The Effects of Failed/Bankrupt Subdivisions on Special Districts and How Districts can Help

THE EFFECTS OF FAILED/BANKRUPT SUBDIVISIONS ON SPECIAL DISTRICTS

AND HOW DISTRICTS CAN HELP

Mathew Mendisco, CliftonLarsonAllenBrent E. Butzin, Esq., White Bear Ankele Tanaka

& Waldron

The Presentation

We are telling the story of the revitalization project in Tollgate Crossing Metropolitan District No. 2.

Why? You as a District may find yourself in this situation, and our hope is that this presentation may act as a guide.

Table of Contents The history/back story of the project The tools you as a District will need to make

this happen in your District The pitfalls the District ran into, and how we

overcame them The policy issues that developed during the

process and how the District dealt with them The lessons we learned Questions

District Aerial

Revitalization Areas Aerial 2010

Overview of Tollgate Crossing Metropolitan District No. 2

Tollgate is located in Southeast Aurora just North of Southlands Mall

Created in 2001 Development started in early 2004 Middle class neighborhood Homeowner Board with very diverse

backgrounds

Overview of Tollgate Crossing Metropolitan District No. 2

In Cherry Creek Schools Homes are in the $250,000 to $400,000

range One primary developer with one primary

home builder (DR Horton), and a secondary home builder (New Town Builders)

The primary HOA (Tollgate Crossing Homeowners Association) is very active

HOA and the District cooperate on many projects

Overview of Tollgate Crossing Metropolitan District No. 2

The District owns and maintains all of the public infrastructure that was not dedicated to the City (Pool, Landscaping, Storm Drainage)

District budget is about $800,000 annually in general fund, with $16 million in outstanding Bond Debt

The Back Story 2007/2008 the housing bubble hit

Tollgate. In November 2008 the District passed a

resolution authorizing the imposition of fees on residential and vacant platted lots to supplement the general fund.

In February 2009 New Town Builders (secondary home builder) became delinquent.

The Back Story New Town tried to sell the land twice in

2009 but both deals fell through. In February 2010 the District initiated a

foreclosure on all of the New Town lots: 83 lots in Phase One, 127 lots in Phase Two.

During the foreclosure process two prospective buyers looked at the property but they backed out due to financial conditions and title issues.

The Back Story First Community Bank was the primary

holder of the loan on the property In 2011 First Community was taken over

by the FDIC. US Bank became the new holder of the

First Community Bank Assets

The Current Environment District was depleting its fund balance

due to loss of fee revenue District’s Assessed Valuation (AV)

dropped as a result of the economy and the delayed development

The District was wrapping up a construction defect (CDARA) action

Revitalization Area 2012

Revitalization Area 2012

Revitalization Area 2012

Revitalization Area 2012

What Were the Community’s Options?

Private Sector? Public-Private Partnership? Urban Renewal Authority – Blighted? Eminent Domain? Foreclosure?

Judicial Foreclosure Special District Fee Powers

Statutory Perpetual Lien Priority of District Lien

Wasson v Hogenson Superior to Private Encumbrances

Familiarity of Title Companies with District Liens: Rare for Districts to Actually Go Through with Foreclosure

Board Decision Making

The Bank will step up and pay off the District lien to avoid loss of the property.

This should only cost us around $17,000 or less for the foreclosure.

Moving Forward US Bank replied to the District’s

foreclosure requesting discovery In June 2011 US Bank notified the

District that it would not redeem the District’s lien, nor would they contest the District’s foreclosure

What do we do now?

The Alternatives Once the bank notified the District that

they would allow the foreclosure to go through without protest, the District had two policy alternatives to choose from:

1. The District could halt its foreclosure and maintain its lien hoping the private sector would eventually redevelop the property.

2. The District could go through with the foreclosure and try and resale the property

The Meeting of the Minds After the District received the Bank’s

response a meeting was called with all of the consultants to figure out what the next steps would be.

Board Decision Making Imagine you are a Board member and

you get this news. 1. You have spent over $17,000 in

foreclosure costs.2. You have spent over $12,000 in

consultant costs. 3. The plan that always works has not. 4. If you move forward you are moving

into un-charted territory. WHAT WOULD YOU DO?

Action Plan Move Ahead with Foreclosure Market the Property to Developers Identify Revitalization Partner Problem: Platted with Common Area

Tracts & Alleys:NO LIEN

Request the Title Commitment

A Distressed Property

Skeletons in the Closet

Quitclaim of Tracts/Alleys from Developer Bank Deed of Trust Existing Litigation Against Developer District Public Art Requirement Defunct HOA – Declarant Rights County Improvement Agreement City Liens Tax Liens

Board Decision Making You forge ahead thinking you doing the

right thing and then you get the title commitment and it’s the scariest thing you have seen.

You have now spent more time and money on research etc and the tasks look more daunting than before.

What are the next steps? How do you minimize expenses while

still getting this accomplished?

Skeletons in the Closet KDB Homes Memorandum of Agreement

for Infrastructure Reimbursement Unrecorded Underlying Agreement What is This Cloud on Title?

Mechanics Lien? Contract? Does it Run With The Land?

Do Statutes of Limitations Apply? Negotiations for Release

Skeletons in the Closet ADM-BLT Entities Master Developer Deed

of Trust Requirements for Release of Deed of Trust Missing Note – Lost Instrument Bond Replacement Note

Title Companies What Is Their Role ? How Do They Make Decisions? Considerations: Potential for Litigation Redemption Periods

Staff Decision Making Now What? Title Company Might Not Play Ball We’re 4 Days Before Closing How Do You Convey This to the Board? Do You Have the Right Team for This

Task?

Quiet Title Action What Does a QTA Do? Will a QTA Clear Any Encumbrance, On

Any Property, At Any Time? Must Have a Possessory Interest (Claim

to Title) Polo Lots – Acquired By Treasurer's Deed –

Title Company Won’t Recognize – 7 Years for Clean Title

Target Specific Encumbrances Provide Legal Justification for “Quieting”

Against Challenging Claims to Title

Where Are We Today?

Keeping Everyone Focused Keep educating the Board on the past

wins and the goal of the project. Keep the project on your agenda every

month regardless of updates. Everyone must understand up front that

this is a painful and costly process.

Keeping Everyone Focused Any positive news gets sent out

immediately, and any negative news as well.

This process is hard to understand (for anyone), you will have to explain it over and over.

Some of the Questions You Will Get From The Public?

Why are you spending my public funds on this redevelopment project instead of landscaping/enhancements?

What fiduciary responsibility does the have to redeveloped this property?

Does the District have a say in what kind of homes will be built?

Where Are We Today?

The District delivered clean title for Phase One and Phase Two.

The District received funds to upgrade the landscaping at the entrance to the property.

The District received funds as payment for lost fees.

The District to get a $4 million bump in AV due to this project.

The District will have fee paying customers again in this area.

The District wrote off a total of $755,000 for both phases.

Wins Losses

Lessons Learned This is an ugly process, one that is really

tough to manage. Redevelopment is really expensive. Communication with the team and the

Board is paramount to the success.

Lessons Learned Your direction and focus will shift several

times; you have to be nimble and adaptable.

Patience is key. Keep moving forward and keep your

goals in mind. Remember this is not about the you are

fees owned, its about the redevelopment and the future of your District.

Questions