ShmoopTube

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

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

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cash flow bonds how about that for a name

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

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other kind of bond well revenue bonds have specific

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

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

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

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

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the distinguishing feature here is that there simply exist many municipal

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

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

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

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

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

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

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

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

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facilities might go away so what happens if a parking structure

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

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

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

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nor the garbage collecting [Lots of garbage]

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

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

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

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

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

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

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center of it and it's endangered in the region

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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income taxes and there's another key difference between revenue

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

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

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

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

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

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

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against that asset as collateral the credit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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enormously profitable with highly likely recurring revenues like gee what

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

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

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

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

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

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

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

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