ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Principles of Finance: Unit 5, Municipal Revenue Bonds 13 Views


Share It!


Description:

Municipal revenue bonds are municipal (city-issued) bonds that pledge the revenues generated from a project with the amount borrowed.

Language:
English Language

Transcript

00:00

principles of finance a la shmoop.. municipal revenue bonds alright well

00:07

maybe these should be called running a city like a real business that produces [Bond name changes]

00:11

cash flow bonds how about that for a name

00:15

crickets okay well why the big difference in a revenue bond versus any

00:20

other kind of bond well revenue bonds have specific

00:24

revenues behind them municipalities issue revenue bonds to fund facilities [Municipal revenue bond definition]

00:28

that actually produce revenue things like airports and bridges with a toll [Cars driving by a toll booth]

00:32

and yes, parking lots..oh, and hospitals too hospitals generate revenue and bonds

00:38

used for Hospital purposes pay interest and principal from those revenues while [Money transfers from bond to hospital]

00:42

the distinguishing feature here is that there simply exist many municipal

00:46

projects that are worth doing but don't produce direct revenue for the city a

00:51

parking structure is the best example here so think about the subtle

00:55

difference in certainty of payment as it relates to a bond backed by revenues

00:59

versus a bond just generally backed up by The Full Faith and Credit of a

01:04

city like their promise to pay based on prayer the revenue bonds may be safer [Man praying in church]

01:09

because they're direct assets and cash flows that come from them, or more profits

01:13

associated with them but for example if teleportation really becomes a thing [Woman teleports]

01:17

well then the usefulness of those parking structures and/or storage

01:20

facilities might go away so what happens if a parking structure

01:24

backed only by its real estate assets goes belly-up well the debt holders of

01:29

the parking lot get the lot and only the lot back they don't get to own City Hall [City Hall appears]

01:34

they don't get to own the sewage system of the city...

01:37

nor the garbage collecting [Lots of garbage]

01:40

franchise even in New Jersey instead they just take ownership of the parking

01:46

lot could they then put a condo on it and sell it and make their debt money

01:50

back and maybe a whole lot more well in theory yes but unfortunately for them

01:55

they have to first apply to yep the city for permits to build that condo and it's

02:01

highly likely that the city will point to a rainbow haired squirrel that eats [Rainbow colored squirrel appears]

02:05

only nuts from a blue oak tree right on that parking lot right through the

02:10

center of it and it's endangered in the region

02:12

if the debt holders build well that squirrel will be harmed so you know no soup

02:17

for you at least no condo permit so the debt holders own the debt on the lot but

02:22

there isn't much they can do with it at that point unless the city cooperates so

02:26

if you were the lender in this situation loaning money to the city knowing that [Lender giving money to the city]

02:31

they've got you by the short hairs if they ever don't pay well you'd want a

02:34

fair amount more interest payment to make up for that grief and hassle and

02:39

illiquidity or said differently a higher interest rate is what you would demand

02:43

to account for the risk you believe that exists for the parking lot to go

02:47

bankrupt and then you not getting paid or being able to sell it or do something [Person hands over a check]

02:51

with it that gets you your money back if the debt on that parking lot is then

02:55

incrementally backed up by The Full Faith and Credit of the city well then

02:59

the parking lot separately from the city would first have to go bankrupt and then

03:04

the city itself would have to go bankrupt or become insolvent before

03:07

there was any issue in the lender meaning you collecting your money in

03:11

practice this manifestation of the b-word rarely happens and I meant [Dog appears on a video]

03:16

bankruptcy but when it does usually the politicians around are tossed out in the [Politician tossed out into corridor]

03:20

next election they're blamed and maybe even sued for malfeasance among other

03:25

things and the new politicians flow to new revenue backed muni bond which pays

03:28

off the old parking lot people plus interest and generates a new bond to new

03:33

more hopeful investors maybe this time parking in the parking lot won't be [Cars parking in a large parking lot]

03:37

cheap it'll cost more than a dollar every time you come into it and leave

03:41

the parking lot and to park in the lot all day well five bucks, maybe a hundred [Electric cars parked in Palo Alto]

03:45

bucks in Palo Alto the basic idea is that user fees are what pay off revenue

03:50

bonds not the city's coffers from their general collections from property and

03:54

income taxes and there's another key difference between revenue

03:58

and general obligation or GO bonds because the city is basically giving the

04:03

deed to the city when it puts its full faith and credit behind a GO bond the [Deed goes to GO bond]

04:08

city has to get everyone or rather a majority to agree that this debt is a

04:13

good idea that is they need voter approval usually in a revenue bond where

04:18

the asset itself ie the 37 storeys of parking structure is backing up the loan [Man pointing to 37 storey parking structure]

04:23

and nothing else well, no vote is needed to raise money

04:25

against that asset as collateral the credit

04:28

ratings for revenue bonds are thus much simpler to PEG than those for general

04:32

obligation bonds like give away more finite set of inputs in just a parking [Car parked in a lot]

04:36

lot than you do a whole city because only the items specified is collateral a

04:41

simple analysis of the value of that property ie the parking lot determines

04:44

most of the core pricing of the debt associated with it...Here's some

04:48

quick math our parking structure has a thousand slots and it'll be open three

04:53

hundred days a year it has a simple pricing structure such that you can park

04:56

there one minute or 24 hours and it cost the same 12 bucks so at a hundred

05:01

percent occupancy the potential total revenues from this parking structure are [Cars going in and out of parking structure]

05:04

a thousand times three hundred times twelve bucks or three point six million

05:08

dollars a year the total cost to manage clean bill and deal with problems and

05:13

like this is a hundred grand a year so the parking lot itself after having

05:17

cost five mil to build is enormously profitable three point six million of

05:23

revenues - 100 grand of cost, yeah three point five million of operating profit

05:26

so it would make back essentially all of its capital invested in the first [Green, blue and red cars parked]

05:31

year and a half or so at a hundred percent occupancy realistically it might

05:35

carry only two-thirds of that number so maybe it takes two years to make all of

05:39

its money back that's pretty good regardless the parking structure is [Cash falling]

05:42

enormously profitable with highly likely recurring revenues like gee what

05:46

are the odds people want to park downtown and it has enormous cash flow [Money transferring from parking lot to piggy bank]

05:50

so it remains an ideal candidate to take on debt or said another way many lenders

05:55

would line up to throw money at the parking lot at low interest rates

05:58

because they would believe that the odds of them being repaid their interest in [Person shakes magic 8 ball]

06:03

principle are very high and they're not too worried about teleportation at least

06:07

they're not anytime soon who knew parking lots are where the real money is

06:11

at...Eat your heart out there Warren Buffett...

Up Next

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...

Related Videos

Finance: How Do Credit Card Companies Work?
116 Views

How do credit card companies work? Credit card companies are, in a way, lenders. They give consumers a rectangular piece of plastic that allows the...

Finance: How Do Some Accountants "Cook the Books"?
103 Views

How do some accountants “cook the books”? Cooking the books refers to accountants making company’s financials look much better than they are....

Finance: How Do You Become Incorporated?
48 Views

How do you become incorporated? Go to Legal Zoom. Pay $150, file with the state of Delaware or whoever each year. Pay another $150. Most file as LL...

Finance: How Do You Get Your Startup Funded?
96 Views

How do you get a startup funded? Depends if we're talking about a tech startup, or a non-tech startup. If you've got a promising, budding tech comp...