American-tax-double-HOA

Passing the buck: development tax districts, HOA fees make housing unaffordable

Two recent investigative reports — one in Colorado and the other in Texas — shed light on a growing financial hardship for U.S. homeowners: developer-controlled special development tax districts.

By Deborah Goonan, Independent American Communities

On IAC, you can read thousands of posts documenting widespread dysfunction in HOA-governed common interest communities. But IAC also been follows reports of development districts set up to pay for infrastructure in new residential and mixed use planned communities.

More often than not, these special tax districts operate under the control of a developer, with little transparency and limited state regulation.

Note: Development districts are local units of government that provide infrastructure and services for planned communities. States refer to these districts by many different names: in Colorado, Municipal Districts; in Texas, Municipal Utility Districts or MUDs, and in Florida, Community Development Districts (CDDs).

Here’s a brief explanation of Development Districts.

How Development Districts work

The plan

A real estate developer approaches the local government — usually a County — to seek approval for a new planned community on unincorporated land.

The County follows its usual land development process and grants development approval. But it also requires the developer to finance and build all the community’s necessary infrastructure first.

The County usually won’t spend a dime of current taxpayer dollars on infrastructure for a new planned community. But it will certainly collect property taxes on all new homes.

The local government’s goal is to ensure that future homeowners repay the upfront cost of building their new community infrastructure and amenities.

The developer makes plans to build the new community’s infrastructure. That typically includes things like roads and street lights, storm water management structures, utility lines (water, sewer, electric,gas, telecommunications, etc.). If community plans include recreational amenities, such as a swimming pool or walking trails, the developer will build and finance those perks, too.

Instead of investing its own money, then including upfront construction costs in the future sale price of each home, the developer decides to set up a special tax district.

 

Creation of the development district

To create a new taxing district, the developer files a request with the County to create one. Under the ruse of a democratic process, the County requires landowners on the future development site to vote in favor of the new District.

The land parcel to be developed is mostly vacant. So the only landowners are the developer, his family members, and co-investors. They vote in favor of the new development District.

The developer then appoints the District’s board of supervisors. It typically includes the landowners who just voted to create the District. The developer-controlled District board then votes on how much bond debt to incur. Generally, it’s tens of millions of dollars.

The District sells most of its bonds to investors, usually banks. However, the developer may also buy back some of its own bonds, with maturity dates 20 or more years in the future, often at very high interest rates.

Payback

The developer sells lots and homes to buyers. Each new homeowner is obligated to pay back the bond debts.

Homeowners pay regular property taxes to the County and School District. But they also pay taxes to their Special Development Tax District.

Most planned communities are also HOA-governed, so homeowners must also pay HOA assessments and fees in addition to their property taxes.

Annual tax increases for Development Districts and HOA fees depend on how quickly a developer is able to sell homes in the planned community.

The total of bond debt and HOA operational costs — plus a reserve fund — is divided among homeowners in the community. The smaller the number of homes sold, the higher the potential annual cost to each homeowner.

A developer or his allies usually continue to control the Development District until a sufficient number of homes are sold.

At some point, registered voters can opt to run for a seat on the Development District. But it can be quite challenging to unseat board incumbents tied to the developer.

 

Who benefits?

Over the next two or three decades, bondholders reap the benefits of their upfront investment. They earn substantial interest on their bonds, which are repaid, with interest, by homeowners in the District.

Developer-acquired bonds are scheduled for full repayment close to the end of the construction phase. If and when that happens, it’s a huge payday for the developer, potentially offsetting much of its upfront investment in the planned community.

 

Homeowner risks

If the District finds it cannot repay its bond debt on time and in full, its board of supervisors is usually required to refinance its remaining debt. The District must insure that all bondholders are repaid.

Refinancing usually results in even higher taxes for homeowners.

Homeowners are compelled to pay ever increasing taxes to their Development District(s). Unpaid taxes are subject to property liens and tax sale foreclosures.

 

Unaffordable housing

More often than not, the owner of a home in a common interest community pays relatively high taxes.

But those tax dollars don’t just pay for community infrastructure and amenities.

Homeowners are, in effect, paying a bond interest premium to further enrich the developer and financiers of their planned community.

In the past two decades, taxpayers have also been saddled with high property taxes for bloated municipal pensions and administratively top-heavy school districts.

While state laws can limit local government’s ability to raise taxes — perhaps requiring voter approval — local governments have clearly devised a work around.

If you own a relatively new home, you’re more than likely part of a new taxing ponzi scheme: the addition of two layers of government — special development tax districts and homeowners associations.

In lieu of paying higher taxes to your city, you’re paying taxes to development districts and HOAs, mostly to benefit developers, banks, and institutional investors.

Instead of paying taxes to one municipal government, you’re paying two, three or more governments or quasi-governments.

In short, contrary to standard political spin about saving money for taxpayers, common interest development makes housing far less affordable.

Bottom line:

Common interest development significantly increases the cost of homeownership.

In fact, according to a recent investigative report in the Denver Post, homes in Municipal Districts and HOA-governed communities come with 20-40% higher property taxes than comparable homes in non-metro, non-HOA neighborhood districts.

A home in a non-metro district neighborhood* in Johnstown, a mile northeast of a similarly valued home in the Thompson River Ranch neighborhood, which is in a metro district, have significantly different property tax bills. Property taxes for the metro district home were more than 40% higher in 2019, and 20% higher when HOA dues were included for the non-metro district home.

It’s further evidence of the need to avoid developer-controlled communities, especially large scale developments. ♦

 

For more details, see the following source articles:

Colorado metro districts and developers create billions in debt, leaving homeowners with soaring tax billsDistricts were created as answer to TABOR, give developers enormous power
By DAVID MIGOYA | dmigoya@denverpost.com | The Denver Post
PUBLISHED: December 5, 2019 at 6:00 am | UPDATED: December 5, 2019 at 6:07 am

MUD taxes can remain higher than city rates, officials say (Texas)
By Brian Perdue, Community Impact | 11:04 AM Oct. 26, 2019 CDT ♦♦