Locally, Millville officials are already well familiar with the notion of special development districts, having been approached by several area developers with the idea that the town might want to ask for the power to create the districts as a way to finance infrastructure and other needed elements as growth centers on the town.
They asked the state legislature to grant them that power earlier this year, with a charter change that is still pending while legislators adjourn their business until January.
Likewise, Bridgeville’s mayor and developers may consider the idea almost old hat now, as the town was the first municipality in the state to both gain the power to create SDD’s and to use it for new communities.
Millsboro followed suit in 2006, with Laurel beating Millville to the punch on requesting their own charter change earlier this year — another that is still on hold for legislators’ consideration next session.
Why all the fuss over SDDs? Experts on the subject of special development districts, tax increment financing, impact fees and transportation districts aimed to explain that to Sussex County Council members at an afternoon workshop on Tuesday, Sept. 25, as the county tries to determine whether it, too, would like to ask for the power to create SDDs.
A lengthy discussion that day led to a unanimous council vote on Tuesday, Oct. 2, to pursue that power – and others – as the county seeks to add to its arsenal of financing options for the booming growth across portions of Sussex.
Simply put, special development districts allow governments to establish designated districts in which an additional, ad valorem tax would be assessed to pay for the installation of infrastructure and other elements needed to serve that development. The tax is used to repay a bond funded by investors who expect to derive a profit off that bond and its eventual payment. It is assessed to each property owner within the new district, in addition to their other financial obligations, until the entire debt is paid.
SDDs allow governments and developers to plan for things such as roads, sewer and water service, libraries and other public services, and to have funding available for those infrastructure costs prior to building and selling the properties in a new community, all without taking on a direct debt.
For the government, it means infrastructure is generally constructed in advance of the growth it will support, rather than going in piecemeal, as developers wait for cash to be available while they build and sell a project.
For developers, it reduces cash flow issues and allows them to reduce costs by building infrastructure at a preferred rate and in a preferred way, as well as allowing them to avoid the added costs of taking on debt up front. Developers are also able to advertise lower sales costs on the homes within a special development district, because the special tax is addressed separately from the asking price of a given home.
Buyers gain the advantage of likely having at least some of the new infrastructure in place when their homes are built, as well as having the ability to pay the entire debt on their portion of the bond early, without penalty, and have available those homes with lower asking prices.
It sounds like a win-win situation for many, if not all, which is why it has proven a growing trend across the state and particularly in burgeoning Sussex County. But many have remained skeptical about the advisability and benefits of SDDs.
County Councilman George Cole (R-4th) was among the skeptics last Tuesday, recalling of previous discussions of the notion, “Mr. [David] Baker (county administrator) and his predecessor reported that this was something that we should not venture into, that it was being used for re-development in most areas.”
Cole said that his impression of the usefulness of SDDs was that they were better for smaller towns, where growth is concentrated.
“Ocean View is a good example,” he said. “They thought when Bear Trap came in that because of the development, they would be fine. And now they’re running out of money. The county is much larger, and we’re dealing with the cumulative effect of all this development.”
Cole said he didn’t believe those looking to develop in Sussex County really needed the kind of incentive to do so that SDDs might provide.
“Developers brag about how easy to develop here in Sussex County,” he said. “They have flocked here. I don’t see how this really is going to help on a county level, because of our size,” he added.
Hal Salmons, the county’s bond attorney, begged to differ, noting that towns, cities and counties around the country were looking at the idea of SDDs and many had found them useful.
Salmons, who has also represented underwriters for SDDs in Millsboro and Bridgeville and who spoke to Millville’s town council about the subject earlier this year, said the county council should look at SDDs as a potential additional tool in their arsenal for both infrastructure funding and the ability to direct growth to areas in which the county government would prefer to see it.
“It would give you tool that you could use, if you decided to use it,” he emphasized, suggesting that merely obtaining the power to create SDDs would not obligate the county to actually create any. That could be decided on a case-by-case basis, he said.
