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Comparison of Improvement Districts and Community Facilities Districts
November 2nd, 2004
Many times throughout the year we are asked by developers and homebuilders to explain the difference between a County and/or Municipal Improvement District (collectively "ID") with that of a Community Facilities District ("CFD"). As such, we have prepared the following abbreviated analysis which attempts to identify some major differences between the two types of financing vehicles.
|
Description |
Improvement District |
Community Facilities District |
Formation of the District |
May be formed in a County, or an incorporated City or Town. |
May be formed in an incorporated City or Town only. |
|
On-Going Administration |
|
CFD Board The Board is usually the City/Town Council however, if a CFD is in excess of 600 acres, the CFD Board may be independent from that of the City/Town Council. |
|
County and/or City/Town Potential Financial Liability? |
Yes, there is potential liability of the Countys and/or City/Towns General Fund in the event of default. |
No, a CFD is a separate political subdivision from that of the City/Town and as such there is no risk of financial liability. |
|
Eligible Public Improvements |
Roadways, water, sewer, streetlights, parking facilities. |
Roadways, water, sewer, drainage, pedestrian ways, pedestrian malls, landscaping, lighting systems, traffic control, public buildings and sites, schools and sites, parks and sites, public recreational facilities. |
|
Public Bidding Required? |
Yes, all public improvements to be funded through the ID must be publicly bid pursuant to Arizona Revised Statue Title 34 and the jurisdictions public procurement procedures. |
Yes, all public improvements to be funded through the CFD must be publicly bid pursuant to Arizona Revised Statue Title 34. |
|
Bidding of Professional Services (Including engineering) |
In some jurisdictions, professional services are required to be publicly bid. |
Professional services are not required to be publicly bid. |
|
Description |
Improvement District |
Community Facilities District |
|
Construction of Public Infrastructure |
Typically, the District constructs the public improvements however, in some instances the Developer may construct the improvements. |
The developer and/or the CFD may construct the public infrastructure. |
|
|
Yes, however the process is more problematic than under the CFD structure. |
Yes, the developer may construct improvements and have the CFD acquire the improvements. |
|
Types of Bonds Available for Financing |
Special assessment bonds only. |
Special assessment bonds, general obligation bonds, revenue bonds or a combination thereof. |
|
Bond Obligation Passed On To End Users of the Property? |
Perhaps. Given the potential liability of the public entity (e.g. County/City/Town) many jurisdictions require that assessment liens be paid off at the time the property is sold to an end user of the property. |
Yes. |
|
Tax Exempt Interest Rate |
Generally, lower than a CFD given the fact that the County and or a City/Town are backing the bonds in case of default. |
Generally, higher that an ID. |
|
Flexibility For Developer? |
Limited flexibility due the statute driven nature of the financing vehicle |
Much more flexibility is granted the developer because of the powers granted to the CFD. |
For illustrative purposes we have shown a comparison of the use of an ID and a CFD to finance $5,000,000 for the construction of public improvements and related costs. The terms shown below are fairly typical given the two financing vehicles. For purposes of this analysis we have assumed that the CFD will issue special assessment bonds only.
|
Description |
Improvement District |
Community Facilities District |
|
Approximate Interest Rate of Bonds |
6.00% special assessment |
7.50% special assessment |
|
Term of Bonds |
10 years |
25 years. |
|
Yearly |
$679,340 |
$448,553 |
While it is our opinion that the CFD is the better of the two financing vehicles due to the flexibility allowed by the CFD; the use of ID financing is preferable over conventional bank financing given the tax exempt interest rate and the longer pay back period. Please note that this presentation is not intended to be an all inclusive discussion of the topic and we urge anyone considering the use of such a financing to seek professional advice.
Mr. Froelich is the Managing Member of the Development Planning & Financing Group with offices in Phoenix, AZ and Orange County,
