Real Estate Land Use, Planning and
Zoning Alert
December 2010
Authors:
Mack A. Paul IV
mack.paul@klgates.com
919.743.7326
Angela L. Cottrell
angela.cottrell@klgates.com
919.466.1269
R. Michael Birch, Jr.
michael.birch@klgates.com
919.743.7314
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Local Government Commission Adopts
Policy to Facilitate Use of Special
Assessment District Financing
On December 7, 2010, the North Carolina Local Government Commission (“LGC”)
adopted a policy that will facilitate the use of special assessment districts as
financing tools for private developers. Before this action, the LGC’s stringent
requirements coupled with the distressed economy practically prohibited the issuance
of bonds backed by special assessments for the financing of public infrastructure. In
fact, no local government has issued bonds backed by special assessments under the
authority granted by the General Assembly in 2008. This new policy allows a
Qualified Institutional Buyer (“QIB”), as defined by Rule 144A of the Securities Act
of 1993, to purchase special assessment bonds. As a result of this policy shift,
special assessment district financing is now a viable tool that can be used by private
developers partnering with local governments to facilitate development.
Bonds issued by local governments must meet the LGC’s “financial feasibility”
standard. Historically, this standard was met by obtaining an investment grade rating
for the bonds, acquiring a letter of credit from an institution with an investment grade
rating, or having a bank commit to purchase and hold the bonds in a private
placement transaction. By permitting the purchase of bonds by QIBs, the LGC has
provided an additional method for meeting this feasibility standard.
The LGC endorsed the policy of permitting QIBs to purchase special assessment
bonds because the LGC was satisfied that QIBs are sophisticated investors that have
a record of performing a thorough analysis and due diligence. This new policy,
requires special assessment bonds purchased by QIBs to contain (i) a continuing
disclosure undertaking, (ii) requirements for an independent third-party administrator
to oversee the collection of the special assessments, (iii) limitations on the transfer
and sale of the bonds, (iv) limitations on the term length and amount of capitalized
interest, (v) limitations on the ratio of debt to appraised value, and (vi) requirements
for loan commitments for vertical infrastructure within the special assessment
district. The LGC noted that by adopting this policy with these guiding principles, it
followed the model established by the State of Utah, which is recognized for its
fiscally conservative policies and AAA bond rating.
Real Estate Land Use, Planning and Zoning Alert
The LGC’s action is the most recent step taken by
the State to encourage the use of special assessment
districts
to
finance
public
infrastructure
improvements. In 2008, the General Assembly
expanded the authority of local governments to use
special assessments to finance public infrastructure
needs. Specifically, the General Assembly enabled
local governments to issue bonds backed by special
assessments, extended the repayment term of
assessments from 10 years to 30 years, and provided
a list of projects that could be financed by special
assessment bonds. Such projects include water and
sewer systems, school facilities, and public
transportation facilities such as streets and
sidewalks. Also, the costs of creating the special
assessment district and the interest on the first few
years of the bonds can be capitalized and rolled into
the total special assessment amount. In 2009, the
General Assembly expanded the list of projects for
which special assessment bonds can be issued to
include renewable energy projects, parking
facilities, parks and recreation facilities and
affordable housing.
We are aware of a number of projects that have
been waiting patiently for this action by the LGC.
Expect to see significant activity involving special
assessment districts in the coming months.
For information on how special assessment districts
are created and how they can facilitate private
development, please review K&L Gates’ prior
analysis on the topic here and here. Also, please
read the full text of the statutes authorizing special
assessment districts for counties and cities.
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©2010 K&L Gates LLP. All Rights Reserved.
December 2010
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