Commerce city, debt, Featured, Land Use, Local, Politics, Taxes, Uncategorized

Leonard: How to rein in abuse of metro districts in Colorado

“I would hire another manager,” a Burger King franchisee told me when I asked what else he could do with the additional property tax he would have to pay to one of Colorado’s many special taxing districts.

He didn’t have any negative doubts about the district and its functions; he was just frustrated about not knowing if he would be getting value for the tax payments that never seemed to end.

In my experience of evaluating and financially analyzing such districts for clients and municipalities, many businesses have this same general feeling.

Most districts – created by cities and counties to allow developers to bond for infrastructure using future taxpayers dollars for payment – are properly planned, transparent, and only seek tax revenues to pay off necessary bonds. The development may have had enormous grading problems, contaminated ground, huge drainage problems, or needed fancy amenities. The bonds issued to fund these challenges are paid back only by the residing homeowners and businesses, so new development “pays its own way.”

But, like anything else in life, the 80/20 rule has some districts pushing the envelope and giving everyone else a bad rap.

When I evaluated a new site for a Burger King restaurant a few years ago in Commerce City near a competitor,  I found out that the North Range Metropolitan District was imposing 88 mills on the land in addition to 27 mills from another district, the Commerce City North Infrastructure General Improvement District. I brought to the franchisee’s attention that his competitor was paying $56,000 a year to quasi-municipal districts. That’s over and above the $50,000 being paid for schools, fire, water and sewer, libraries, and the city and county. At 218 mills, the property taxes were consuming 21.8% of the assessed value of that business!

This was a payment his Burger King operation could not afford so he passed on the site.

Why aren’t more retailers and businesses pushing back on the metro district boards to lower their property tax levies? Most metro districts have small developer-controlled boards and, with a little financial analysis, they can determine that the property tax they control can be lowered as the development builds out and the tax revenues increase.

And why don’t city councils, who approve the formation of these districts, exercise a little more oversight and cap these districts’ ability to shoot for the moon with such high mill levies?

The same applies to their review of the districts’ annual report. Cities should run a few numbers to see if what could have been disposable income spent in their city, is instead paying high-interest rate bonds, stuffed in a bank, or profited by developers.

The problem, as always, is the very human tendency to find and exploit a loophole to enrich oneself at the expense of another. Some attorneys and developers can’t help but bend the definition of “public improvements” to mean the private parking lots in front of the big box retailer that they would like to “incentivize” on the backs of the other taxpaying district members.

Some town and city councils can’t help but pass off their obligations for essential public infrastructure so they can spend more on non-essential items.

Council members breeze over boring financial statements and their staff rarely run any numbers to see what the developer is spending taxpayer money on. And when the cat is away, mice play. Bond underwriters, bond legal counsel, special district attorneys, bond holders, contractors, and accountants are all interested in receiving the money from just one source: the new taxpayers who had no voice in the new taxes save their “yes or no” to buy land in the district.

While the cost of these new high taxes can weigh heavily on the homeowner, the real killer is what these high taxes do to the value of the operating business. For example, $56,000 of additional district taxes for a new Burger King means $56,000 less in its net operating income. When that business is valued (to sell or borrow against), the investor can only value the income at a preferred rate of return. If that investor wants a rate of return of 6%, then that loss of $56,000 of income just cost that business owner $933,000 in lost business value!

If more business owners understood this, they would get their pitchforks and demand that district boards review their tax rates every year, and keep bond payments as low as possible. They would also object to any funds spent on public infrastructure projects that only benefit one taxpayer at the cost of the others.

The abuse of metro districts, and their siblings, Business Improvement Districts (BIDs), has escalated substantially in the past 10 years and it’s now adding to the problem of affordable  housing and higher prices for goods and services by businesses.

This doesn’t need a legislative fix – it just requires council members to exercise meaningful oversight before creating new districts. Retailers need to say ”no” to handouts. Landowners must hold their district boards accountable.  And developers and their attorneys need to get their hands out of someone else’s cookie jar.

Tim Leonard has been in the commercial real estate business in Denver metro for 35 years. He was a founding member of a downtown development authority and a board member of a large metropolitan district.

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