Craft Homes LLC community will be established as a Metropolitan Special District
By Deborah Goonan, Independent American Communities
Is Colorado developer Tim Craft actually thinking outside the HOA box?
Yes, according to a report on Denver 7 News. Craft says his new 900-home community, Independence, will be financed by a Metropolitan Special District (MSD) rather than a homeowners association (HOA).
(Note: In the Denver area, a $300,000 new home is considered “affordable.”)
No HOA, but special district will lead to more housing affordability, developer says
Jackie Crea, Denver 7
Our Colorado series
9:53 PM, Sep 7, 2018
10:20 PM, Sep 7, 2018
ELBERT COUNTY, Colo. — As Colorado grows, buying a home is becoming increasingly difficult. Now a developer with big plans for a brand new community is doing something to make it more affordable.
In 2017, Elbert County resident Jacqueline Tugwell spoke to Denver7 about the effort to stop the future development, now slated to move forward.
“Farms, ranches, agriculture; you see wildlife; you see cattle. There is no high density,” said Tugwell. “We’re not Denver. People moved out here to be in the country.”
That may change with a master-planned community: Independence. The development will provide more than 900 single-family homes.
Developer Tim Craft of Craft Companies LLC is behind the development. He told Denver7 there won’t be an HOA at the Independence; instead a special district will run it.
“It’s actually like a mini-town, complete with elections. But because its structured more of a tax, the homebuyers can deduct their monthly fees from their income tax at the end of the year,” said Craft.
Read more (Video):
The establishment of a MSD instead of an HOA has some advantages.
Colorado Special Districts are local governments and political subdivisions that are publicly accountable. Meetings and records are open to the general public, and not limited to members of the community. As units of government, Special Districts are bound to the same accountability and transparency laws as city, county, and state government.
Special Districts are subject to annual audit and budget requirements, with all information accessible to the general public. That means the Districts and their board members are accountable to all residents (including non-owners), investors, concerned citizens, or public watchdogs.
And because costs to operate MSDs are assessed as taxes, when a homeowner has a mortgage, the lender collects the money needed to operate the community. Compared to an HOA, the MSD reduces the likelihood of delinquency, and virtually eliminates the need for the governing board to hire collections agents and attorneys to collect from slow payers or non payers. It also eliminates lucrative incentives for predatory collections agents.
The other advantage to the MSD is that the board is elected by registered voters in who reside in the district. There’s only one vote per registered voter, just like any other election in the U.S. By contrast, votes in a homeowners association attach to the property, not the people who reside in the community. Typically, in an HOA, only homeowners vote, and they are entitled to one vote per property.
However, when it comes to Special Districts, the devil is in the details.
What is a developer’s role in the creation of special districts and governance in the early stages?
Under Colorado statute, at the start of construction, the developer establishes the MSD and “elects” members of the development team to the board. As homes are sold the MSD acquires qualified electors (registered voters), who will vote in future elections, and who may also choose to run for election to serve on the District’s board of directors.
The transition to a resident-controlled board of supervisors takes years, and if no one from the community shows interest in running for election, members of the development team can continue to take turns leading the MSD indefinitely.
Similar to Community Development Districts (CDDs) in Florida, the developer issues bonds that create a debt service for future homeowners of the MSD. In Colorado, some developers cover a portion of the debt until a sufficient number of homes are sold, contributing to repayment of bondholders (investors). Some communities generate revenue from other sources — golf or country club memberships, or service fees, for example. But many MSDs rely primarily on bond issues and tax revenue.
Why would a developer choose a Special District?
Mainly, because it benefits the developer, by spreading out financial risk among other real estate investors. The developer sells bonds to help finance construction of roads, storm water management systems, recreational amenities, and to initiate services such as fire protection, and water utilities.
How do Special Districts make housing more affordable?
The bonds create a debt service that allows new construction homes to be sold a lower price points, making them more affordable to purchase.
