News & Updates

2017 LEGISLATIVE EFFORT TO PROVIDE NECESSARY FUNDING FOR ARIZONA’S ECONOMIC DEVELOPMENT

Written by Carter Froelich for TRENDreport's February 2017 Issue

Tucson Real Estate + New Development

In 2016, a group of land owners, business owners and other interested parties, working with Arizona legislative leaders ran House Bill 2568 which attempted to revise Arizona’s community facilities district (“CFD”) statute.

The purpose of HB2568 was to create more certainty surrounding the use of this effective financing tool to allow Arizona to be more competitive with the states of California, Colorado, Florida and Texas. The aforementioned states use similar financing mechanisms to much greater advantage and success, allowing them to provide infrastructure in advance of growth to attract commerce, industry and economic development.

This point is illustrated in the table below that displays the amount of bonds issued by the states from 2000 to 2015.

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HB2568 was passed by the legislature, but was ultimately vetoed by Governor Ducey who indicate that he wanted more accountability and protections for tax payers.

While another year has passed, the need for infrastructure financing vehicles to fill the void created by the departure of commercial lending institutions that used to provide infrastructure financing prior to the great recession remains. Meanwhile, Arizona continues to fall further-and-further behind its competitive brethren in the infrastructure race. For example, in 2016 Colorado financed $1.5 billion in infrastructure through its Metro Districts while Arizona financed less than $10 million through its CFDs, a 14,900% difference!

Challenges with Arizona’s Current CFD Law and Practice

The reason Arizona lags behind other growth states in CFD financing stems from the reluctance of municipalities and counties to establish and administer the Districts. Unlike Texas’ municipal utility districts (“MUD”) Florida’s community development districts (“CDD”) or Colorado’s metropolitan districts (“Metro”) that are governed by the land owner and later elected residential boards and third party administrative firms; Arizona CFDs are governed by the jurisdictional governing board ex officio and the jurisdictional staff performs the administrative functions of the District. This is one of the reasons that it has been very challenging to persuade Arizona jurisdictions to allow CFDs. Typically, the jurisdictions either attempt to dissuade the development community from using CFDs or they use the CFD formation process as a means of exacting and extracting additional infrastructure commitments and concessions from the developer, thereby driving up the costs of the project.

To discourage the use of CFDs some municipalities in the major growth areas of metropolitan Phoenix require a $100,000 non-refundable CFD application fee and a $50,000 deposit prior to their acceptance of a developer’s CFD petition and application. Once the CFD application has been accepted, it is not uncommon for a jurisdiction to take up to two years (or more) to establish the district, making the CFD process cumbersome, frustrating, expensive and, above all, uncertain.

Lastly, once a CFD has been established, the CFD Board (e.g. jurisdictional governing board) often
finds itself involved in political and/or staff upheavals that hinder and delay the issuance of
bonds, again making the process burdensome, costly and uncertain. The result of the aforementioned
challenges is evident in the chart above.

New Year / New Bill

As the excess infrastructure capacity that was created during the last economic boom has been utilized and as the demand for finished lots, commercial and industrial sites is increasing, the need for a workable usable CFD statute is critical. Accordingly, a senate bill will be introduced
by the time this article is published that will attempt to make the use of CFDs more certain and efficient, while at the same time addressing Governor’s Ducey’s concerns of accountability and tax payer protection.

The major differences between this year’s effort and HB2568 pertain to governance of the CFD and jurisdictional limitation. With regarding to governance, HB2568 specified 2 members selected by jurisdictional governing body; 2 non-landowner members selected by landowners; 1 member selected by governing body from a list of non- landowners provided by landowners. The revised senate bill specifies 3 jurisdictional governing body elected officials; 2 landowners (e.g. jurisdiction is in control of the CFD). With regard to jurisdictional limitation, the senate bill does not allow the jurisdiction to increase infrastructure requirements above that what is needed for the project or allow the debt limit, tax rate or duration of the district beyond the limits set by the petitioners. Under HB 2568, there was no jurisdictional limitation.

It is anticipated that with the changes noted above that the development, construction and home building industries will finally have a functional, usable financing tool to fund infrastructure for new growth. The importance of CFDs (e.g. special districts) to fund growth-related infrastructure cannot be overstated. The National Association of Home Builder’s 2014 publication An Overview of Special Purpose Taxing Districts states that special districts are “A more efficient and effective way to fund public improvements in advance of growth, while at the same time ensuring that new growth pays for the improvements, is through the use of Special Districts.” The publication goes on to say that “More importantly, Special Districts provide a more efficient form of financing because infrastructure improvements can be delivered in advance of growth, are funded exclusively by property owners within the Special District, are secured by liens that ensure collection of the funds by the Special District, and often deliver higher- quality public improvements that might otherwise be economically feasible”. I couldn’t agree more.

Carter Froelich, CPA is the Managing Principal of the Southwest and Mountain Regions of the
Development Planning & Financing Group, Inc. and may be reached at carter.froelich@dpfg.com.