What sets these bonds apart from plain vanilla munis is that the obligor on a dirt deal changes over time. As long as someone—anyone—owns the land itself, the bond must be paid. As can happen with any borrower, payments are occasionally delayed or missed. Dirt deals are structured so that the current landowner, whoever that might be, must fully pay the tax that pays the bondholders and makes them whole. As the following example illustrates, the responsibility for making payments can change hands many times over the course of a project’s evolution.

The Bottom Line

We continue to believe that most of our investments in land development projects will provide favorable levels of tax-free income for our shareholders over time. At Oppenheimer Rochester, we are confident that carefully researched dirt deals belong in our funds’ portfolios. Over the years, we have done our credit homework and acquired many Special Tax or Special Assessment bonds that we believe have attractive yields and structures. As the projects these bonds finance get built and as the number of property owners increases with the sales of individual parcels and buildings, those property owners assume some responsibility for paying the tax. The more taxpayers there are to shoulder a given tax, the less risk the bondholders face.

Another way we try to mitigate the risks of these investments is to buy bonds representing many different builders and developers and many different types of projects at different stages of development. We buy bonds in different geographies and work hard to ensure that our holdings represent a diverse set of maturities, structures and credit ratings, too. In combination, the Special Assessment and Special Tax sectors typically constitute a significant percentage of Oppenheimer Rochester California Municipal Fund’s investments. The two sectors may represent large segments of other Oppenheimer Rochester funds as well. As long-term investors know, our portfolios reflect many sectors and include many different types of securities that have passed our in-house credit evaluations. We believe that the varied nature of our funds’ overall holdings can help mitigate the impact of the risks associated with having significant holdings in these real-estate-related securities.

Our in-house team of credit analysts brings significant energy and experience to the process of evaluating these opportunities. We have looked at many different types of deals, worked with many different tax districts and have developed considerable insights into the nuances that make a deal successful. It’s not always a straightforward process, but it’s one that we believe will continue to provide long-term benefits to our shareholders.