LELAND — Special Assessment Districts are a rare development strategy, used only three times since the state created them ten years ago. The one proposed in Brunswick Forest is by far the largest and most expensive and residents have been asking: how will it work?
In a traditional development project, developers agree to fund infrastructure improvements. Those costs may be factored into housing prices, but there can be years between infrastructure work and selling a housing unit — time that puts a developer at financial risk.
In a Special Assessment District (SAD), the developer is either compensated up front, or assured of reimbursement afterward, by adding annual payments from the property tax on future residents of the district.
Historically, all of the previous SAD projects have used revenue bonds, loans from an outside investor made to the town, city, or county. In short, a SAD shifts infrastructure cost from a developer to future homeowners, and a revenue bond shifts the financial risk from the developer to the city or county, with those jurisdictions essentially acting as a cosigner to the debt.
RELATED: Build now, property owners pay later: Brunswick Forest’s Special Assessment District
However, the SAD does not legally require a revenue bond and developers could also use their own capital to fund improvements with the assurance that future homeowners would pay them back.
Leland’s SAD
According to Gary Vidmar, Leland’s economic and community development director, a SAD is not so different from traditional development. Vidmar pointed out that, traditionally, homeowners pay up front for the groundwork done by developers as part of their closing cost.
In Leland’s SAD, property owners would also pay those costs, but spread out over a 25-year period, Vidmar said.
The SAD process also involves community input; SADs can only be established if over 66 percent of the owners – or owners representing 66 percent of all property – in a community agree to be assessed.
In Brunswick Forest’s case, that’s a moot point: the 1,643-acres proposed to be assessed was petitioned by the developer Funston Land and Timber, LLC, which owns the entire plot of land.
(Read Port City Daily’s introduction to Brunswick Forest’s Special Assessment District in part one —Developers build now, property owners pay later: Brunswick Forest’s Special Assessment District)
SADs in the state
Introduced to the state legislature in 2008, SADs have a sunset clause; the option to establish a SAD expires in 2020.
To date, only three SADs have since been established. All involve revenue bonds, taken out by jurisdictions seeking the SAD in partnership with a developer.
The first was in Hillsborough in 2013, when the developer of a $300 million, 313-acre mixed-use project established a SAD secured by a $4.63 million bond. Using the SAD, roads and a community park in the Waterstone Development have been financed by a revenue bond, issued by the town of Hillsborough.
The town of Mooresville established its own SAD in 2015, through a $9.8 million revenue bond, backed by the town. The Langtree Lake Norman mixed-use development was the benefactor, receiving financing to build streets, electrical systems, water and sewer and more.
A year later in 2016, Richmond County approved issuing a $2.7 million revenue bond. The bond is being used to reconstitute flood-control mechanisms and improve property values around Ledbetter Lake, according to a North Carolina Local Government Commission agreement.
According to Vidmar and Leland’s assistant town manager, Niel Brooks, attorneys representing both the town and the developer previously worked on establishing the aforementioned SADs in North Carolina.
However, both Vidmar and Brooks were unfamiliar with SADs until it was pitched by Brunswick Forest’s developer, Jeff Earp, earlier this year.
Assessments, construction, and bonds
If Leland were to pursue a $15.9 million revenue bond, as proposed, it would establish the most costly SAD in the state. But according to Vidmar, issuing a revenue bond to cover the cost of improvements may not happen.
“There’s not a requirement for a bond to be issued,” Vidmar said.
After the SAD is established, Brunswick Forest’s developer will begin infrastructure improvements on his own financial accord, according to Vidmar.
The developer’s initial improvements will be reimbursed at a later date through assessments paid by property owners, regardless of whether a revenue bond is issued or not.
“Bonds would only be issued when there is sufficient assessment revenue to make the bond payments,” Vidmar said. “The town would not put itself at risk to issue bonds without a guarantee for repayment from the assessments.”
Whether the town decides to cosign on the funds or not, the developer still gets paid back.
In a SAD, assessments are levied against individual parcels rather than individuals. In one sense, Leland is protected – although future property owners could be at risk – by a lien on the future parcels. In the event an owner fails to pay assessment fees, the town could obtain ownership of the property.
If a SAD is established, and only a small number of lots are sold, the developer would be responsible for covering assessments on land he still owns. This could act as an incentive to speed up a developer’s construction schedule.
“If there’s a bond in place that is paying him for those improvements, then he may accelerate the construction of those improvements,” Vidmar said.
Because a SAD operates differently than traditional financing, could construction quality be impacted on an accelerated schedule?
According to Vidmar, it shouldn’t be. “We’d still be inspecting the roads the same way we do under normal circumstances,” he said.
A market guarantee?
In order to ensure revenue is in place to back a bond, Brunswick Forest will have to sell lots in its proposed SAD. Those lots would have to be sold to owners that consent to be assessed over a 25-year period.
Vidmar said the average annual cost of assessments could range from $500 to $1,000, as quoted by the developer. That annual bill is subject to fluctuate over time.
“The statue allows you to build in inflationary increases over time so once you set the roll, there’s an opportunity to increase that roll over time for inflation up to a certain percentage,” Vidmar said. “That’s where the complexities come in.”
While the developer is guaranteed the cost of the total cost via assessments over time, it’s unclear whether the assessments would be split evenly among property owners.
Within Brunswick Forest’s already developed retirement community, there are townhomes and single-family homes for sale. Prices range from $250,000 to $950,000, according to Brunswick Forest Realty.
“I envision it based upon the size of the parcel, not the value of the house,” Vidmar said. “Because it’s a lot price upon which the assessment is based. The building on that lot is irrelevant.”
Without a marketplace study submitted by the developer, Vidmar said it’s difficult to speculate on how many lots will be assessed, or how quickly those lots would sell.
“I think we’re getting ahead of ourselves,” he said. “There will be more information forthcoming.”
Risk factor
So, who is at risk? Each party involved? In working through the proposed SAD, Vidmar is tasked with fielding questions from councilmembers unfamiliar with the idea, as well as from town staff and residents.
“What if the assessments are not sufficient to pay off the bond or pay off the improvements? Is the town at risk? Is the taxpayer at risk?” Vidmar asked. “I think the answer is that we would still require the developer to post a letter of credit or other types of guarantee that those improvements get paid for and completed.”
Brooks said that though a SAD is complex, it’s also cut and dry.
“Something like a SAD is very clear-cut because the cost of future improvements are squarely on the people that will be buying those houses,” Brooks said. “It’s not on the current taxpayers.”
“For a town like us it is an option that makes some sense,” he said.
Brunswick Forest Master Land Use Plan by Johanna Ferebee on Scribd
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