Mariposa property owners say the developer was looking out for itself and leaving them in the lurch when it set up the public improvement district and related bonds, but the developer said it was following common practice at the time.
Mariposa East Public Improvement District (PID) property owners are facing an increased property tax rate despite probable decreasing property values after developer High Desert Investments Corporation, the investment wing of Albuquerque Academy, pulled its financial support.
Mariposa property owners Lynn and David Wheeler recently sent a letter to James Babin, PID board chairman and acting city manager, that questions the integrity of all parties involved with the PID.
“The information we have researched and discovered originating with the (state) change in the PID statute in 2001 portrays a systematic abuse of power and influence by the parties involved including: Albuquerque Academy, High Desert Investment Corporation, the City of Rio Rancho, the bond underwriters, the bond trustee, the PID board, the financial analysis firms, and finally the legal firms representing several parties tied to this particular development and related activities,” the letter stated.
“They’ve protected themselves very well through this entire process,” said Lynn Wheeler, referring to High Desert in an interview.
However, Babin, the city attorney when the PID was formed and the bonds issued, said in an email that he was aware of no improprieties.
“This kind of PID is still allowed under state law and the Academy was just off High Desert development in Albuquerque at the time, so as they say, hindsight is 20/20,” he said.
High Desert and Albuquerque Academy had successfully completed the Albuquerque development, which was similar to Mariposa, shortly before starting work in Rio Rancho.
High Desert board member Gary Gordon said the terms of both the PID and the bond were normal in 2005 and 2006, when no one expected a large decline in the national real estate market.
The Wheelers closed on their lot in December 2005.
In 2006, the PID was created and issued a $16 million bond to finance infrastructure, create a reserve fund for paying interest on the bond and pay fees associated with issuing the bond.
The bond was one of many like it, Gordon said.
“Everyone just thought this was a normal part of our economic world,” he said.
Gordon said city planners and elected officials, underwriters, feasibility experts, accountants and others, totaling three or four dozen people, looked at the bond plan before the issuance.
High Desert was going to subsidize the bond, paying whatever was left after property owners paid $9 per $1,000 of assessed property value, or 9 mils, on the debt service until enough people bought property in the district to cover the tax bill themselves.
While the property tax to support the bond was set at an unlimited rate, the Wheelers’ disclosure documents said High Desert would pay any remaining money due after property owners paid 20 mils toward the debt service. A disclosure document they obtained from June 2006 makes the same statement but adds that if High Desert failed to pay, the tax rate would increase to the extent necessary to make the bond payment.
Lynn Wheeler said she found three, possibly four, changes in the language over the years.
Also, a one-time $2,400-per-residential-lot or 25-cents-per-commercial-square-foot facility fee that buyers paid upon purchase went into the bond fund for added security.
However, after High Desert didn’t sell anything in Mariposa for four years, the corporation announced in June that it was out of money and would no longer contribute to the bond payment or subsidize the operation of the community building.
“The problem in this case is 20 mils wouldn’t be anywhere near adequate,” Gordon said.
Property owners faced having property taxes for the bond increase from 9 mils to 110 mils, not including a levy for district administration. However, the PID board of directors, High Desert and the bondholders are negotiating an agreement that would bring tax rates to 13 mils and require High Desert to give its unsold 800 acres in the development to the bondholders to avoid penalties for a short tax payment.
That forbearance agreement, as it is called, would provide time for the bond to be restructured to keep tax rates for current property owners about where they were initially.
First American Financial Advisors president Rob Burpo, who wasn’t involved with the Mariposa PID, said bonds such as Mariposa’s had been used for 20 to 30 years.
“It’s a very established practice, very established,” he said.
Mariposa’s business model was considered sound, but it was predicated on things on which circumstances had an adverse effect, Burpo continued.
However, he said it is unusual for High Desert to make a verbal commitment and then back out.
“They’re doing what is a legal remedy for them, regardless of how morally upset people are about it,” Burpo said.
David Wheeler said he began investigating after hearing about High Desert’s pullout in June. The more he found, he said, the more troubled he became.
He said the infrastructure for the development seemed to be finished halfway through 2005, meaning the bond was issued after the fact. If High Desert had the money to build the infrastructure in the first place, he asked, why create the PID and issue the bond?
“Understand there was a lot of infrastructure built that High Desert paid for,” Gordon said, listing streets and underground water lines as examples.
He confirmed that the infrastructure was “somewhat built” before the bond issue and said the bond reimbursed High Desert for the water and wastewater systems, now City of Rio Rancho property.
“Certainly, you can’t build everything on cash or you couldn’t survive,” he said.
Because the city would take ownership of the water and wastewater facilities, Gordon said, it’s typical for a developer to pay for them with a bond or a tax. Only public utilities can be financed that way, he said.
The city governing body gave final approval for creation of the PID, but the PID board made the decision to issue the bond, Gordon said. However, he said, three city officials were on the board.
Then-city manager James Palenick, then-city Development Services Director Robert Anderson, then-city Fiscal Services Department Director Richard Kristof, and High Desert representatives Lauda Medara and Jack Eichorn made up the board when the bond was passed.
No Mariposa residents have ever served on the board. According to the rules, two members were appointed by the city council, two by High Desert and one agreed upon by both the city and the developer.
This year, according to those rules, the board had to either hold an election or have five city councilors take over. At a recent PID board meeting, Babin said that didn’t happen because the board needed to put out the fire rather than talking about it while the building burned.
