project to this project, this single block should be easily able to float $750,000 giving us a grand total of $340.90 per linear foot for infrastructure. This would accommodate sewerage, storm water, decent sidewalks and roads.
But remember, growth! If we assume a 1% growth in taxes due to higher real estate value and sales over a 20 year period, this bond could be paid off 11 years earlier.
If the mutual fund in question sold 10,000 shares to finance this project, we'd have the following:
Initial investment: $75 a share
19 years later: $112.5 a share
But, that $112.50 a share now allows us to loan out 10 times the value, we brings the value of those shares up to around $1125 in another 20 years— a 1500% increase in value.
Can this not be done with an REIT or a Syndication? There in, this is still being controlled by one person or entity. I don't see that as a problem, if you have the right private partner. If the government is the controlling entity, watch out. Problem is you need to find an investor who is willing to wait 40 years for a decent return ,8% on average at that point, but only 4.5 over the 1st 20. I don't see how this eliminates self interest or minimizes risk.
Just discovered that there's an entire bank in Malaysia named Public Bank who controls "Public Mutual" who does exactly the crazy scheme I purposed above.
Public Mutual is the largest private unit trust company in Malaysia and currently manages more than 80 funds with a total net asset value (NAV) of RM43.4 billion [USD$14,418,608,400]*.
Jul 3, 11 3:47 pm ·
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Anyone want to create a new investment security for semi-public development?
This is the basic idea: privatize and monetize the public bond market in a slightly different way.
The more complex idea is that more efficient — environmentally and economically — cities and towns produce more wealth than inefficient, and sometimes incoherent, urban environments. In a sense, we can also think of conservation as "savings." Although this does hit a wall in the form of diminishing returns, being able to do more with a gallon of gas or a cubic foot of concrete technically means making more money.
Even if the economic growth in a better designed city is only marginal — say 0.5% higher — that growth compounds pretty significantly over the course of decades: a $100,000,000 worth of assets appreciating at 4% will become $324,339,751.00 while the same $100,000,000 worth of assets appreciating at 3.3% will become $264,855,896.19, which gives us a difference of $59,483,854.81.
The problem with developing better cities is two-parts of the same problem: self-interest in the form of private enterprise and self-interest in the form of government.
To make public investment more successful, cities have to be able to put up more cash upfront to minimize the debt-service load incurred by making large public bonds. In a town of 40,000 people, a $100,000,000 bond will cost a resident about $10 a month in taxes at a debt-service-coverage-ratio of 1.0.
In reality, a DSCR of 1.0 is asking for danger. If we move to a much safer 1.3, the debt load per resident is $13.70. So, for a family of four, that's roughly $657 annually. That's quite a chunk of change considering that would be about 1% of a family's gross annual income.
All lending has regulations whether it is an enterprise zone funded by a local government, a HUD housing development, a real estate development carried out by a regional bank, a non-for-profit community agency or an elaborate scheme carried out by a international investment firm. And many times each of these individual organizations self-interest collides in quite uncomplimentary ways.
To get around this inherent self-interest and to provide a funding platform for communities to actually get productive developments done, there needs to be capital.
This is where the security comes in— if the collateral for these large funds was crowd sourced through small stock purchases, the risk would be spread over possibly hundreds to thousands of investors.
The creation of stock would then serve as a basis for increasing the amount of practical debt that could be taken on to provide the capital for making loans. This funding could, in turn, provide gap or total funding for municipalities looking to make "smarter developments."
If we tie the return rate and therefore interest rate — essentially the rate of new growth in municipalities — of these bonds together, success means higher returns for everyone. Essentially, these adjustable rate bonds would only adjust to higher rates if there's a increase and growth in revenue. The faster the bonds get paid off, the quicker the fund can loan again. And because the buy in is a stock rather than a bond, investors aren't tied to 1-year to 30-year commitments.
By using a combination of Landscape Urbanism and New Urbanism, we could create some fairly simple stipulations regarding how fund money can be used by local governments and community organizations for funding projects — zoning requirements, density minimums, specific archetypes for certain buildings or uses. Lower taxes, higher growth and more financial flexibility would definitely be a selling point for most people.
