A multi national $20 Billion developer from Dallas Texas has proposed a metro district at the Federal Center development. Their counsel is one of the premier developer law firms who has led the way in creative ways to maximize developer control over resident metro districts and maximize developer profits.
Here is an evaluation of the proposed Service Plan – the charter which will create the district if adopted by Lakewood City Council. Also here is also an evaluation of the proposed resolution the developer asked GM to sign supporting the new metro district and creating an IGA to hook up with GM (Green Mountain Water and Sanitation Board).
Both the full Service Plan and the proposed pre IGA resolution with GM are attached below. References to the Service Plan are provided throughout the presentation.
“The Bend @ Lakewood Metropolitan District” (New metro district for the Federal Center project)
There are both good and bad parts to the proposed Service Plan. Keep in mind the Service Plan is the governing document – like a charter – which will define and create the metro district. It is not a constitution because it was not written by the people. It is a charter written by the developer’s attorney and approved by the city.
Virtually every metro district in Colorado is based on a template form that looks pretty much the same, but includes some variation related to the taxing and spending of resident money by the developer.
The BAD
1. There is no stated NEED for a metro district. Title 32 requires that the city SHALL deny the application if the developer doesn’t show there is a need for the district. As is true in most of their applications, the attorneys here simply say there is a need because there isn’t a metro district already. See Section I B.
Under this reasoning, there would have to be a metro district covering every square inch of Colorado. Of course that’s absurd. The fact that there IS NO metro district is not a reason to have a metro district. There is no NEED.
A NEED for metro districts can only be shown if the developer proves to the satisfaction of the city council that the developer can’t pay for the cost of the infrastructure in the traditional way – built into the cost of the developed lot.
In most of the rest of the country, before metro districts in Colorado and where metro districts don’t exist in Colorado, the developer makes his money and pays for the cost of the pipes in the ground by selling the developed lot to the builders.
The cost of the developed lot paid by the homebuilder to the developer and passed on to the homebuyer includes
- cost of the land paid by the developer,
- cost of the infrastructure paid by the developer (pipes in the ground and suits getting permits) and
- the profit to the developer – typically 15 – 30%.
If the money paid by the residents for the developed lot covers the cost of the infrastructure, then there is no NEED to create a new metro district for the purpose of paying for the cost of the infrastructure (through developer loans and bonds with two sets of interest and interest on interest).
Until the developer can show that the cost of the developed lot WILL NOT cover the cost of the infrastructure, then the city council SHALL, according to Title 32, deny the application for a metro district because there is no NEED for a metro district.
In Solterra, for example, there was no need for a metro district. Homeowners paid anywhere from $100,000 to $200,000 for the cost of the developed lot. That money covered the cost of the land, the cost of the infrastructure (pipes in the ground plus related expenses) and paid $75 million in profit. The profit equalled an 180% return instead of the industry average of 15 – 30%. The overpayment has been shown in all the metro districts where this analysis has been done. It appears from these studies that residents are being double billed for the cost of the infrastructure – paying once when they buy the home and again through metro district financing.
Recall as well that developers already have the money to develop. They get it from their own capital, investment partners or banks. They get it and spend it putting the pipes in the ground before ever issuing bond debt in metro districts to “pay back” their costs.
IN THIS CASE WE ARE DEALING WITH A MULTI NATIONAL $20 BILLION DEVELOPER WHO CLEARLY HAS THE CAPITAL TO FUND THE UPFRONT COST OF THE INFRASTRUCTURE AND RECOVER THAT COST THROUGH SALE OF THE DEVELOPED LOT – MUCH CHEAPER TO THE RESIDENTS THAN THROUGH METRO DISTRICT LOANS AND BONDS WITH TWO SETS OF INTEREST AND INTEREST ON INTEREST.
According to the financial plan attached to the Service Plan, the cost of the infrastructure is $33,741,000. The number of “multi-family” dwelling units is 2000. The cost of the infrastructure per unit is $16,850. That is well below the industry average cost of infrastructure at $30,000 – $40,000 per lot or unit. (This cost comes from the industry in their own publications).
$16,850 can easily be absorbed into the cost of the new home and will cost much less if paid through the cost of the home than with multiple loans and interest on interest through a metro district. Especially if it’s being paid for already through the cost of the developed lot.
UNLESS THE DEVELOPER CAN SHOW WITH VERIFIABLE DOCUMENTATION THAT THE COST OF THE NEW HOME COVERS:
- ONLY THE ACTUAL COST OF THE LAND AND
- A REASONABLE PROFIT (Industry range 15 – 30%)
- AND DOES NOT COVER THE COST OF THE INFRASTRUCTURE
There is no NEED. The application must be denied under Title 32.
