THE EFFECTS OF FAILED/BANKRUPT
SUBDIVISIONS ON SPECIAL
DISTRICTS AND HOW DISTRICTS
CAN HELP
Mathew Mendisco, CliftonLarsonAllen
Brent E. Butzin, Esq., White Bear Ankele Tanaka & Waldron
The Presentation
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We are telling the story of the revitalization project
in Tollgate Crossing Metropolitan District No. 2.
Why? You as a District may find yourself in this
situation, and our hope is that this presentation may
act as a guide.
Table of Contents
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The history/back story of the project
The tools you as a District will need to make this
happen in your District
The pitfalls the District ran into, and how we
overcame them
The policy issues that developed during the process
and how the District dealt with them
The lessons we learned
Questions
District Aerial
Revitalization Areas Aerial 2010
Overview of Tollgate Crossing
Metropolitan District No. 2
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Tollgate is located in Southeast Aurora just North of
Southlands Mall
Created in 2001
Development started in early 2004
Middle class neighborhood
Homeowner Board with very diverse backgrounds
Overview of Tollgate Crossing
Metropolitan District No. 2
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In Cherry Creek Schools
Homes are in the $250,000 to $400,000 range
One primary developer with one primary home
builder (DR Horton), and a secondary home builder
(New Town Builders)
The primary HOA (Tollgate Crossing Homeowners
Association) is very active
HOA and the District cooperate on many projects
Overview of Tollgate Crossing
Metropolitan District No. 2
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The District owns and maintains all of the public
infrastructure that was not dedicated to the City
(Pool, Landscaping, Storm Drainage)
District budget is about $800,000 annually in
general fund, with $16 million in outstanding Bond
Debt
The Back Story
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2007/2008 the housing bubble hit Tollgate.
In November 2008 the District passed a resolution
authorizing the imposition of fees on residential and
vacant platted lots to supplement the general fund.
In February 2009 New Town Builders (secondary
home builder) became delinquent.
The Back Story
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New Town tried to sell the land twice in 2009 but
both deals fell through.
In February 2010 the District initiated a foreclosure
on all of the New Town lots: 83 lots in Phase One,
127 lots in Phase Two.
During the foreclosure process two prospective
buyers looked at the property but they backed out
due to financial conditions and title issues.
The Back Story
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First Community Bank was the primary holder of the
loan on the property
In 2011 First Community was taken over by the
FDIC.
US Bank became the new holder of the First
Community Bank Assets
The Current Environment
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District was depleting its fund balance due to loss of
fee revenue
District’s Assessed Valuation (AV) dropped as a
result of the economy and the delayed
development
The District was wrapping up a construction defect
(CDARA) action
Revitalization Area 2012
Revitalization Area 2012
Revitalization Area 2012
Revitalization Area 2012
What Were the Community’s Options?
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Private Sector?
Public-Private Partnership?
Urban Renewal Authority – Blighted?
Eminent Domain?
Foreclosure?
Judicial Foreclosure
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Special District Fee Powers
 Statutory
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Perpetual Lien
Priority of District Lien
 Wasson
v Hogenson
 Superior to Private Encumbrances
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Familiarity of Title Companies with District Liens:
Rare for Districts to Actually Go Through with
Foreclosure
Board Decision Making
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The Bank will step up and pay off the District lien
to avoid loss of the property.
This should only cost us around $17,000 or less for
the foreclosure.
Moving Forward
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US Bank replied to the District’s foreclosure
requesting discovery
In June 2011 US Bank notified the District that it
would not redeem the District’s lien, nor would they
contest the District’s foreclosure
What do we do now?
The Alternatives
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Once the bank notified the District that they
would allow the foreclosure to go through
without protest, the District had two policy
alternatives to choose from:
1.
2.
The District could halt its foreclosure and
maintain its lien hoping the private sector
would eventually redevelop the property.
