Sometimes referred to as a special assessment bond or special purpose bonds, an assessment bond is a municipal bond that is used to generate funds for improvements to properties owned by a government entity, such as a city or county. The terms of the bond issue call for assessing a tax on the citizens who will benefit from the improvements, thus providing a means for generating the revenue needed to honor the bond issue when it reaches maturity. This approach often provides a quick and easy way to generate funds to make improvements, and not place a great deal of stress on the municipality’s exiting budget.
The way that an assessment bond functions is fairly straightforward. The municipality determines to make some sort of improvement to an existing property, such as a street or sidewalk in a specific part of town. In order to raise the funds necessary to successfully pay for the improvement project, the municipality issues a bond. Typically, the bond will offer investors a fixed rate of interest that is paid when the bond reaches maturity, although it is possible to create a bond issue that employs a variable rate that is paid incrementally throughout the life of the bond.
In order to help with the interest payments on the bond issue, those who will benefit directly from the improvement are levied with an additional tax. For example, if the project involved paving streets in a given neighborhood, property owners in that area would be assessed an additional tax, with the proceeds earmarked to retire the bond successfully. While the property owners bear the burden of the extra tax for a period of time, they also benefit from the enhanced condition of the streets, as well as the positive effect that the newly paved streets have on the value of their properties.
For investors, an assessment bond is usually a very safe way to earn a small return. Since the bond is honored using funds generated from tax collections, the chances of the municipality failing to retire the bond on time are extremely slight. It is not unusual for those who will benefit the most from the community improvements to invest in the bond issue, effectively offsetting the additional taxes that are levied in order to finance the bond.
The duration of an assessment bond will vary, depending on the complexity of the improvement project and the amount of time needed to successfully complete the entire project. A bond issue of this type may have a duration as short as twelve months or as much as twenty years. As with any type of investment, it is important to consider when and what type of return can be reasonably expected, then decide if the investment is worth the time and effort.