This can be easily done with an affidavit – like a truth in lending disclosure –
- as to the cost for the land,
- cost of the infrastructure paid by the builder to the developer,
- total cost of the developed lot and
- amount of profit included in the cost for the developed lot.
- With reliable documentation for each number.
2. The size of the authorized Debt is 33% more than the cost of infrastructure. The authorized debt must be equal to the cost of the infrastructure – $33.7 million instead of $50 million.
Experience has shown developers will max out the debt that is authorized in the service plan and “spend” it with no independent accountability to the residents on what it’s spent for – especially where the costs are already paid for with the price of the developed lot. It’s like a credit card limit with no check and balance on how it’s being spent.
If they need more money, they can prove to the city why they need more money with a request to modify the Service Plan later on (with approval of the residents).
Note that the financial plan already shows potential profits for the developer built into the cost of the infrastructure (Exhibit D p. 2 of Service Plan):
- “Contingency Fee” of 15% ($4.4 million)
- Developer Fee of “5% of hard costs” ($750,000)
3. Interest allowed on cost of infrastructure
The Service Plan does not prohibit the developer from creating a “loan” to the residents to cover the “advances” he pays for the cost of the infrastructure and charging interest (profit) on the cost of the infrastructure until the developer is ready to cash out with a bond. This of course assumes his costs for the infrastructure weren’t already covered by the money he was paid for the developed lot.
In Solterra in 2017, the developer laughed at the residents saying they owed so much money just on the interest which accumulated on the unpaid infrastructure costs (0ver $59 million) that they should be happy paying another $30 million as “authorized” by the Service Plan.
3. Unlimited Mill Rate for Debt
Service Plans typically set a limit on the mill rate allowed to finance debt. The mill rate is how much you pay in taxes.
Section VI C is the description of the “limit” developers have used the past several years. It is a convoluted legal mish mash that essentially says there is no limit when the developer decides there is no limit. But it is written to make it sound like the limit is 5o mills.
This should be eliminated and replaced with one sentence: “The limit of the mill rate is ___. It may be increased by filing a request for a modification with sufficient financial data to justify the increase”.
A more reasonable limit is 35 mills instead of 50.
4. Unlimited Fees
The Service Plan states several times that there is no limit on the amount of fees that can be charged and that fees can be used to pay debt as well as operations and maintenance. See, for example Section V A (19), V A (1) and VI E.
This is a significant problem. Most current districts are upside down because the value of the homes is not generating enough tax revenue so developer controlled boards unilaterally increase fees on residents. Its often equivalent to another 35 mills in taxes.
Until the residents have 100% control of the boards, there should be no fees unless reviewed for necessity and fairness and approved by the city council.
5. Unlimited Mill Rate for Operations and Maintenance
There is no limit on the mill rate that may be imposed by the developer to pay for operations and maintenance costs. Most Service Plans have a total cap – including the operations and maintenance and debt and that total cap is typically 50 mills. Here the mill rate for operations and maintenance is unlimited. See VI I, last paragraph.
6. Interest Rate on Debt is 18%
Any interest rate for bond debt should be the current market rate. If the developer wants to increase it, they can get permission from the city council until the boards are 100% residents.
7. TABOR
The developer wants a TABOR election immediately, before any residents arrive. There is no need for a TABOR election until after the residents arrive and they are available to begin paying taxes.
Having a TABOR election before the residents arrive is purposefully designed to eliminate the right of future residents to ever vote on their own taxes or bond debt.
The ballot issues for developer TABOR elections expressly eliminate the right of the residents to vote by creating an enormous debt authority equivalent to a blank check by a vote of 1 – 8 developer employees and family. Creating this massive debt authority eliminates the right of residents to ever vote on issuing bond debt. Many districts are now having their own TABOR election once the residents take control of the boards, reversing the developer TABOR election.
Note that from the very beginning, the developer has an absolute conflict of interest with the residents because he is taxing and spending the residents money to then pay himself that same money. And the residents never have a say in their own taxing and spending until they get 100% control of the governing board. There is no check and balance, no accountability for public finance, as long as the developer dominates the decision making process of the board
In Solterra, 8 developer employees and family “voted” to impose a $4.9 billion debt authority and then for the next 12 years the developer issued bond debt on the residents without any vote, permission or even knowledge in most cases of the residents.
As explained in earlier material, the developer’s insistence on the city voting to approve a metro district in time for the November election cycle is wrong. An election to create a metro district can happen at any time. It is the TABOR election, which has nothing to do with creating a metro district under Title 32, that must be held generally in November.
Again, the only reason to have a TABOR election before the residents arrive is to deprive them of the right to participate in deciding how much debt they should take on to repay for infrastructure, assuming the developer can show it hasn’t already been paid.