According to the PID formation resolution, the bond financing would “serve the interests, convenience and necessity” of High Desert, Mariposa property owners and city residents by allowing cost-efficient construction of the facilities, not imposing an undue burden on property owners and providing for the dedication of the facilities to the city without cost to the city. According to the document, the district was formed to issue the bond.
The document repeatedly said the city wouldn’t be responsible for repaying the debt.
Gordon said High Desert’s situation isn’t unique, since other real estate companies have gone down and districts similar to PIDs in Florida are having trouble. Burpo said some bonds have defaulted and such things also happened in the 1980s when a real estate bubble burst.
Because of the crash of the real estate market, Gordon said, property values dropped and, more significantly, no one bought lots and built homes, which could have made the value of that property go up at least tenfold. In 2006, the project value was $100 million, but the development is now assessed at around $23 million, he said.
Gordon said individual owners, builders who bought large amounts of land and High Desert all paid the same taxes on their property, but vacant land doesn’t drive revenue.
According to the report of the city Public Improvement District review team, the city policy requires that PIDs be approved only if they provide services that wouldn’t otherwise be available. High Desert’s petition said no other entity would provide the water and wastewater facilities, and the PID was necessary to economically provide the infrastructure, according to the review.
Also, the report said PID financing would keep the cost of acquisition and construction of the water and wastewater infrastructure, or impact fees for the city to build it, from being added into prices for Mariposa lots.
High Desert submitted information showing it had a net worth in the tens of millions, and the city’s financial adviser believed the corporation had the financial ability to complete the development.
The review committee recommended approval of the PID and said High Desert’s plans met city policy requirements.
Gordon said if anyone — the city, the bondholders or High Desert — thought the developer would have to pay $1 million or more per year on the bond, as the situation became, none would have allowed the bond agreement. The agreement that High Desert would pay debt service property taxes didn’t cover was meant only to smooth out odd years, he said.
On another issue, the bond raised $16 million, but David Wheeler said he was told at closing that the infrastructure cost $10.5 million. From the bond indenture documents, which describe the bonds and district to potential buyers, he learned most of the extra $5.5 million went to a reserve fund from which High Desert paid interest on the bond debt.
Some also paid fees associated with issuing the bonds.
David Wheeler called the added debt “grossly unnecessary.” He said he and his wife knew the bond would be for up to $16 million for infrastructure, but no one told them part of it would go to pay interest.
Gordon called the reserve fund “very, very typical.” Mostly national companies facilitated the transaction, he said, and they thought a reserve fund was the way to go.
The PID formation resolution lists the reserve fund as protection for the bondholders.
The Wheelers believe High Desert used its power inappropriately to issue the bonds.
PID property owners could vote for or against the bond, with each acre of land giving them five votes. High Desert had 6,936 votes, or 91.2 percent of the total, since it owned most of the land. All other property owners together had 669 votes, meaning 8.8 percent, the Wheelers said.
“(High Desert) had all the votes; they wrote all the terms,” Lynn Wheeler said.
According to minutes of the PID board on May 12, 2006, there were 7,242 votes, or 99.9 percent, in favor of the bonds and 10, or 0.14 percent, against. Also, 7,235 votes, or 99.8 percent, were for the property taxes and 17 votes, or 0.23 percent, against.
According to the PID formation resolution, the property owners unanimously agreed to form the district.
David Wheeler said that at closing he and his wife signed a document giving the developer authority to vote on their behalf to create the district.
“Of course, I didn’t understand that at the time,” he said. “Now I’m kicking myself.”
He said he didn’t know about PIDs when he bought the lot in Mariposa. Documents referred to the $16 million bond issue as general obligation bonds, which he believed meant they were backed by a governmental authority.
Burpo said “general obligation” typically refers to all the citizens of a city or county, but the PID bond could be considered a general obligation to the people in the district.
Gordon said most of the land High Desert sold went to builders, who were contractually obligated to inform their buyers of the PID provisions. When High Desert did sell directly to a buyer, he said, they were given a notice of the provisions 20 to 90 days before closing.
The few people who bought property before the bond existed still had to be made aware of it, Gordon said.
The Wheelers said the disclosure document they received was a brief summary about the anticipated PID formation, bond and tax rates. David Wheeler said they weren’t shown the PID formation resolution or the bond indenture document.
The indenture document has “incredible amounts of disclosure about risk,” he said. It let potential bondholders know about the possibilities of failure and the difficulty of foreclosing on properties for delinquent tax payments.
The bond had interest rates ranging from 5.5 percent to 6 percent among the three dates when bonds matured. David Wheeler said a rated bond would have had 2.5 percent or 3 percent interest rates, but the Mariposa PID bond had higher rates because of high risk.
Also, it was an unrated bond, so it wasn’t possible to get insurance on it, he said.
Gordon said bonds sold in retail are normally rated by a third-party agency for the convenience of buyers. However, he said it’s not unusual for bonds to go unrated, meaning investors judge the risk for themselves.
The bond underwriter, in this case D.A. Davidson and Co., would probably decide if a bond should be rated, he said. If there’s a market for the bond, Gordon said, the underwriter may save time and money by skipping the rating, especially with bonds to finance city building.
The bondholders must have liked the bond without a rating as well, he said.
Gordon said the tax-free, 6 percent interest rate on the Mariposa bond did suggest the buyers thought there was some amount of risk, but he said he still wouldn’t categorize it as high risk.
“The world in general thought the United States real estate market was not subject to large declines,” he said.
Gordon said it was a different world in 2005-06.
“Hindsight is always incredible,” he said.