In suburban Texas, a neighborhood complete with an amphitheater, dance hall and goat farm is scheduled to be erected 40 miles from Houston’s downtown — providing municipal-bond investors a window to bet on one of the fastest-growing areas of the US.
In a transaction that priced this week, a municipal authority sold high-risk, tax-exempt bonds to finance infrastructure associated with a housing development dubbed Two Step Farm. The planned community stretches more than 2,000 acres in Houston’s sprawling metropolis. Once built out, the development will have more than 1,000 homes priced between $350,000 and $1 million, as well as parks and amenities.
The bonds are backed by future revenues generated by the project, meaning investors are wagering that the development will be built out and populated. Texas metros are seeing the most sustained population growth of all the nation’s major cities this year, according to US Census Bureau data. Houston added nearly 140,000 people to its population this year, following closely behind Dallas. San Antonio and Austin also ranked in the top 10 of the largest increases in new residents.
“Texas is a high-growth state, and Houston’s a high-growth area. So this is something where the demographics really do support building this development,” David Mann, senior investment analyst at Manulife Asset Management, said. “Families are going to move here. They’re gonna work somewhere in the area. That’s one of the major things that’s attractive about it.”
The sale builds on an already strong year for real estate backed transactions in the muni market. Known as dirt deals, developers have been tapping investors to help finance a range of projects — from a luxury golf enclaves to a revamp of Atlanta’s downtown hub. Broadly, high-yield munis have performed well this year, with such debt up 7.9% in 2024, besting the broader market, according to data compiled by Bloomberg.
Two Step Farm is being developed by JEN Partners — a private equity firm specializing in homebuilding — and Oxland Group, a real estate investor focused on land acquisition, according to bond documents.
The first phase of the project “will feature a dance hall inspired by original dance halls from the 1800s throughout South and Central Texas; plus, a working goat farm, farm shop and café, and taproom,” said Tom Woliver, co-president and founder of Oxland Group. “More traditional amenity offerings will include a coworking space, nature trails, and a swimming pool.”
The securities are capital appreciation bonds, meaning investors don’t receive regular interest payments, but the return is fully paid when the bonds are due. For example, the Two Step Farm project is borrowing $60 million at issuance, a value that will accrete to about $110 million at maturity in 10 years.
Such a structure can be “fairly risky” if the construction of the development is disrupted or if the growth of the surrounding area starts to wind down, according to Chad Farrington, co-head of municipal bond strategy at DWS Group.
“In the meantime you haven’t collected any interest or been paid a coupon, and now you’re left with a development that probably has a lot less value than how much debt is on the property,” he said.
Those risks are noted within offering documents. The securities are unrated and offered only to qualified institutional buyers and accredited investors — indicative of a high level of risk.
Investment in the bonds “involves a significant degree of risk and is speculative in nature,” the bond documents say.
The bonds are due in 2034 and priced with a 6.125% yield, according to data compiled by Bloomberg.
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