The District could go through with the
foreclosure and try and resale the property
The Meeting of the Minds
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After the District received the Bank’s response a
meeting was called with all of the consultants to
figure out what the next steps would be.
Board Decision Making
Imagine you are a Board member and you get this
news.
1.
You have spent over $17,000 in foreclosure costs.
2.
You have spent over $12,000 in consultant costs.
3.
The plan that always works has not.
4.
If you move forward you are moving into uncharted territory.
WHAT WOULD YOU DO?
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Action Plan
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Move Ahead with Foreclosure
Market the Property to Developers
Identify Revitalization Partner
Problem: Platted with Common Area Tracts & Alleys:
NO LIEN
Request the Title Commitment
A Distressed Property
Skeletons in the Closet
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Quitclaim of Tracts/Alleys from Developer
Bank Deed of Trust
Existing Litigation Against Developer
District Public Art Requirement
Defunct HOA – Declarant Rights
County Improvement Agreement
City Liens
Tax Liens
Board Decision Making
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You forge ahead thinking you doing the right thing
and then you get the title commitment and it’s the
scariest thing you have seen.
You have now spent more time and money on
research etc and the tasks look more daunting than
before.
What are the next steps?
How do you minimize expenses while still getting
this accomplished?
Skeletons in the Closet
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KDB Homes Memorandum of Agreement for
Infrastructure Reimbursement
Unrecorded Underlying Agreement
What is This Cloud on Title?
 Mechanics
Lien?
 Contract?
 Does
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it Run With The Land?
Do Statutes of Limitations Apply?
Negotiations for Release
Skeletons in the Closet
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ADM-BLT Entities Master Developer Deed of Trust
 Requirements
for Release of Deed of Trust
 Missing Note – Lost Instrument Bond
 Replacement Note
Title Companies
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What Is Their Role ?
How Do They Make Decisions?
Considerations: Potential for Litigation
Redemption Periods
Staff Decision Making
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Now What?
Title Company Might Not Play Ball
We’re 4 Days Before Closing
How Do You Convey This to the Board?
Do You Have the Right Team for This Task?
Quiet Title Action
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What Does a QTA Do?
Will a QTA Clear Any Encumbrance, On Any
Property, At Any Time?
Must Have a Possessory Interest (Claim to Title)
 Polo
Lots – Acquired By Treasurer's Deed – Title
Company Won’t Recognize – 7 Years for Clean Title
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Target Specific Encumbrances
 Provide
Legal Justification for “Quieting” Against
Challenging Claims to Title
Where Are We Today?
Keeping Everyone Focused
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Keep educating the Board on the past wins and the
goal of the project.
Keep the project on your agenda every month
regardless of updates.
Everyone must understand up front that this is a
painful and costly process.
Keeping Everyone Focused
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Any positive news gets sent out immediately, and
any negative news as well.
This process is hard to understand (for anyone), you
will have to explain it over and over.
Some of the Questions You Will Get
From The Public?
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Why are you spending my public funds on this
redevelopment project instead of
landscaping/enhancements?
What fiduciary responsibility does the have to
redeveloped this property?
Does the District have a say in what kind of homes
will be built?
Where Are We Today?
Wins
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The District delivered clean title for
Phase One and Phase Two.
The District received funds to
upgrade the landscaping at the
entrance to the property.
The District received funds as
payment for lost fees.
The District to get a $4 million
bump in AV due to this project.
The District will have fee paying
customers again in this area.
Losses
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The District wrote off a total of
$755,000 for both phases.
Lessons Learned
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This is an ugly process, one that is really tough to
manage.
Redevelopment is really expensive.
Communication with the team and the Board is
paramount to the success.
Lessons Learned
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Your direction and focus will shift several times; you
have to be nimble and adaptable.
Patience is key.
Keep moving forward and keep your goals in mind.
Remember this is not about the you are fees owned,
its about the redevelopment and the future of your
District.
Questions