SAN FRANCISCO - Many land-secured bond issues in California, beaten down by a parade of headlines about the state's tanking real estate markets, have become attractive investment opportunities, according to a report published this week by Piper Jaffray & Co.

Land-secured bonds, typically called Mello-Roos bonds in California after the two lawmakers who sponsored the enabling legislation, are often issued to fund infrastructure such as sewers and streets in new real estate developments. They're typically sold without a credit rating.

With California's residential real-estate market in freefall amid a wave of foreclosures, it may not on the face of it seem to be a propitious time to take on what are, effectively, speculative investments in real estate.

But attractive pricing for outstanding Mello-Roos bonds can result in attractive yields for investors who do their homework, said the Piper Jaffrey report, published Wednesday.

"The unrated municipal market is fundamentally different today than it was a year, or a year and a half, ago," Piper Jaffray managing director Yaffa Rattner, the report's author, said yesterday. "Therefore securities that were underwritten then, even if performing at par today, would yield a higher rate.

"That fact, coupled with the overall credit concerns in the market, particularly as they relate to California land-secured debt, together generate a unique investment opportunity," she said.

Even in a damaged real estate market, legal covenants built in to many Mello-Roos bond structures can make them acceptable risks for investors. They include typical debt service coverage ratios of 1.10 times to 1.25 times, providing a surplus of revenues to protect investors from some delinquencies.

It is also "imperative" to have a debt service reserve fund at the maximum level allowed by the Internal Revenue Service, the report said, and "extremely important" to ensure that the value of a property relative to the loan is at least three times higher and preferably more than four times higher.

Mello-Roos investors also benefit because the special taxes that back them are tied to a dollar amount, rather than property value, meaning that they will continue to generate expected revenue even if property values decline, as long as delinquencies are manageable.

The size of the Mello-Roos district and the planned development, its location with respect to nearby job markets, and diversity in the price point and target market of the homes to be built also are important considerations, the report said.

"We believe that appropriately priced securities can yield good returns without incurring significant principal risk," the report said.

The real estate downturn appears to have led to a downturn in new Mello-Roos bond issuance: according to a California Debt and Investment Advisory Commission report released this month, there were 88 new-money issuances reported in fiscal 2008, down from 188 the previous year and 191 the year before that.

Mello-Roos districts have shown increased draws on debt reserve funds, but defaults remain at record lows, according to the CDIAC report.

"Although historical results cannot guarantee future payment expectations, we believe the probability of actual defaults on these transactions is extremely low," Piper Jaffray's report says, adding that the default rate for Piper Jaffray transactions is zero. The firm reported underwriting more than 258 Mello-Roos bond issues, for more than $5 billion out of the total $22 billion in issuance.

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