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Master Planned Community And Land Development Financing Strategies
November 1st, 2004
Over the past decade the burdens placed upon the development community by municipalities to provide costly amounts of public infrastructure as a condition of development have been rising and these demands are expected to escalate in the future. The pressure applied upon developers not only drives up construction costs, but it also increases the financial exposure of the developers. As a result, developers are urged to prepare a comprehensive public infrastructure financing strategy related to their project which will offset some of the conditions being placed upon development.
While the financing strategy related to a specific real estate development project will vary based upon project size, location, and land uses; the common elements the strategy may address include the following:
Land Secured Financing
The developer should have the ability to utilize land secured financing vehicles including Community Facilities Districts (CFD), Municipal and/or County Improvement Districts (ID). These financing vehicles allow the developer to issue bonds at tax exempt interest rates for the construction of public improvements. Typically, the obligation to repay the bonds is passed on to the end users of the project and are amortized over a 10 to 25 year period depending upon the type of taxing district utilized.
Other important elements to be addressed within the land secured financing component of the financing strategy include, but are not necessarily limited to, the following: eligible public improvement costs, benefiting land areas, eligible bond types (in the case of a CFD), public bidding process, construction management, assessment methodologies, appraisal methodologies, lien-to-value criteria, special assessment lien prepayment formulas, development fee credits, selection of bond underwriters and bond transfer restrictions.
Allocation of Costs To Benefiting Land Owners
Many times the construction of public improvements related to a large project benefit other surrounding land owners at the expense of the developer. It is in best interest of the developer to include specific language within its development agreement with the municipality to allow for benefiting land owners to be charged their fair share allocation of the costs of the public improvements for which they have received benefit as-soon-as-possible in the development process. This may be done through inclusion of the benefiting land owners within the boundaries of the land secured taxing district (e.g. CFD and/or ID) or through the establishment of a reimbursement district related to these benefiting land areas. In the case of the reimbursement district, an objective event should be established for the payment of the benefiting land owners fair share costs. For example, we typically, suggest that upon the recordation of a final plat map by a benefiting land owner, the full amount of the fair share cost allocation obligation be due and payable to the developer.
Excess Capacity
If a project is required to construct public improvements which are in excess of its demand requirements, such excess capacity should be provided at the cost of the municipality with reimbursement for the related construction to be paid by benefiting land owners to the municipality. If this option proves unfeasible, such excess costs should be included in the benefiting land owners fair share cost allocation subject to repayment through a land secured taxing district and/or a reimbursement district.
Development Fees
The financing strategy should address the topic of development fees from the stand point of what development fees the project will be subject and to what degree development fees may be revised over time. Additionally, the strategy should address the issue of how development fee credits are generated; an objective formula or method of calculating development fee credits, and which parties will receive the benefit of such development fee credits (e.g. land developer and/or home builders). This topic will be become increasingly important in Arizona as development fees increase and as the potential to transfer and/or sell development fee credits becomes more refined.
With proper planning and the inclusion of a comprehensive financing plan within annexation and/or development agreements with municipalities, the development community may offset the increasingly burdensome conditions which are being placed upon development.
Carter T. Froelich is the Managing Member of the Development Planning & Financing Group's (DPFG) Arizona office. DPFG has offices in Phoenix, AZ, San Juan Capistrano, CA and Sacramento, CA has assisted developers and home builders in the financing of over $3 billion public improvements over the last 15 years. Mr. Froelich may be reached at 602-381-3226 or via email at www.carter.froelich@dpfg.com
