The effects of failed bankrupt subdivisions on special districts and how districts can help
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Mathew Mendisco, CliftonLarsonAllen Brent E. Butzin, Esq., White Bear Ankele Tanaka & Waldron. The Effects of Failed/Bankrupt Subdivisions on Special Districts and How Districts can Help. The Presentation.

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

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  • Mathew Mendisco, CliftonLarsonAllen

  • Brent E. Butzin, Esq., White Bear Ankele Tanaka & Waldron

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


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:

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

    • 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.

  • You have spent over $17,000 in foreclosure costs.

  • You have spent over $12,000 in consultant costs.

  • The plan that always works has not.

  • 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?

Wins

Losses

  • 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.


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


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