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Metro Districts: Good for Longmont

(Part 1 of 2 Parts)

Nearly every city in the USA is experiencing a housing crisis. Many have adopted ordinances to require real estate developers and builders to provide affordable housing. For the most part, these have not been effective.

Longmont took a novel approach. We passed an ordinance mandating the construction of affordable housing, and charging fees to developers and builders who choose not to do so. But we structured our ordinance to make it most profitable to build “starter” homes rather than “luxury” homes, combining the ordinance with a toolkit of fee waivers, land use code changes, and incentives to ease the pain of the added costs for developers, builders, AND homebuyers. A powerful tool in this toolkit is the Residential Metropolitan Tax District (Metro District).

Longmont’s approach is working – exceeding expectations, in fact – and it’s promising to produce even more good things for our city. But a vocal faction in Longmont wants to kill Metro Districts. This would be a mistake. Here’s why.

Metro Districts Lower Costs

A Metro District is just a public financing tool. It helps a developer borrow money to invest in a residential subdivision. Developers build infrastructure such as water and sewer lines, streets, roads, and drainage features. Infrastructure must be in place before housing can be built.

A real estate developer takes out a short-term loan to build infrastructure. Because the value that secures the loan is in the future, the interest rate is high. (Your mortgage interest rate is low because the house that secures the mortgage already exists.) The construction loan is the biggest expense most developers incur. And the longer it takes to finish work and sell the developed lots to builders, the more interest they pay.

A Metro District levies a tax (the mill levy) on the properties inside the district. The future revenue from the mill levy makes the loan less risky, letting the developer obtain a lower interest rate. The developer can issue bonds secured by the future tax revenue. The effect is to lower the developer’s “cost of money.” This is not much different than you getting a low mortgage interest rate because you have a high credit rating or a large down payment.

Lowering the developer’s cost lets builders ultimately sell the finished homes at a lower price. Even with the mill levy added to its property tax, the total cost of owning the home over the life of the mortgage can be lower, too. Like this. That means everybody wins, which is why Metro Districts were designed as they are.

Like any financial instrument, without proper regulations and oversight, Metro Districts can be abused. But the Longmont City Council ought to be looking at how to regulate metro districts rather than prohibiting their use.

How Metro Districts Work

In Longmont, a developer applies for the creation of a special district to the city, submitting a Service Plan which details what the District will do and how it will be financed and operated. Here is a link to the Service Plan for Mountain Brook Metropolitan District, the only Residential Metro District to be created in Longmont since the Council reinstated them in February 2019.

Mountain Brook Partners LLC (the Developer) brought their Service Plan to the City Staff. It already contained limits on the mill levy and the amount of reimbursement the developer could receive. The City asked for additional sureties before bringing the plan to the City Council for approval. The Developer complied. That Service Plan is a terrific example of how a Metro Districts should work.

After all that work, the City Council still had the choice to just say no. This plan was approved. But if the Developer wants to make any material change to the terms of the Service Plan, they must come before Council again to explain the change, and ask for approval. Again, the Council may say no. This is an example of exercising the oversight capability that opponents of special districts assert does not exist. It exists, and it works!

Why Longmont Needs Metro Districts

First of all, they’re a way to ensure that affordable housing gets built. That’s a big deal. But even more than just with affordable housing: Metro Districts can ensure that what gets built is what our city needs!

How does that work, you ask? Don’t developers just do whatever they want?

Of course they don’t! We have land use codes (zoning) and building codes. We have a comprehensive city plan. And with the ability to create or refuse a Metro District, we have a firm grip on at least one purse-string. The hope of being granted a Metro District means developers will work to fit their concepts into our city’s vision for the future.

Property developers now come to our City with concept plans for a subdivision. And those concept plans match up point for point with the City Council Vision and the Sustainability Plan. Here’s just a short list of benefits to Longmont proposed or approved in a Metro District (so far):

• Special community features like the Veteran’s Community Project.
• Helpful infrastructure features, such as traffic mitigation, multi-modal transit, and greenways.
• Environmentally friendly subdivisions with all-electric, solar-ready, zero-net-energy homes.
• Walkable neighborhoods including child care facilities and local food shopping.

Won’t Every Developer Want A Metro District?

No! To prove it consider this: The same developer who’s working on Mountain Brook, which has a special district, is working on a second project on the east side of Longmont, near UC Health’s new hospital and the Fox Hill neighborhood. This project is also fully compliant with the new land use codes, Envision Longmont, and the Affordable Housing Ordinance. Builders to construct dense, efficient, affordable housing aimed at the hospital workforce, Smucker’s employees, and so on were lined up in advance and participated in the concept planning.

There will be no Metro District, though. Because this plan has no special features or special problems, but is just a good, solid design, no Metro District is needed for financing. Both developers and builders can achieve a decent but not excessive profit on the work.

Metro Districts create extra work and a longer-term commitment for Developers and Builders. They must administer the district and fulfill reporting requirement to the State and the City until there are residents who can take over the district’s board of directors. It’s a special tool for special needs.

What about all the Abuses I’ve Heard About?

In the real estate boom era, poorly regulated subprime mortgages were used to “qualify” aspiring homeowners for mortgages they could not afford. Sketchy financial instruments were invented to spread the risk from these bad mortgages. In 2008 the house of cards crashed down, contributing to the Great Recession.

Does that mean that home mortgages shouldn’t exist?

There are many satisfied, responsible homeowners right here in Longmont who would be very unhappy about that idea. Mortgages needed to be regulated and standardized to prevent abuse. Not eliminated.

Over 100,000 patients die every year in hospitals in the US from medical errors. Does that mean we should close down all the hospitals? No, it means that we should better regulate hospitals, and find best practices to help avoid the mistakes. Good work is being done in this area by hospitalists, incentivized by the Medicare program, which requires that hospitals bear any cost that results from some kinds of preventable medical errors.

Longmont can handle Metro Districts the same way – by regulating the kind of Districts the Council can approve, setting limits on their debt and the developers’ level of reimbursement from the mill levy, and prohibiting certain risky bond transactions.

Making Metro Districts Safe for Longmont

Opponents of Metro Districts point to a few cases where Metro Districts have been used to enrich developers while shifting debt onto consumers. And the argument they make against allowing Metro Districts is that future city councils may be too corrupt or too gullible to prevent it. But we, here and now, can put the kind of protections the Mountain Brook Service Plan already has into city ordinances that will apply to all future Districts, instead of just the one.

A few common-sense ordinances need to be passed to make Metro Districts safe and helpful for Longmont. The Mountain Brook Service Plan already contains within itself examples of those safeguards. Rather than wiring them into every Service Plan, they can be embodied in Ordinances.

When that’s done, we won’t have to rely on civic-minded developers and detail-oriented city staff and council members to make sure enough safeguards are included. It will be automatic.

So tell our City Council: don’t throw away opportunities for Longmont out of fear of making a mistake. Whether it’s greenhouse gas reduction or providing affordable housing for the next generation that moves you, the Metro District ordinance is something we need to get it done. Regulate, don’t obliterate, this very useful form of special financing.

Part 2 of this series explains this in detail. Stay tuned!