Articles
|
Publications
Special Taxing Districts - A Public/Private Development Tool for the New Millennium
By John R. Orrick Jr.
On April 11 2002, Montgomery County issued approximately $16 million in special revenue bonds to fund certain road, sewer and water, and public park improvements for the Woodcliffe Park communities being developed in West Germantown. These properties are included in a special taxing district called the "West Germantown Development District," which represents the second such taxing district created by Montgomery County since the enabling legislation to authorize the creation of such districts was implemented in 1994. Other counties throughout the State of Maryland have created such districts, including a related type of district known as a "tax increment" financing district, and more of these districts are currently pending throughout the State.
Residents of the homes located in the West Germantown Development District will see approximately an additional $300 to $1,000 of special taxes added to their real property tax bills each year, which special taxes will be used by the County to pay debt service on the revenue bonds. The special taxes will continue until the bonds are repaid in full, which may not occur until 2027.
What are special taxing districts, and why are they being used in Maryland? As was the case in California in the late-1970's when Proposition 13 was passed, which led to the creation of special taxing districts, called "Mello—Roos" districts, to fund roads, water and sewer systems and schools, local governments in Maryland are facing increasing funding issues in providing infrastructure to support growth. These districts represent a "public-private partnership" which can prove to be quite useful in addressing the funding concerns, while providing a means for directing growth to the desired locations.
Background Of Special Taxing/Tax Increment Financing Districts
In this era of Smart Growth, local jurisdictions are increasingly involved in directing the pattern of new real estate developments throughout our region. At the same time, pressures to reduce government spending and taxes have limited the transportation budgets of the local jurisdictions and have resulted in less new road and other public improvement construction. "Making development pay its own way" has become the mantra for local planning agencies and citizen action groups.
The problem we face is that most of the existing methodologies for requiring development to pay its own way for the needed public improvements, such as proffers, impact fees, and other developer contributions, are tied incrementally to the development schedule of the project. Furthermore, often private developers are not able to finance through banks and other conventional lending sources large up-front payments even if the local jurisdictions require them. The result is that the construction of the needed roadways, water and sewer facilities, and other public infrastructure needed to support the new developments, are often built in a piecemeal and haphazard fashion. If the particular development does not succeed financially, or if the developer is financially burdened by other projects, the ability of the local governmental jurisdiction to realize the developer contributions can be severely impeded. Finally, even if the local jurisdiction actually collects developer contributions, the political nature of approving budgets for transportation and other public infrastructure spending can delay the construction of the needed infrastructure and ultimately endanger the viability of the development project.
Tax increment financing districts and special taxing districts represent two related tools which are available in the State of Maryland to address this problem. Both of these tools involve the issuance of tax-exempt bonds by the local jurisdiction to finance the construction of roads, sewers, and other public infrastructure, which bonds are repaid through taxes imposed on the benefitted properties.
In the case of tax increment financing, the differential in the local real estate ad valorem property tax, as measured from a baseline established prior to commencement of the development and the actual tax receipts based on the property as improved, is the source for the repayment of the bonds.
In the case of special taxing districts, an additional tax is layered above the general real estate property tax to repay the bonds. Such tax may be in the form of an additional ad valorem tax, a special assessment tied to the benefit created, or a combination of the two. Further, these two methods of financing infrastructure can be combined to better allocate the benefits and burdens of the public/private financing tool.
Benefits Of Tax Districts
Tax increment financing and special taxing districts are a win/win/win situation for the local jurisdiction, developer, and ultimate purchaser of the benefitted development. The local jurisdiction is able to ensure that the infrastructure necessary to sustain growth in the community will be built when it is needed, and not tied to the individual developer's development schedule or financial condition.
Further, this financing tool is a carrot that can be used to attract development to a desired area. In the case of special taxing districts, the government is not giving up any tax revenues it would otherwise get, and in fact benefits in general real estate tax receipts through the increased valuation of the properties. In the case of tax increment financings, the local jurisdiction is still gaining improved properties and increased general property taxes on the benefitted properties over the long haul, which arguably would not have been the case absent the temporary diversion of the tax increment payments.
For the developer, a huge advantages is that the cost of constructing the public infrastructure is removed from the developer's balance sheet, which in turn reduces development costs and frees up capital resources. The developer is able to pass along the debt service obligation to the property owners as the property is improved. Further, the interest coupon on tax-exempt bonds is often much lower than the cost of capital through private banking institutions and private equity.
For the home buyer/property owner, the benefit generally includes a reduced purchase price for the real estate since the infrastructure development cost financed through the bonds is no longer incurred by the developer. The property owner will pay no additional property tax in the case of tax increment financing, or some additional tax in the case of special taxing districts, but such taxes are paid on an annual (or semi-annual) basis and are only incurred during the period of time that the property is owned by that purchaser. The special taxes are generally structured to be fully deductible on the homeowner's federal income tax return, thus lowering the cost even further.
