DJ Stockbridge is currently pursuing a Masters degree in Accounting.
Imagine you are working at a sandwich shop. You make $10 per hour, and work 40 hours per week. You are usually pretty good at saving money but you recently started dating a girl and you've spent most of your paycheck on dinner and gifts for her. You are now starting to regret that decision just a little because you need to buy a birthday gift for your brother. His birthday is in two days, and he hinted that he would like a new smartphone. You also hinted that you would get it for him. But you do not know where you will find the money. So, you turn to your best friend. You tell him that if he lends you $200 you will pay him back with your future earnings from the sandwich shop. He works at the same shop and knows you are a hard worker, so he agrees.
That simple example describes, in essence, what a revenue anticipation note is. An IOU (bond) is issued with the understanding that the bond will be paid back from future revenue. In this lesson, we'll go into further detail about revenue anticipation notes, which are also known as RANs. We'll give the formal definition, along with a more detailed example.
A revenue anticipation note (RAN) is a municipal bond whose payments (interest and principal payments) are secured by the future revenue of a project. In our example, your IOU was secured by your future sandwich shop revenue. RANs are similar but the issuer is a government entity. The bond is issued to finance a project (in our example it was used to finance a birthday gift), and the future revenue comes from that project.
Revenue anticipation notes come in all different shapes and sizes. We'll discuss a few of the most common:
- Sports Stadium RAN - Certain sports stadiums are eligible to issue municipal bonds. When the bonds are issued the entity receives the cash from the issuance, builds the stadium, and then pays the interest and principal on the bonds through the revenue generated by the stadium.
- Toll-Road RAN - Similar to the sports stadium example, a government entity (like a Turnpike Authority) issues bonds, builds the new road (or upgrades an old road) and charges customers a toll for use of the road. The toll revenue is collected and used to pay back the bondholders.
- Hotel RAN - Some hotels can issue municipal bonds, as long as they issue them through a government entity known as a conduit. These developments need to show some public benefit, such as hiring a lot of new employees and/or stimulating the local economy. Hotel RANs have the same process we outlined above in the two other cases. Bonds are issued, the entity uses the cash to build the hotel, charges customers and then uses the revenue to pay the bondholders.
Revenue anticipation notes (RANs) are municipal bonds where the bond proceeds are used to build a project whose revenue is then used to pay back the bondholders. Some examples of RANs include building a sports stadium, toll road or a hotel. They are a useful way for municipal governments to reduce their risk exposure. Normally, governments would need to guarantee the principal and interest payments for the project with their own taxing authority. With RANs, however, they can apply that taxing authority to other projects that are not secured by the project's revenue.
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