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In this time when we need to be strategic about how things get done in a City and how to get more into the City, the age old question of "How are we going to pay for it?" There are some commonly used financing tools and incentives available for the City to negotiate for current development projects. Do you know what they are? Here is a quick breakdown.
What is a Municipal Utility District (MUD)
This is a financing tool that creates a political subdivision authorized to issue bonds for utility infrastructure to provide water, sewage, streets drainage and other services within the MUD boundaries. Typically, a MUD is created by the State Legislature or the Texas Commission on Environmental Quality (TCEQ). A developer will petition for creation of the MUD and, once created, will begin development on a property. Upon approval by the TCEQ and acceptance of approved infrastructure, the MUD will issue bonds that are used to reimburse the developer for a portion of the approved costs for the infrastructure improvements. The MUD bonds are paid off through the collection of a property tax assessment that is issued against all properties within the district. Areas within a MUD cannot be annexed by the City until a certain percentage of the outstanding bond amount has been paid off. In essence, the developer is reimbursed through bonds that are paid off by taxes collected within the District and the MUD cannot be annexed by the City until the majority of the outstanding MUD debt has been retired.
What is a Public Improvement District (PID)
While similar to a MUD in function; however, the major difference between a MUD and a PID is that PID bonds are issued prior to construction of any infrastructure and are secured by a lien against the property. PID’s are a financing tool that allow for a City or County to issue bonds for construction of required infrastructure. Unlike a MUD, a PID will issue bonds for necessary infrastructure improvements based on the appraised value of the property. The appraised value of the property is established based on initial land value as well as the potential improved value of the property. These bonds are paid off through collection of a special assessment levied on the property, similar to property tax, paid by the property owners within the boundaries of the district. To summarize, a developer is not reimbursed, rather, infrastructure improvements are paid for through bonds that are issued and paid off by assessments collected on the property within the District. However, unlike a MUD, a property with a PID may be annexed at any time without any obligation to the City for the outstanding debt.
What is a Tax Increment Reinvestment Zone (TIRZ)
is a type of financing incentive that reimburses a developer the eligible costs for approved infrastructure improvements out of the incremental tax increase that is generated on the property. This mechanism is similar to a Tax Increment Financing (TIF) District. The City will establish the taxable value of a property in its pre-development condition. As the property is developed, the value will increase over time. Based upon the terms negotiated in the TIRZ or TIF agreements, a certain percentage of the increased tax revenue generated on the property will be reimbursed to the developer.
For example, if a property is currently generating $1,000 annually in tax revenue to the City and after development, it generates $2,000 in annual tax revenue; there is an increase of $1,000 in tax revenue generated on the property. If the City negotiated a 60%/40% split in the tax revenue with a developer, with the City keeping 60% of the increased tax revenue, the City would reimburse the developer $400 out of the $1,000 increase.
Now you know about these terms, but wonder why it matters
For prospective homeowners specifically, knowing whether a property has a PID or a MUD tax is important in the qualification phase of the a home-buying process because the inclusion of a PID or MUD tax very often results in higher overall property taxes. Higher than expected taxes can cause a buyer who is stretching their budget to no longer qualify once the higher taxes are identified.
Higher tax rates can also impact marketability and home prices and should be a consideration for buyers whether they are buying new construction or resale. A home in a PID or a MUD might be less expensive than a home in a competing development that does not include a PID or a MUD.
In addition in many cases there will be an HOA because the area has to be maintained but that is a discussion for another post
Bottom line, the more we know, the better it will help us make smart buying decisions, whether that means buying in a PID, a PUD, a MUD or none of the above could be the hardest thing to find in North Texas. Whether you support providing development incentives or not, each tool has pros and cons. The hope is that our City leaders, at all levels, fully evaluates and scrutinizes each and every development tool on its own merits to make decisions based on what is best for our City and those that live here.
Disclaimer: Many of my pieces of information have been obtained through extensive research but more research is needed since many of these financing tools are changing literally as they are being written. Each City may have a slightly different setup, do your research.
Sources:
https://www.ccar.net/pids-puds-and-muds-oh-my/ April 1, 2019
https://smcorridornews.com/whats-the-deal-with-city-councils-financing-incentives/
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