8. “Other Qualifying Entity”
Here is where the attorneys get creative. They slip in two sentences in the TABOR section (VI H) that have nothing whatsoever to do with TABOR. It says that the district may create a separate entity to run the district. That is a very sly way of opening the door to an “authority” which this law firm champions. It is another way to do “master/servant” and make sure the developer keeps control of the residents’ purse strings.
The “authority” this firm uses under Title 29 creates a separate body to actually tax and spend. It is “created” by the board but separate from the board. The separate “authority” is then manipulated to remain developer controlled even after the residents take control of the board.
These two sentences about an “entity” should be eliminated. There is no provision that allows this under Title 32. There are several metro districts currently suffering under continued control of the developer through use of “authorities” even after the residents take control of the board.
8. Length of Debt – 40 years
The length of debt should be no greater than 20 years – similar to a mortgage. The longer the period, the greater the amount of interest, especially in metro districts where the schedule of payments frequently does not pay down any principal until much later.
9. Audits ONLY when debt is issued
Annual metro district audits must be done whether debt is issued or not. And the city should consider requiring audits more frequently during the construction phase. See Section VI J which requires audits “only” when debt is issued.
10. Incomprehensible “Disclosures”
The developers do their best to bury disclosures to residents in long oppressive legalese. Below is a simple alternative disclosure that will provide critical information to residents.
And the information should be provided
- at the point of initial contact with a sales person,
- again at the point a contract to purchase is signed,
- again during the mandatory disclosure period,
- and again at closing.
The language in Section IX about using “reasonable” efforts to convey the information is silly. It will never happen.
Here is the suggested disclosure. It has received support from real estate agents and mortgage brokers:
11. Filling Board Seats with Residents Immediately
The Service Plan fails to provide a mechanism for immediately getting residents on the boards when they are ready to serve. The only reason developers serve on the boards under Title 32 is because, generally, residents are not available to serve yet.
As soon as one or more residents express an interest in serving on the boards, they must be permitted to do so. The developers have no right to sit in those seats once residents are willing to serve.
The Service Plan must provide a mechanism,
- to inform residents whenever an agenda is published for a board meeting,
- that there are ___ board seats occupied by developer agents who have an absolute conflict of interest with the residents, (which is expressly disclosed by auditors in every metro district audit in the state . . . when they are filed)
- that if a resident is willing to serve on the board a developer agent will give up his seat to the resident, (the event of a resident being willing to serve creates a “vacancy”.)
- here is a copy of the self-nominating form to provide notice to the board of a resident’s willingness to serve and who to send it to.
Also, as written, the provision in Section X about filling vacancies does not provide enough information in the notice and should include the information above, particularly a copy of a self-nomination form and who to send it to.
12. Bond Debt Letter Fails to Require Key Information
- Before a bond is approved by the city, the developer must provide verifiable documentation that the infrastructure was not already paid for with the cost of the developed lot, including the amounts the
-
- developer paid for the land,
- developer paid for the infrastructure,
- residents paid for the developed lot and
- developer paid to himself in profit
- Identify precisely who will own the bond and after the bond is processed who finally holds the bond
- Identify precisely what the bond income will pay for and who will receive the principal and interest payments on the bond
13. Misrepresenting the Power of the City to Hold the Developer Accountable
In at least two sections of the Service Plan, the developer’s counsel declares that essentially the city has no power to hold the developer metro district accountable once it is created. See for example Section I A (1) and (25). That is misleading.
In fact, under Title 32, the legislature gives the city a blank check to regulate and restrict metro districts. The city could require daily reports during construction and require city approval for every expense. The city could grant approval conditionally until residents hold 100% of the board seats and reserve the power prohibit the developer from issuing any debt at all if the developer fails to comply with the city’s regulation in any way.
The city can write any limitation, oversight and accountability into a Service Plan they want to. Indeed a city council could establish that the city council will act as the district board until the board is fully occupied by residents.
THE GOOD
1. There is only one district. This is what Title 32 contemplates. The developer’s counsel is listening to the city council’s concern about multiple districts and the “master/servant” configuration that this counsel routinely uses in metro districts.
NOTE HOWEVER THE APPARENTLY CONTRARY REFERENCE TO AUTHORIZING “OTHER ENTITIES” TO RUN THE DISTRICT INSERTED IN THE TABOR SECTION VI H. THIS IS A POTENTIAL MANEUVER TO SET UP A VARIATION ON THE “MASTER/SERVANT” DISTRICT.
THOSE TWO SENTENCES IN SECTION VI H SHOULD BE ELIMINATED.
