Make your Developer Note more marketable - 8 tips

by DLA Piper

There is a common misperception that a municipality's willingness to issue a so-called Developer Note on a pay-as-you-go basis is tantamount to providing equity to the redevelopment project.

Unfortunately, most Developer Notes have too much "hair" on them, thereby compromising their marketability. As a result, unless properly structured in the context of a negotiated Redevelopment Agreement, the utility of a Developer Note is not often maximized.

I have represented clients who have successfully monetized Developer Notes issued by a municipality. Working in tandem with underwriters, we have been able to finance and/or market for sale proposed Developer Notes.

As you structure the features of Developer Notes, the following principles may help you maximize their marketability. Keep these eight tips in mind.

  1. The Developer Note must be a negotiable instrument with defined principal and interest components.
  2. The Developer Note must have a defined amortization of principal.
  3. Upon issuance, the Developer Note should be "non-callable" for one-half the term of its life. Ideally, this means that a 20-year Note would have call protection for a period of 10 years. Call protection precludes the municipality from prepaying the Developer Note unless the lockout period restriction is formally waived by the holder of the Developer Note. Because of the already narrow range of prospective purchasers and interest holders in such a Developer Note, the anticipated income stream from the Developer Note must be protected for the benefit of the prospective purchasers and/or note holders.
  4. The Developer Note must be accompanied by an opinion of bond counsel that interest under the Developer Note is not includable in the gross income of the holder. The tax-exempt nature of such a Developer Note is critical to its marketability. Because of IRS private activity rules, in such an event, the underlying Redevelopment Agreement cannot, for example, preclude the developer from challenging real estate assessments, etc.
  5. There must be the option of assigning the Developer Note to a trustee for the benefit of certificate holders. The common structure is to assign to a trustee the interest in, and the right to receive payments under, the Developer Note. Therefore, the Redevelopment Agreement must authorize (preferably without the consent of the municipality) the assignment of the Developer Note to a so-called "qualified investor", meaning a qualified institutional buyer (QIB) or a registered investment company. The Redevelopment Agreement should define a qualified transfer to include the pledge of the Developer Note to a lender providing financing or the sale of the Developer Note to a "qualified investor" or to a trust where certificates of participation are sold to qualified investors.
  6. The original holder of the Developer Note will be required to provide a limited guarantee equal to 10 percent of the face amount of the Developer Note. That guarantee can be in the form of a letter of credit or cash. This 10 percent reserve will protect the purchaser(s) of interest(s) in the Developer Note from the consequences of unmet expectations due to increment projections which are not fully realized.
  7. In order for a Developer Note to be marketable, there can be no restrictions on the flow of increment to the holder. All restrictions must be removed or by their terms expired. Here is an example: in an instance where the municipality has remedies under the Redevelopment Agreement in the event the Developer fails to perform, breaches a covenant or fails to comply with other requirements,* then the remedies, if exercised by the municipality, cannot affect the requirement to make payments as and when required pursuant to the debt service schedule. Any remedies for events of default that threaten to interrupt the flow of such payments must be negotiated out of the Redevelopment Agreement. One alternative is to provide for a larger, tax-exempt note to be issued by the municipality and for a smaller, taxable note to be issued, against which the municipality has recourse and remedies under the terms of the Redevelopment Agreement. This structure is becoming increasingly popular in deals with the City of Chicago.
  8. The Developer Note should be issued on a parity basis. In order to retain maximum flexibility on the sale of a Developer Note, where multiple obligations are issued the Developer should have the ability to request that other obligations be subordinated to the primary, tax-exempt Developer Note. One benefit to this structuring is that additional coverage with respect to the primary, tax exempt Developer Note is built in.

The sale of Developer Notes at a relatively early stage in the development process can yield early and significant cash to supplement or replace a Developer's equity. In this way, the sale of Developer Notes can effectively produce the same results as take-out bonds issued during the course of the development process.

There are many pitfalls associated with successfully negotiating Redevelopment Agreements while not compromising the tax-exempt status or marketability of a Developer Note. Being aware of these pitfalls and structuring the terms of a Redevelopment Agreement around them is the key to successfully monetizing Developer Notes and to optimizing their value at an earlier stage in the development process.

*The City of Chicago, for instance, requires that certified minority and women’s business enterprises be used for 28 percent of the hard construction budget; that prevailing wages be paid to contractors and sub-contractors; and that at least 50 percent of hours worked be performed by residents of the City of Chicago.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© DLA Piper | Attorney Advertising

Written by:

DLA Piper

DLA Piper on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.