(Bloomberg) -- Clap along for Grammy-winning singer and producer Pharrell Williams, whose long-awaited effort to build a surf park in his hometown of Virginia Beach, Virginia, will mark one of the biggest high-yield deals so far this year.

In a two-part transaction split between the Virginia Small Business Financing Authority and the Atlantic Park Community Development Authority, the issuers plan to sell a combined $121 million of unrated revenue bonds on behalf of private developer Venture Realty Group.

Proceeds from the sale will help fund a 4-acre surf park dubbed The Wave. It’s the pièce de résistance of a gargantuan $330 million development project, Atlantic Park, which is the largest public-private partnership in the city’s history, according to bond documents.

“This deal is one to watch,” said Dora Lee, director of research at Belle Haven Investments. “It’s the first truly high-yield deal of size to hit the calendar this year, so it’s interesting to see it in the context of this January, where you have record-low issuance and you’re starting to get inflows coming into munis again.” That’s a sharp reversal from last year when investors yanked about $144 billion from the municipal-bond market, Lee added. 

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The plan is to transform the site of Virginia Beach’s former concert venue, The Dome, which once hosted legends like Diana Ross and The Rolling Stones, into 12 acres of retail, office and dining space. The development will also include a brand-new entertainment center that will hold up to 5,000 occupants. 

Virginia Beach is betting more than $140 million of its own dollars that Atlantic Park will turn the city into a year-round, family vacation destination, according to City of Virginia Beach Director of Communications Tiffany Russell. 

Worth Remick, a Virgina Beach councilman and one of the liaisons on the project said the city has “high expectations.” 

“It’s been thoroughly vetted, it’s top-notch all the way through,” he said in an interview. 

Williams first teamed up with the developers behind the project in 2017 when he pitched his idea for a surf park along the oceanfront. The feasibility study attached to the deal estimates attendance at the surf park alone will be about 200,000 patrons per year. The cost of admission will range between $85-$150 per hour, with private lagoon rental costing as much as $2,500. The park is expected to open to the public by October 2024. 

High Yield, High Risk

Despite the “Happy” singer’s star power behind The Wave, muni deals funding tourist attractions have a checkered past. The list of defaulted bonds is a long one, including a water park in Edinburg, Texas, and an iron and steel manufacturing-themed amusement park in Bessemer, Alabama. 

Like the development in Virginia Beach, those parks were speculative bets conceived to invigorate local economies. But many have gone under because success was reliant on enough people consistently showing up, year after year.

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That risk is baked into the sale documents. The bonds are being offered in minimum denominations of $100,000 exclusively to qualified institutional buyers. The official statement to the VSBFA bonds carries 12 pages of bondholders’ risks. Some of those risks include hurricanes, flooding, earthquakes, construction delays and the unpredictability of consumer spending on discretionary purchases.

The project has had “unanticipated increases” in construction and code costs to expand the venue size and increases in infrastructure, among other line-items, according to Russell, the city’s spokesperson. A representative for the developer didn’t respond to a request for comment. 

“There hasn’t been a lot of success stories in this area,” Lee said, referring to high-yield municipal bonds for tourist attractions. “The fact that there are other constituents taking risk in other parts of the development is a positive, but on the flip side, you have to get all the various moving parts clicked in at the right time for the whole project to succeed.”

On the bright side, tourism has roared back to life in Virginia Beach. Visitor spending surpassed the $2 billion mark for the first time in 2021, up 8% compared to pre-pandemic levels, according to the Virginia Beach Convention & Visitors Bureau. However, the number of visitors actually fell from 2019, down 15% in 2021, suggesting some of that income was inflation-driven.

The surf park lagoon will be outfitted with a mechanical wave that can generate up to 900 waves per hour, and as high as six feet, compared to the average wave height for ocean surf in Virginia Beach, which is two to four feet, according to bond documents. Developers are betting the difference will be worth the price of admission.

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