A client has recently purchased 100 acres of land in a suburb of Denver with the intention of supporting the development of 400 homes. The client would like to know how much money can be generated for infrastructure development via special district financing.

Property Development

The client expects to develop lots that will eventually be sold to home builders, eventually resulting in 400 single-family homes with a market value of $750,000 each. The lots will begin developing in 2023 and the first 50 homes will be complete in 2024, with the community continuing to build out at a rate of 50 per year until completion.

Special District Revenue

The Special District will be permitted to levy a 50-mill tax to repay bonds issued to finance infrastructure. In Colorado, the assessment rate for residential properties is 7.15% of the total market value. Mills are applied to the assessed value of the property. The district must pay for certain annual expenses out of the mill levy revenue before paying debt service, including $30,000 per year to pay for maintenance. You also expect a property tax collection loss rate of 1%.

Bond Issue

Your plan is to issue 30-year bonds at the end of 2024 (maturing at the end of 2054) based on 75% of expected tax revenues. Estimate the par amount of the bonds by taking the present value of the revenues at a 6% discount rate. Bond issuance costs are expected to be 4% of the bond par amount. The district also will have to deposit 10% of the par value in a reserve fund in the event the actual revenues are less than expected.

Deliverable

 

create a cash flow model using Excel that ultimately provides the estimated sources and uses of funds for the bond issuance.

 

Tips

• This will be the client's first special district financing, so make the presentation as easy to follow as possible. Consider the steps involved in to arrive at the sources and uses: (1) create the development schedule, 
• (2) project the assessed value of the district through 2054, 
• (3) calculate annual revenues, and (4) calculate the present value and create sources and uses.
•  
• Model cash flows annually, not monthly
• One mill levy is equivalent to one dollar per $1,000 of assessed value

Answer rating: 100% (QA)

To create the cash flow model for the bond issuance we need to follow the steps outlined in the tips provided 1 Create the development schedule 2 Proj... View the full answer