Salmons acknowledged that the county could potentially make money through creating SDDs.
“Those towns (Millsboro and Bridgeville) negotiated certain things from the developers that they would otherwise have had to pay for themselves,” he said, pointing to Bridgeville’s new library and internal improvements, such as computer systems, that were justified as needed because of the new residents who would reside in the SDD communities but that also serve the town’s existing population.
With SDDs, government works with underwriters and an administrator to set up an amount and terms for the bond, including what the money can be used for. The administrator continues through the life of the bond to determine how much each property owner owes. That amount is then added as a separate line item on tax bills, and the county would be responsible for collecting it.
That would be the biggest change for Sussex County, Salmons warned — the county would be required under the agreement to collect delinquent taxes without any excessive delay.
Property owners who purchased homes in the SDD but who did not pay the related taxes could be evicted from those homes and the properties sold to clear the debt. The county now generally avoids aggressive collections on its other debts and home owners are not generally evicted when they get in arrears.
But Salmons said buyers would be warned amply when they made the purchase that it did come with the special tax, though he said that inevitably someone seems to come forward in these cases and say they weren’t aware. Procedures such as separate, prominent documentation in sales agreements and notices attached to deeds are aimed at preventing such cases, he said.
Cole said last Tuesday that he had less of an issue with SDDs if their funding was targeted solely outside of the given community, toward things such as improving roads leading to the development instead of internal roads and other projects that would tend to primarily benefit a developer or private property owners.
Such restrictions are technically possible, though Salmons warned that something as simple as an on-site sewer treatment plant potentially taken over someday by the county might end up being excluded from funding if they were put in place.
But Cole was not won over by the arguments last Tuesday.
“You’re talking like this is going to be a golden bullet to fix all problems off site,” he said. “I don’t believe it. You’d almost have to have every new subdivision in the county created as a special tax district. This is a lot of red tape. We should do it the old-fashioned way.”
Shares of infrastructure cost debated
That old-fashioned way includes the DelDOT way, which has recently involved requiring developers to pay for some or all of needed infrastructure improvements near or leading to a new community before they are granted approvals.
DelDOT’s Ted Bishop addressed such plans for the council on Sept. 25, pointing most particularly to the Westtown area near Middletown, at which development was begun in 2003.
“DelDOT asked to meet with the developers and the mayor, and talk about the idea of a master plan,” Bishop said, with the notion being that the area would be annexed by Middletown, development of the communities would be made and infrastructure built all at the same time.
The master plan included some 1,500 acres, 3,000 homes, commercial and industrial property, a hotel, 6,500 new students needing new schools and parklands. It also featured a transfer of development rights (TDR) aspect designed to protect that area’s agricultural land by moving the development to more central parts of the master plan area.
“They were targeting the development to the growth areas adjacent to the town, which is part of the Livable Delaware plan and state strategies,” Bishop emphasized. “This partnership was an opportunity for us to work with the town fathers and six or seven developers, all working together.”
Bishop said 18 months of negotiations and discussions had involved a regional approach to planning, as has been talked about in the county’s comprehensive plan. He said that, like SDDs, DelDOT’s master plan approach also “provides a necessary base for getting things done in a more long-term planned way — one that’s less piecemeal.”
“You design and build a community with all the elements there,” he said, noting the benefits of such plans in time and costs for infrastructure construction and new communities in place as multiple developers work together instead of just one developer at a time.
Transportation, water, sewer and drainage were all included in the master plan. “This is an approach DelDOT supports strongly,” Bishop added.
However, Bishop acknowledged that such plans are “no magic bullet,” with developers having decided to work together to share costs of road improvements on a per-square-foot costs for industrial and commercial development and flat rate for multi-family units, age-restricted housing and single-family homes. That contribution totaled some $15 million.
Even then, after two years, costs at Westtown had increased above expected rates and the developers were asked to kick in additional money to complete the master plan infrastructure, which they agreed to do, Bishop noted, sharing the costs with DelDOT on a 30/70 state/developer share.