That’s because the somewhat lower purchase price of a new home in the MSD does not include many up front costs of the community’s infrastructure and services. However, there’s no free lunch. Future homeowners will gradually repay those costs — the bond debt service — in the form of property taxes, usually over a period of 20 years.
The ability of taxpayers in the MSD to repay their debt service is directly affected by the number of homes sold in the community, and the pace at which those homes are sold. If all goes as planned, and the development reaches complete build-out on schedule, taxes remain manageable. But if the economy slumps and construction slows down or comes to a halt, homeowners can be faced with steep tax increases.
According to Colorado’s Department of Local Affairs (DOLA), a small number of MSDs (12 out of 875) failed to meet build-out goals in the state’s deep recession of the 1980s, resulting in large tax increases for homeowners in those MSDs. (See references)
Therefore, Colorado state law requires a prominent disclosure of the existence and nature of any Special Districts applicable to real property, as well as the possible financial risk of substantial future tax increases.
The Three Layers of planned communities
It must be recognized that most newly developed common interest communities (including The Independence community) may consist of up to three distinct layers.
Layer #1. The physical aspect of the common interest community, which, by definition, includes at least one portion of property that is either owned or maintained in common. In industry jargon, this is the “built environment.”
The “commons” could include shared infrastructure of a multifamily building, private roads and amenities of a master planned community, or, as is the case for the majority of small common interest communities, a single storm water ditch or pond, plus an entry monument.
At Independence, according to tentative plans, the community will consist of about 900 homes, with related infrastructure, and a system of trails and community parks, all of which will be open to the public.
Layer #2. The restrictive covenants (CC&Rs) that are imposed upon individual property owners, and that “run with the land,” meaning that these rules pass on to each new owner when the property is sold, until such time that they officially expire or are dissolved by a supermajority vote of affected homeowners.
It is this invisible layer of communities that is considered to be a mutual contract, agreed upon by owners and residents. CC&Rs or Declarations are also often the source of restrictions imposed by landowners and developers upon private property rights and individual liberties.
It should be noted that CC&Rs, commonly referred to as the “rules” of the community, can and do sometimes exist without the establishment of a governing body (HOA) to enforce those rules. When that is the case, individual property owners have the right to enforce CC&Rs against any of their neighbors by legal action through local civil courts. Essentially, disagreements over compliance with restrictive covenants are contract disputes.
Layer #3. The governance body of common interest communities, which often includes private entities such as homeowners’, condominium, or cooperative associations (collectively, I will refer to these as “HOAs”), but may also include public entities such as Special Tax districts.
At Independence, according to several news releases, Craft Companies LLC plans to establish a Metropolitan Services District to govern the new community.
Will there be CC&Rs at Independence? Will there be an HOA in the future?
Below are two screen shots from the current website for Independence in Elbert County. The PLAN page says there will be CC&Rs and an HOA, for the purposes of enforcing consistent building standards, although the page also says that the PLAN is subject to change.
According to public records, Independence may include some zero-lot line patio homes with maintenance provided. It’s hard to imagine providing maintenance services without an HOA, at least for maintenance-provided properties.
Remember, if homes and lots are subject to one or more sets of Declarations or CC&Rs, the governing documents could allow for the establishment of an HOA in the future. (See previous IAC articles on “phantom HOAs” here and here.)
So, until Tim Craft solidifies his plan and clarifies his future intentions, in writing, the answer to both of the above questions is “maybe.” Hopefully, there really won’t be an HOA, giving housing consumers the option to avoid the increasingly unpopular association-governed community.
Any buyer of property in a new home community must carefully read any CC&Rs that will apply to the property. And it’s a good idea to consult a trusted real estate attorney, representing the buyer’s interests, to explain any complex, vague, or confusing language of the CC&Rs.
Could replacing HOAs with special districts help Denver’s housing affordability? (Subscription only)
State of Colorado information booklet about Special Districts