2. Bond debt must be approved first by the Executive Director of Finance for the city.
This provides a good independent check and balance on the need for bond debt. (Although I could not find any reference to there being an actual “Executive Director of Finance” for Lakewood. If there is such a person, this is potentially a good idea.)
Another better alternative would be to require that only the City Council can vote to authorize bond debt, acting as the representatives of future residents.
If NOT THE CITY COUNCIL, THERE SHOULD BE CLEAR CRITERIA SET FORTH BY THE CITY COUNCIL FOR THE EXECUTIVE DIRECTOR IN MAKING THE DECISION TO AUTHORIZE BOND DEBT, INCLUDING:
- WHAT HAPPENED TO THE MONEY PAID FOR THE DEVELOPED LOT. HOW DO WE KNOW THE RESIDENTS AREN’T PAYING TWICE FOR INFRASTRUCTURE (AND/OR SIGNIFICANTLY HIGHER PROFITS THAN INDUSTRY STANDARDS)
- WHO WILL OWN THE BOND. WHO WILL ULTIMATELY RECEIVE THE PAYMENTS OF PRINCIPAL AND INTEREST
- WHAT IS THE VERIFIABLE DOCUMENTATION FOR WHAT THE BOND MONEY WILL PAY FOR
- PROVIDE AN ANALYSIS SHOWING
- THE RESIDENTS’ PAYMENTS FOR INFRASTRUCTURE COSTS THROUGH METRO DISTRICT LOANS AND BOND DEBT
- WILL BE LESS
- THAN IF THE PAYMENTS FOR INFRASTRUCTURE COST WERE INCLUDED IN THE COST OF THE DEVELOPED LOT
- (ASSUMING THE INFRASTRUCTURE COST IS NOT ALREADY INCLUDED IN THE COST OF THE DEVELOPED LOT AND HOME).
GREEN MOUNTAIN WATER AND SANITATION DISTRICT
This proposed new metro district falls in the Green Mountain District. Under Title 32 there can’t be two districts providing the same service for the same area.
- Typically, the new proposed district will build the infrastructure for water and sewer.
- But Green Mountain will provide the service.
- In this way, there are not two districts providing the same service. There is no “overlap” and the two districts are not providing the same service (and charging the residents for the same service).
However, the developer is suggesting there is an “overlap” and
- now wants Green Mountain to “consent” to the creation of the new metro district.
- The developer also wants Green Mountain to agree to sign a new IGA to provide the service.
- Yet, the new development is already in Green Mountain’s district. An IGA is only necessary if the new development is OUTSIDE the district boundary.
Again, based upon past experience, it appears the developer’s law firm is being “creative”.
- The resolution they drafted for Green Mountain to sign does nothing for Green Mountain. There is no apparent benefit to Green Mountain. In other words, there is no reason for Green Mountain to sign it.
But the proposed resolution does help the developer by:
- Expressly stating that Green Mountain supports the creation of this new metro district – essentially having GM recommend to the city council that the new metro district should be approved, even though there are all kinds of reasons set forth above why the metro district should not be approved.
- Binding Green Mountain to provide service before they have had an opportunity to fully evaluate whether or not they have the capacity to provide service to 2000 new residents and a significant commercial operation.
There simply is no good reason why Green Mountain should bind itself when its not ready and approve creation of a metro district which is probably not a good idea for all the reasons set forth above.
NOTE THAT THE FINANCE PLAN IN THE SERVICE PLAN EXPRESSLY STATES THAT THE ESTIMATE FOR WATER AND SEWER INFRASTRUCTURE IS BASED UPON A HOOK UP TO GMWD AND: “If the developer is required to utilize an alternate water / sewer district, costs will increase”.
SO THE DEVELOPER ALREADY KNOWS THERE MAY NOT BE ENOUGH CAPACITY AND APPEAR TO ALREADY HAVE ALTERNATIVE SOURCES LINED UP. See Exhibit D p. 2 to the Service Plan.
Green Mountain has a process for providing water and sanitation service to developments in its district. There does not appear to be anything special about this proposed development that requires “special handling” and a special resolution and a special IGA.
And as a neighboring special district, pursuant to Title 32, GM has an opportunity to recommend or not recommend that Lakewood City Council approve a new metro district for this development. And if GM chooses to make a recommendation, as set forth above, there are reasons to support it and reasons to oppose it. And of course, GM may find other reasons to support or oppose as well.
Here is the full Service Plan and the GM proposed resolution prepared by the developer:
SERVICE PLAN_MAPS_EXHIBITS_PDF
Well laid out. This is just another example of overreach by the MD industry at taxpayer expense. It is essential that the government entities approving or denying metro districts have a better understanding of the long term effects.