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How MUD bonds work.
Municipal Utility Districts (MUDs) are political subdivisions authorized under the Texas Constitution to levy taxes, charge for services, and issue debt for infrastructure such as water, sewer, and drainage, within limited geographically defined areas. The Texas Commission on Environmental Quality (TCEQ) regulates and provides ongoing supervision of MUDs and other special-purpose districts. There are more than 600 active “typical” MUDs in the five-county area surrounding Houston. MUDs exist in and around other large Texas cities (Austin, Dallas, San Antonio), but not to the same extent that they’re utilized in Houston’s real estate markets.
The primary sources of revenue for a district, from which debt service on the MUD bonds are paid, are the ad valorem taxes and water and sewer revenues.
In the bond resolution, the district promises to levy a continuing direct annual ad valorem tax, without limit as to rate, on all taxable property in the district sufficient to pay principal and interest on the bonds as it becomes due. The bonds are a general obligation of the district and are not obligations of the state of Texas, the city, or the county. The investment quality of the bonds depends on the ability of the district to collect taxes levied against the taxable property within the district, and in the event of foreclosure of the district’s tax lien, on the marketability of the property and the ability of the district to sell the property at a price sufficient to pay taxes levied by the district and by other overlapping tax authorities. The levy of ad valorem taxes by the district constitutes a lien in favor of the district on parity with the liens of all other state and local taxing authorities on the property against which taxes are levied. Current tax collection rates for MUD districts generally average in excess of 97%. Texas MUD bonds are an excellent fixed-income option for the informed tax-free municipal bond investor.
Investing in Texas MUD bonds involve risk, including the risk of default by the issuer on the payment of interest and principal when due. Prices are subject to market fluctuation and if sold prior to maturity, the amount received may be more or less than the amount invested.