A struggling housing development project in Bel Aire, Kansas, provides a prime example of how a rapidly changing economic environment requires local governments to find flexible financing solutions. Bel Aire used the Community Improvement Districts Act (CID Act) as an innovative financing tool in order to resolve a housing development issue. Although the CID Act is intended more for economic development that is related to retail and commercial uses, the city used it to successfully revitalize a failed residential subdivision.

The dilemma began in 2007 when an experienced developer planned a 60-acre upscale housing community in Bel Aire, for homes ranging in price from $450,000 to $800,000. The city accepted the petitions for installation of infrastructure and issued a temporary note to cover the cost of installing streets, water lines, sewer lines, and storm drainage.

The developer built 10 upscale model homes on the site and was able to sell several of them relatively quickly. In 2008, the “housing bubble” burst and residential development slowed to a halt as the recession hit Kansas. The developer struggled to keep the project moving, but was eventually forced to claim bankruptcy and walk away.

The few remaining unsold homes and the remaining residential lots reverted to the ownership of an out-of-state bank.

Special Assessments

In 2011, Bel Aire issued a general obligation bond to refund the temporary note that was issued in 2008. In Kansas, special assessments are used where the cost of infrastructure is spread to a benefit district in accordance with state law and paid by the homeowner over a period of 20 years. The bank, however, owned 57 lots and chose not to pay the special assessments or property taxes on any of them. (Note: The authors recognize that special assessments and related legislation are handled differently in various states and that this example may not be relevant to all states and readers.)

The bank understood that Kansas law allows a property to accrue three years of back taxes and special assessments before such property is eligible to be sold at a sheriff’s sale. So, while the bank held the lots in limbo for three years incurring no cost, Bel Aire was responsible for repaying the debt service payments on the bond, yet receiving no revenue from the special assessments. The total special assessments on the bank-owned lots amounted to $150,000 per year.

The city was in a no-win situation. Not only were taxpayers having to cover the special assessment payments for at least three years, the city was also losing out on the revenue from the general property taxes for that same time period. In all likelihood, at the end of the three-year period, Bel Aire would end up purchasing the lots at the sheriff’s sale and taking possession of the property in order to protect its investment.

Stakeholder Meetings

In 2012, a successful developer contacted the manager’s office seeking assistance in acquiring the lots and dealing with the special assessments. Staff held meetings with the bank and the developer, both jointly and separately, to determine what each party needed from the other to allow this developer to move forward with construction.

The bank agreed to sell the lots to the developer for the value of the outstanding real property taxes and special assessments in order to validly transfer the lots.

The developer could not turn the project into a successful development if such a significant portion of cash was tied up in paying the annual special assessments.With the existing special assessment law, there was no flexibility to delay or reduce the payments.

Manager Lasher began with the premise that Bel Aire might be open to covering costs of the special assessments.

Councilmembers were open to the idea, but needed to know how these costs would be recovered. The developer agreed that the pace of development would be increased without the burden of the special assessment payments for the initial two years of the development.

Working with the idea that the special assessments would need to be initially absorbed by Bel Aire as a cost of development, Attorney Brown began to look for a secondary means of spreading these costs to the benefitting lots. It was determined the best tool to make this happen was to overlay a secondary special assessment on the benefitting lots through a community improvement district (CID).

Such an assessment would extend the period of time for paying the original special assessments. They would eventually be paid for by the owner(s) of these lots so that Bel Aire would receive reimbursement for initially covering some of the special assessment payments.

The Kansas Legislature approved the Community Improvement District Act in 2009 under K.S.A 12-6a26 et seq. The CID Act is generally recognized as authorizing local governments to create CIDs for the purpose of imposing and collecting a community improvement district sales tax on retail sales. Other states have enacted similar legislation to help spur economic growth coming out of the Great Recession. As the Bel Aire case study illustrates, local governments may have additional options to use CIDs as an innovative financial tool.

Prior to the property being sold to the developers, the bank petitioned for creation of the CID, and Bel Aire accepted the petition. The CID process was streamlined since it was created at the beginning of the process and the land was still held by a single owner.

The Solution

Clearly, the sale of the lots to the new developers would directly benefit Bel Aire, as the sale would result in the unpaid special assessments being brought up-to-date, as well as the payment of the outstanding back taxes. Bel Aire, however, also needed some reassurance that its two-year investment in this development would eventually be repaid.

As the special assessments had initially been spread in 2011, by state law the actual owners of the lots would automatically be responsible for the payment of those assessments. Bel Aire and the developers decided that the best approach for paying the special assessments for the 2014 and 2015 tax years was for the developer to pay both these assessments and real estate taxes when billed by the county.

The developer would then provide Bel Aire with a receipt showing the special assessments had been paid, verifiable through the county’s online tax information system. In turn, Bel Aire would reimburse the amount of the special assessments that had been paid.

Based on the possibility that a subsequent purchaser of a lot would choose not to seek the initial two-year reimbursement or would pre-pay its special assessments, it was important not to assess the CID special assessment upon all lots equally. Assistant Manager Meyer will be responsible for tracking the amount of reimbursement provided to each lot over the two-year period.

This approach meant that only those special assessments actually advanced by the city would be spread through the CID assessment process to the benefiting lots. The innovative use of the CID Act allowed every participant in the process to achieve some level of success.

The bank was able to sell all of the lots that it had been holding without putting further investment into the properties, thereby avoiding the negative ramification of having the county foreclose on the property.

The developers who purchased the lots were able to invest more cash into constructing model homes as they were able to avoid incurring the carrying cost of special assessments, which meant that construction began immediately and added a vibrant and exciting new development to the community.

Bel Aire was paid for delinquent special assessments associated with the lots that had been unpaid prior to 2013, as well as the delinquent real estate taxes. Both the city and the community benefitted because a previously failed development was rejuvenated.

The homes currently being constructed will add to the city’s tax base, as well as residential valuation in the future. Finally, the burden of the city paying special assessments for the failed development has been eliminated.

While it will take two years longer than what was anticipated in 2008 to receive total payment for the infrastructure improvements provided for the home lots, for Bel Aire it is encouraging to know that eventually the special assessments will be paid by the lot owners. We consider these successful results.