Proposed legislation that aims to stop metro district developers from buying and profiting from the public debt they approved as a district’s board members narrowly cleared a state House committee on Tuesday.
It is the second time in as many years that a bill looking to restrict the practice has been put before the legislature, both strongly opposed by developers and others in the housing industry. It failed last year.
This time, the House Transportation & Local Government Committee voted, 7-5, to pass House Bill 23-1090 following nearly four hours of testimony, much of it from developers. The vote came hours after the same panel voted to bring metro district governing boards under the authority of the Colorado Ethics Commission.
Bill proponents, including bill sponsor Rep. Mike Weissman, an Aurora Democrat, pointed what he described as an obvious conflict of interest of a developer borrowing from himself and relying on future metro district homeowners to pay back.
“This seeks to prevent the phenomenon of the same people wearing the hat as a metro district director to authorize its debt, subsequently, not as a director but as an affiliate for the project, buys that debt and subsequently profits from it,” Weissman said. “It simply says that, as a director of the metro district board, you cannot buy a portion of the debt you’ve had a hand in issuing.”
Several developers testified that the costs of their project would be prohibitive to potential homeowners if they aren't allowed to purchase the financing tool.
“The point of this is, but not for these flexibilities, many projects would not get started,” said Keith Simon, executive vice president of Coventry Development Corporation, who admitted his company did not make use of self-purchased bonds for their Ridgegate project in Lone Tree.
Developer JR Osborne testified that his work in Fort Lupton would not have happened without the use of developer bonds.
“These bonds don’t pay for a majority of the stuff,” Osborne said. “We need the district to make it viable and need to get paid back. What you’re proposing is overbearing and will drive small guys like me out.”
The problem of developer-purchased financing begins when a metro district project is initiated. Developers are the only landowner and, as a result, the only ones typically able to sit on a metro district’s board of directors.
That board of directors then decides how much money will be needed to build the project’s infrastructure – water lines, sewers, sidewalks, streets – and approves that amount to be sold as municipal bonds, which are typically sold to the general public. Investors, such as pension funds, will buy the bonds.
When the bonds are sold, the developer will also purchase some of the debt — essentially loaning money to themselves — to ensure they are repaid for the initial outlay of funds. Those bonds, however, are frequently at higher interest rates than the first bonds that are sold to the public.
Jim Gibson, a critic, said although he sees the inherent benefit in metro district construction, the conflict of interest in developer-owned bonds is too strong to ignore.
“There is something wrong with developers using a government entity to create a separate profit center,” Gibson said.
Several developers said there is inherent risk in buying their own bonds, but critics said homeowners should have to bear that weight.
“If debt is so risky that banks, mutual funds, and institutional investors are unwilling to purchase those bonds, then how is that not too risky for taxpayers to bear?” said Brian Matise, an attorney and expert on metro district operations.
Builder Tim Leonard said developers are profiting from a loophole.
“This bill asks to stop the abuse of a developer from buying his own bonds,” Leonard said. “Bonds can still be sold to the public. This doesn’t stop a developer from financing his own project, this stops working to the complete detriment to the taxpayer.”
The bill moves to the full floor of the House and, if approved, heads to the Senate for additional hearings.
