Texas Bond Tool Could Solve A Massive Problem For MPC Developers: Financing Infrastructure

With demand for new homes at a fever pitch across Texas, developers of master-planned communities can spend tens of millions of dollars to lay out roads, water and sewer lines, treatment plants and the like. 

Now, a new tool is helping to accelerate the repayment of funds shelled out for infrastructure improvements. And with almost $700K in financing under its belt, Launch Development Finance Advisors' forward-funding bond program is already spawning other Lone Star State imitators.

“Why this has revolutionized financing in Texas is that now the developers are able to get reimbursed sooner for the infrastructure,” Launch Development Finance Advisors Managing Principal Carter Froelich said. “They're able to pay down very expensive loans that they're having to get, and then they're able to plow that money back in to keep Texas growing.”

Texas has a number of financing mechanisms at the disposal of developers planning new infrastructure. Among the most popular is forming a Municipal Utility District, or MUD, that eventually allows the issuance of bonds to help them recover some of those funds.

But that can take up to 20 years in some cases, Froelich said. That's why the consulting firm specializing in public infrastructure financing launched the Texas MUD Forward Funding Launch Bond about 18 months ago, cutting that time down to just months for several big-name developers.

The idea is that financing for infrastructure improvements is provided upfront in exchange for a developer’s right to be reimbursed through a MUD’s financing and reimbursement agreement being reassigned to buyers of the Launch Bond, Froelich said. 

“Why would anybody do that? Because the bond itself is nonrecourse to the developer,” he said. “It does not encumber the land and it's nonrecourse to the MUD.” 

Because the deal isn’t securing the land with a deed of trust, buyers can't foreclose on the land if the bonds aren't paid, Froelich said. Bond buyers are usually large institutional high-yield funds from JPMorgan Chase, Goldman Sachs and many of the big Franklin funds. 

The Launch Bond can take one of two structures. The first is a capital appreciation bond that has no scheduled interest payments and no reserve fund. The other is a current interest bond that does have scheduled annual interest payments and a reserve fund. 

Launch Bond buyers have preferred the capital appreciation bond because it usually carries a slightly higher interest rate and requires less paperwork if the MUDs don't issue bonds, Froelich said. 

Since it was created in 2023, Launch Development Finance Advisors has financed more than $683M for developers like Starwood Land, Hillwood Communities, Megatel Homes and Johnson Development Corp.

Launching the new financing mechanism took time. Froelich said his company spent three years working with the local Houston MUD attorneys and a Chicago attorney to turn the idea into a business development. 

Part of the complexity was getting around state limits on how bonds work.

“The reason we were able to issue this bond is that we are issuing it through the state of New Hampshire, through a conduit,” Froelich said. “That's how we're able to issue a larger bond than what the Texas code would allow us to do, because we're doing it through a different state.”

Randolph Texas Development President Randy Rollo served as the guinea pig for the Launch Bond, he said. With $42M spent on water and sewer infrastructure as well as the first phase of a wastewater treatment plant for its Lariat development in Williamson County, Randolph Texas became the proof of concept when Launch Development Finance Advisors issued its first capital appreciation bond for $33.5M.

“Randy netted out $33.2M at an interest rate of 7.5%,” Froelich said, noting interest rates have dropped below 7% consistently since that first bond. “Of that $33.2M, $28.8M of it went to pay off his lender that had a middle-teen interest rate, and then we held back $4.4M million to construct Phase 2 of the wastewater treatment plant.”

Starwood followed Randolph Texas Development with the cross-collateralization of 10 different MUDs from four noncontiguous projects, and the genie was out of the bottle.

“To date, there's been over $1B of this issued, but we've got a lot of folks that are now copying what we're doing,” Froelich said, adding the Launch Bond strategy has “changed the face” of how large master-planned communities are financed. 

Yet the firm is cautious not to overuse the strategy and “kill the golden goose,” he said.

With the debate over city control of master-planned communities in extraterritorial jurisdictions likely to be decided by the court system, developers are fighting for independence to build as they see fit, while municipalities want influence and the ability to annex big communities.

That battle can extend to Public Improvement Districts. Froelich noted many local governments have started requesting a portion of proceeds from bonds issued by the districts.

Using MUDs and Launch Bonds avoids the bureaucracy that can crop up in dealing with public agencies, allowing development to be controlled by the private sector, Froelich said. 

“Developers are getting their money sooner to help them provide more affordable product, get reimbursed and pay down their financing costs,” Froelich said. “It's really a win-win-win for everybody.”