Colorado Lawmakers Void Original Intent of Bill, Instead Allowing Developers to Buy Metropolitan District Debt | Governor
In less than two hours on Friday, the Colorado House moved from discussing a bill aimed at preventing developers in the metro district from working on both sides of a public deal in which they personally took the opportunity to approve one which authorizes the practice.
House Bill 22-1363 would have prevented developers who sit on a metropolitan district board from approving public funding for their project through municipal bonds and then buying those bonds for themselves.
Instead, the body passed by voice vote a last-minute amendment pressed by House GOP Minority Leader Hugh McKean, R-Loveland, which gutted the original bill’s intent and l ‘replaced with language that allows the practice to continue but tempers the amount of money developers can possibly pocket by seemingly limiting the interest rate of bonds.
Dejected Rep. Mike Weissman, D-Aurora, who co-sponsored the original bill, had little cause for celebration.
“What just happened is pretty nasty,” Weissman said of the amendment. “It’s not at all surprising that developers profiting from this conflicting practice have fought hard to protect their ability to continue to do so.”
The bill is scheduled for a third and final reading which could take place as early as Saturday before heading to the Senate.
The bill would only apply to practices in newly formed metropolitan districts after Jan. 1, 2023, and would not affect any debt issued by existing districts or districts created in upcoming elections this year.
“What it does is hit the underlying structure to ensure consumer protection,” McKean said in introducing the amendment. “It creates wealth, to make sure the guardrails are in place, to limit anything outrageous and to ensure that what we are doing is protecting potential financial interests.”
But attorney Brian Matise, a Metropolitan District expert who has served on the board in several cases and argued against others, said the bill changes nothing but codifies in the law a developer’s right to purchase the funding from the metropolitan district that it had originally approved.
“This bill makes no sense,” Matise said. “He says bonds should have an interest rate consistent with market rates for high-yield securities, which are essentially junk bonds. If the debt that district managers issue to themselves, their employers, or their businesses is so risky that the financial market won’t buy it, then it shouldn’t be issued. Taxpayers shouldn’t have to pay junk bond interest rates.”
The promoters of metropolitan neighborhoods and their associates are frequently members of its board of directors, especially when a project has just started and the indebtedness that a project may incur is established. This debt comes from the sale of municipal bonds, usually to the public and often for millions of dollars.
Money from the bonds is used to repay the developer for expenses they incurred to install infrastructure — sidewalks, sewers, water pipes and lighting — in a metropolitan neighborhood before homes were built. The district, through property taxes levied on property owners, pays off the bonds over decades, with bondholders earning interest until everything is paid off.
Acting as the district’s board of directors – and long before there were any owners – the promoter and his associates approve the sale of the bonds to the public. Often there are a smaller number of bonds issued simultaneously, but which are not sold to the public, have much higher interest rates, and the promoter buys them for himself in a private sale.
These bonds are secondary to the primary bond issue, meaning they are not paid off as quickly and are structured over decades so that interest accrues on interest, turning it into a handsome profit for its owners.
McKean and others in the House defended the practice, saying it was “gap funding” needed for a project and saying future development would stop if it was cut back.
Other reps, such as Rep. Adrienne Benavidez, D-Commerce City, opposed the idea, noting it’s an inherent conflict of interest that should be stopped.
“It’s a practice that cannot be allowed, where you work on both sides of a transaction and the consumer, the owner, is the one left to foot the bill,” Benavidez said.
Colorado’s metropolitan district reform has been a tough sell in the legislature, despite hundreds of people telling lawmakers they were hurt by the financial conditions of living in one.
Last year, lawmakers passed a bill that increased the degree of disclosure potential buyers would get before buying a home in a metropolitan area.
But critics said it wasn’t doing enough, and Weissman sought to harpoon the very practice that appears to give developers the highest financial return on the backs of generations of owners.
Weissman presented several examples of how a developer buys their own funding, somewhat different from a town mayor approving a deal for their own company to profit from, and ultimately looking to pocket proceeds far greater than their initial investment.
“It is often said that development should pay for itself, but in these cases development has paid for itself,” he said.
Lawmakers who opposed the original bill, including Rep. Andres Pico, R-Colorado Springs, said it would nullify any future development because it would place too heavy a burden on businesses.