Fidelity
New Jersey bill would spur municipal bonds for commercial real estate development
Municipal Market Analytics analyst Lisa Washburn said the bill enables local governments with another mechanism to encourage economic development by facilitating developers with access to the tax-exempt market through ERG grants or securing bonds with PILOT payments. She noted that a positive of the legislation for bondholders is provisions assuring that the pledge of PILOTs are subject to a statutory lien.
“The presence of a statutory lien gives investors some comfort that their claim to the PILOT payments should survive a hypothetical chapter nine,” said Washburn. “They will be a secured versus an unsecured creditor thus improving recovery prospects.”
Washburn said there are risks associated with the proposal since bonds are non-recourse unless specifically guaranteed by the municipality. While local governments can be immune from the bonds, Washburn noted that some localities may feel pressure to eventually step in and specifically guarantee the debt to assure completion.
“Financings for some projects may be speculative and that may result in trying to get the municipality to guarantee the debt to allow it to secure better rates, which would be a risk factor to the municipality should the project sour,” said Washburn. “These would likely increase the amount of riskier debt issued in the state.”