He said the original concept of a 4 percent escalating cost agreement had been scrapped before the agreement was finalized but was later recognized by all involved as having been a good idea.
Each developer had also agreed to provide and dedicate lands for a right-of-way, for which they were credited on the roads’ final costs.
“They knew it would increase traffic, but it could accommodate that traffic with improvements,” Bishop said. “And the improvements were made concurrent with each phase of development.”
That contrasts many of the state’s infrastructure deals with developers now, where developers going in last in a given area are often the ones who pay most or all of the tab assessed by the state, as the capacity of existing roads is reached or exceeded. That, in turn, has developers looking for cooperative agreements such as the Westtown master plan.
On that subject, Council President Dale Dukes (D-1st) pointed to a common issue for developers. When they build in an “area of rampant development with lot of stuff going in and one intersection, they are seeking to come up with reasonable allocation of the funding,” he said.
“DelDOT is passing these things on,” Dukes added. “For the Route 54/Route 20 Bayside intersection, DelDOT paid nothing. That project is a benefit to everyone in Sussex County. The developer did a beautiful job and made it safer to pass through,” he pointed out.
Jack Hayes, who represents developers working in the area, said cost sharing between developers and the state had not been going well recently and would not begin to address long-term funding of the county’s overall infrastructure needs.
“We’ve had ongoing meetings with DelDOT, and they have a spreadsheet that is showing impacts on Route 26, Route 20, Route 1 and around Bethany Beach. And if you add up the costs it will take just to finish the transportation work there, it’s at least $75 million,” Hayes said. “To do it piece bit by piece bit will never work.”
“You can do impact fees. You can charge the developers. But $2 million cannot finish a pump station. It cannot elevate a curb,” he said. “You can’t do it a little bit at a time.”
Bishop, though, said that even in a slow real estate market DelDOT’s agreements with developers have kept infrastructure projects online. Pointing to the Little Heaven interchange project, he said the state had received some $650,000 from developers in that area at the outset.
“But with the economic downturn, development has slowed down or stopped completely,” he said. “It’s not dead, but it has slowed down. And the money we’ve received thus far has enabled DelDOT to bring the project back on board and continue design and engineering work. And it will go in sooner than it would have without the developers.”
Bishop added that the developers involved in Little Heaven had also received recoupment arrangement that as other developers come in to that area in future, the developers who had put money in will get some of that money back, several years out.
He stressed that these agreements had – at least to date – all been voluntary. But Cole said he thought perhaps that was one thing that should change.
“We need legislation if we want to make this available as something we can enforce,” Cole said.
“It’s a good partnership opportunity, but it is voluntary,” Bishop replied. “We’ve been very persuasive in these two cases.” Asked by Cole whether the projects had been deemed a success in traffic control, Bishop said it was really too early to know for sure but that signs were encouraging. “It will be another couple years before we can say this has worked perfectly, or very closely.”
Cole had strong praise for the concept.
“These are good ideas,” he said. “Everybody loves to criticize you guys,” he acknowledged of DelDOT. “It’s good that we’re doing this, but the word voluntary keeps popping up,” Cole reiterated, again suggesting legislation that would mandate such cost sharing.
“In no way have we forced anyone,” Bishop replied. “What it took was education, to sell them upon the idea of working on this together. There are economic advantages to this. It’s not just DelDOT trying to pass the buck. I think the results are going to be positive.”
Impact fees have their own drawbacks
Cole also expressed a preference for an existing system of impact fees. But some of those commenting on Sept. 25 issued cautionary words about relying on impact fees.
Les Guthorn of Public Advisory Consultants said the trends were toward SDDs rather than impact fees in no small part because SDDs can be planned for, whereas the finances of impact fees are difficult to predict.
“Impact fees are used for growth-related projects,” Guthorn said. “They’re paid for at the same time that building permits are pulled. And it’s difficult to put them on a forecast plan, to see when and how much will be coming to the government entity.”
