LOS ANGELES — Veteran public finance banker L. William Huck and real estate lawyer and developer Todd Anson have formed San Diego-based Common Bond Capital Partners to capitalize on an estimated $5 billion in defaults expected in the land-secured municipal bond market.
Though plenty of companies have formed since the economic crash to capitalize on distressed debt underlying real estate projects, Huck and Anson say they have a unique approach to an untapped market. The timing is right because land-secured bond defaults are a lagging economic indicator, Huck said.
While housing markets are beginning to recover, he said the wave of bond defaults has not yet passed. “I observed coming out of the last recession that when these bond issuances get stuck, it’s hard to get them unstuck,” Huck said.
Of the $30 billion in dirt bonds issued over the past decade nationwide to finance public infrastructure supporting residential projects, about $2.3 billion were in default as of year-end 2011, according to Bloomberg.
Defaults will reach more than $5 billion over the next two years in Florida alone, according to the Florida Community Development District Report website, which estimates that 78% of the state’s $6.5 billion of dirt bonds issued between 2003 and 2008 are in default.
The difference in the default numbers are that Bloomberg counts payment defaults, while the FCDD report counts both payment defaults and instances where the reserve has been tapped as a default, Huck said. Typically, when a project starts to tap into reserves, it’s in trouble, he noted.
Florida and California represent the firm’s biggest opportunities, but it plans to scout deals nationally. Florida has a 25% default rate, while California only has a 1% default rate, but leads in issue volume, according to Common Bond Capital Partners LLC.
Over the past decade, California issuers sold $13.3 billion of dirt bonds, Florida issued $7.3 billion, and Connecticut scored a distant third with $1.6 billion.
Of the six projects the firm currently has lined up, four are in California, one is in Florida and another is in Virginia. Other states on the firm’s radar are Arizona, Nevada and South Carolina.
Bonds supported by special district taxes often go into default when the developments aren’t completed or the developer ends up in financial distress. Huck and Anson believe they know how to get the issuances “unstuck.” Their firm will provide capital as well as applying financial and real-estate development expertise to resolve default problems.
“There is some competition in the space from the typical private-equity opportunity funds,” Huck said. “We are going to differentiate ourselves, because the municipal bond sector is very esoteric. It is a very small community of people and I’ve worked for 30 years in that space.”
Huck successfully managed workouts and restructurings of two dozen California bond defaults during a 30-year career at San Francisco-based Stone & Youngberg. While the opportunity funds are waiting for bondholders to capitulate so they can buy at a big discount, Huck said they want to partner with bondholders to restore their investment to 100%.
Once the financial issues have been resolved and the projects have been resuscitated, they plan to sell the land to single-family home developers.
“We will either end up successfully working through the maze of problems and generating handsome returns for investors, or end up with the real estate that secures the bonds at a deep discount,” Anson said. “Either way, we are thinking it is a winning combination for ourselves and our investors.”
Homebuilders don’t have the expertise or desire to work through bond issues to get to the land, said Anson, who has spent his career working in real estate, first as partner for the defunct Brobeck Phleger & Harrison law firm.
A decade ago, he co-founded Cisterra Partners, the real estate development firm that built the DiamondView Tower office building in San Diego. It achieved the city’s highest price paid per square foot when it sold for $161 million in 2008.