The stipulations here would separate this fund from the traditional bond markets where stupid decisions and often loud criticism seem to go perpetually unnoticed. And if enough cities and towns benefit from this financially, it would give other cities some motivation to change their habits or face undue suffering by offering lackluster services and environments.
Wouldn't you want to have a stable return for a set period of time? If it is just a standard stock purchase, you incur the risk of losing that investment (although, if you listen to folk like M. Whitney, muni's aren't that safe these days anyway...although we all hope she's very wrong).
Can you elaborate on what you mean with the stock vs. bond? Let's say I am an investor looking for a stable return, how do you convince me that this is safe? If it can go up, it can go down, like any stock, correct?
There is some money being lent out there, some TOD, low income, etc., for multi-family. That's great it is being used.
The big problem isn't money, there's plenty of money out there, the problem is the lending. The restrictions are so great on lending that there just aren't speculative projects being started.
For the zoning, while I fully agree we need TONS more density, good luck getting the votes on that. I've seen TONS of problems locally with this, many, many cases going to court (and even a rezone overturned because the local residents did not want more density, and, they are the ones that re-elect representative's that control the process - a sad round'n'round of stagnation).
Much is just politics. Large moves, large incentives, require a top-down approach (otherwise they will lose the votes), much political wrangling, and tons of lobbying. We are seeing several multi-billion dollar projects starting now that show this approach (and, indeed, there are several of the factors you are mentioning that are part of the projects, part of the marketing, etc.).
if you're using the term "stocks" to mean something like shares (ownership stake) of a business-like entity, then it sounds very anti-democratic and possibly illegal - one person can gain majority of these municipal shares and start dictating how this money is to be used.
I mean more of a mutual fund like an unit investment trust where there is a slight risk and no individual holder, whether majority or not, has little control of the fund. As far as I know, there is no mutual fund that exists solely for public development projects.
@trace, The problem with investing in municipal bonds is two part problem — they lack liquidity being too rigid albeit it too safe and many projects, though required to pay back their bonds, are often shortsighted and don't produce any real growth.
Let's make up an example.
Our example is said find is going to loan money to pre-develop a 800' by 300' downtown (measured from setback line) urban block— this gives us 2200 linear feet of right of way and 240,000 square feet of ground floor space.
If we do a 50/25/25 split for 4 stories of development, we get the following:
480,000 square-feet residential (~320 units)
240,000 square-feet retail
240,000 square-feet office
Now, we have to estimate two types of tax basins, property and sales (I'll be using universal millage rate of approximately 11.000 {school excluded} and a sales tax of 6.5%; we'll value residential development at $80 a square foot and retail and office at $100 a square foot):
Residential: $42,240
Retail: $26,400
Retail Sales tax: $93,600
Office: $26,400
Total: $188,640
Now to find out how much loan they can afford:
If we dedicate 25% of the general fund tax revenue generated from this project to this project, this single block should be easily able to float $750,000 giving us a grand total of $340.90 per linear foot for infrastructure. This would accommodate sewerage, storm water, decent sidewalks and roads.
But remember, growth! If we assume a 1% growth in taxes due to higher real estate value and sales over a 20 year period, this bond could be paid off 11 years earlier.
If the mutual fund in question sold 10,000 shares to finance this project, we'd have the following:
Initial investment: $75 a share
19 years later: $112.5 a share
But, that $112.50 a share now allows us to loan out 10 times the value, we brings the value of those shares up to around $1125 in another 20 years— a 1500% increase in value.
Can this not be done with an REIT or a Syndication? There in, this is still being controlled by one person or entity. I don't see that as a problem, if you have the right private partner. If the government is the controlling entity, watch out. Problem is you need to find an investor who is willing to wait 40 years for a decent return ,8% on average at that point, but only 4.5 over the 1st 20. I don't see how this eliminates self interest or minimizes risk.
I showed this to my fiancee (MBA finance/ accounting) and she just laughed hysterically for a good three minutes.
I think you're onto something!
Just discovered that there's an entire bank in Malaysia named Public Bank who controls "Public Mutual" who does exactly the crazy scheme I purposed above.
Public Mutual is the largest private unit trust company in Malaysia and currently manages more than 80 funds with a total net asset value (NAV) of RM43.4 billion [USD$14,418,608,400]*.
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