He likened impact fees to transfer taxes in that respect – that they are dependent on the real estate market moving construction and sales forward. Also, they require the county to basically front the money for a project and then have it be repaid as units are built.
In contrast, he said SDDs build up an accumulation of funds over time and do not add to the county’s general obligation debt.
“The economy is slowing even in Sussex County,” Guthorn warned. “If you are generating general obligation debt based on growth, you may be feeling a pinch.”
But Cole was not necessarily persuaded, saying that all of the infrastructure funding options were market-driven to one degree or another. “None of these are any better than the others,” he said, eschewing the other options in favor of impact fees, which he said at least did not come with the additional costs and red tape of involving even more lawyers and administrators.
That bill for administration could come to around $20,000 per year, which would typically be funded through the SDD bonds themselves. Additional costs to the county could also be generated by creating a wider system of impact fees, proponents of the SDDs pointed out — something that would also require additional enabling legislation for the county to pursue.
Council sets vote on SDD legislation request
It may have seemed six of one and a half-dozen of the other by the time all of the assembled experts had their say on Sept. 25.
But Councilman Vance Phillips (R-5th) quickly drew the bottom line on the conversation: “This is an exercise that really doesn’t matter unless we go ahead and get the authority,” he said. “Why would anyone not want to get the enabling legislation passed so that we could go ahead and do this in the future?” he asked rhetorically.
County officials suggested that perhaps dealing with SDDs as a pilot program could be the notion with which to move forward.
Councilman Lynn Rogers (D-3rd) was in agreement. “It would be good to have this as an option,” he said.
Faced with open support of most of the council for pursuing enabling legislation for SDDs, Cole asked, “Why don’t we get the ability to do all of it?” — with SDDs, impact fees and master plans for infrastructure on the council members’ collective plate.
“It sounds like impact fees are much riskier,” Phillips countered. “They’re not predictable and they can drop off.”
“The testimony seems to be in favor of everything but impact fees,” Cole acknowledged.
“It’s risky,” Phillips said of impact fees.
“It’s all risky,” Cole replied.
Hayes said he believed SDDs would also help the county address issues of affordable housing. “By putting a tax on the house, how many more people can afford that house?” he asked, reminding the council that no one is required to buy a house in a SDD.
“He will buy it because he wants and can afford it. This is another vehicle for him to finance $20,000 of cost over 25 to 30 years at very little cost to him. He may not be able to afford that upfront,” he said.
“I would encourage get all tools in your toolbox that you can, and to look at each individual case on a case-by-case basis,” Hayes advised.
Dukes agreed, asking council members for a consensus to request the enabling legislation that would allow the county to begin creating SDDs. But his efforts were stymied by the council’s gathering in a workshop, which allows no formal action. Dukes added the item to the council’s Oct. 2 meeting, at which he advised there would be no further discussion, only a vote.
Despite that proclamation, council members did briefly discuss the proposed resolution Tuesday. With the notation that SDDs, the related tax increment financing element and expanded impact fees could be used as possible tools, if the county chooses to do so when and if it is granted the power.
Salmons drafted the resolution, authorizing and directing the county administration to draft enabling legislation for all three financing options. The county would have to create ordinances at the county level if it is granted the power, and would then consider individual cases for the implementation of each.
“If you don’t like impact fees, you can vote no on that ordinance,” Dukes emphasized Tuesday about the package of enabling legislation.
Phillips questioned why additional enabling legislation about impact fees was needed, since the county already assesses them for its sewer system. But Dukes pointed out that impact fees could be assessed for other county services, or thing such as libraries or paramedics.
Dukes also warned Cole that his support for a package of enabling legislation including all three options was not indicative of any agreement with Cole regarding impact fees. “I agreed to ask for enabling legislation for all three, but I want to tell you up front that I don’t support impact fees,” he said.
Council members voted unanimously to adopt the resolution. County administrators will draft proposed enabling legislation, which will eventually be sent to state legislators for possible introduction and adoption when they return to legislative session in January.