PROCEDURES TO CREATE AND FUND TAX DISTRICTS
Both tax increment financing districts and special taxing districts require actions to be taken by the county or municipality where the proposed district is to be located to define the boundaries of the district and to authorize the issuance of municipal bonds to fund infrastructure improvements on behalf of the district.
Special taxing districts are authorized in ten counties throughout Maryland, or portions thereof: Anne Arundel, Calvert, Charles (commercial projects only), Frederick (specific election districts only), Garrett, Howard, Montgomery, Prince George's, Washington, and Wicomico Counties, and all municipalities within the State.
In order to institute a special taxing district, the owners of at least two-thirds (80% in Montgomery County) of the properties proposed to be included within the taxing district must file a petition with the legislative body of the local jurisdiction seeking the creation of such a district. A legislative body must then adopt by resolution (i) the designation of an area or areas as a special taxing district; (ii) the creation of a special fund with respect to the district into which these special taxes and assessments are to be deposited; and (iii) the authorization to provide for the levy of an ad valorem or special tax on all real and/or personal property within the special taxing district at a rate or amount designed to provide adequate revenues to pay the debt service on the bonds.
Tax increment financing districts are also created by the adoption of a resolution by the local legislative body of the county or municipality to create the district and to provide for the payment of a portion of the general ad valorem taxes into a special fund to be used to pay dept service. Tax increment financing districts can be created in any county or municipality located throughout the State.
In addition to the resolutions creating the districts and authorizing the payment of special taxes or increments of general ad valorem taxes into special funds, the County or municipality must adopt an ordinance or a resolution to authorize the issuance of bonds. In addition, additional resolutions may be necessary to include the public improvements within the capital budget and to address the jurisdiction's public procurement requirements.
Examples Of Tax Increment Financing And Special Taxing Districts In Maryland
In addition to the West Germantown Development District, several tax increment financing districts and special taxing districts have been created in the State of Maryland in recent years, and many others are under consideration at this time. The following represents a brief summary of certain of these districts which have been successfully created.
Frederick County - Tax Increment Financing District for Toys-R-Us
A tax increment financing district was created in 1995 to allow Toys-R-Us to finance roadwork, sewers and other infrastructure for a warehouse facility located in the Dudrow Business Park. Several million dollars in special obligation bonds were issued by Frederick County for this project.
Frederick County — Special Taxing District — Urbana Community Development Authority
In 1998, Frederick County issued $30 million in special obligation bonds to finance the construction and acquisition of road improvements to Rte. I-270 and certain state highway intersection and collector roads and the construction, establishment and extension of a water and sewer system to properties located within a special taxing district for several developments, which included residential, retail, and office uses.
Montgomery County — Special Taxing District for Kingsview Village Center
Montgomery County issued $2.4 million of tax-exempt bonds in 1999 to finance certain road improvements in connection with the establishment of the Kingsview Village retail shopping center and adjoining residential properties located in Germantown, Maryland.
Prince George's County — Special Taxing District for Woodview Village
Prince George's County approved the creation and funding of a special taxing district for a subdivision composed of 584 residential units in 1996 whereby $8 million of special obligation bonds were issued to finance road and utility improvements in addition to the contribution of a recreational facility and a monetary contribution for the design, construction and extension of improvements to public schools serving the district.
Anne Arundel County — Special Taxing District — Farmington Village Project
In 1998, Anne Arundel County approved the issuance of over $6 million of tax-exempt bonds to finance roadway, storm sewer and sanitary sewer facilities for a special taxing district formed on behalf of a residential subdivision of approximately 450 homes.
Anne Arundel County — Combined Tax Increment Financing District and Special Taxing District — Arundel Mills Project
Anne Arundel County approved in 1999 a combined special taxing district and tax increment finance district and the issuance of $28 million of special obligation bonds to fund the cost of interchange improvements on state highways, the construction of new roadway facilities, and water, sewer, and other public utility items for a regional mall to be built by the Mills Corporation. In this instance, the special taxes serve as a backup in the event that the revenues from the annual tax increment payments are insufficient to retire the bonds.
In addition, several special taxing/tax increment financing districts are currently pending in Montgomery, Anne Arundel and Frederick Counties, to name a few.
Conclusion
The debate over "Smart Growth" policies has been joined in the State of Maryland and elsewhere. One of the overriding themes in this debate is the role that the public sector must play to steer development towards socially desirable areas, and away from areas which require the construction and maintenance of roads and other public infrastructure in a sprawling, haphazard manner. The tax districts described in this article are both a financing vehicle and a land planning tool which can provide incentives to the development community for projects which address these public policy concerns.
Although the creation and funding of these districts can be a complex process, and is subject to some political uncertainties, they will become increasingly important weapons in the arsenals of governmental entities for directing growth in the future.
Jack Orrick is a partner in the law firm of Linowes and Blocher LLP, Silver Spring, Maryland, and is currently representing developers in several tax increment financing and special taxing districts located throughout the State of Maryland.
|
