The Effects of Failed/Bankrupt Subdivisions on Special Districts and How Districts can Help

1. Mathew Mendisco, CliftonLarsonAllen • Brent E. Butzin, Esq., White Bear Ankele Tanaka & Waldron The Effects of Failed/Bankrupt Subdivisions on Special Districts and How Districts can Help

2. The Presentation • 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.

3. Table of Contents • 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

4. District Aerial

5. Revitalization Areas Aerial 2010

6. Overview of Tollgate Crossing Metropolitan District No. 2 • 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

7. Overview of Tollgate Crossing Metropolitan District No. 2 • 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

8. Overview of Tollgate Crossing Metropolitan District No. 2 • 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

9. The Back Story • 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.

10. The Back Story • 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.

11. The Back Story • 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

12. The Current Environment • 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

13. Revitalization Area 2012

14. Revitalization Area 2012

15. Revitalization Area 2012

16. Revitalization Area 2012

17. What Were the Community’s Options? • Private Sector? • Public-Private Partnership? • Urban Renewal Authority – Blighted? • Eminent Domain? • Foreclosure?

18. Judicial Foreclosure • Special District Fee Powers • Statutory Perpetual Lien • Priority of District Lien • Wasson v Hogenson • Superior to Private Encumbrances • Familiarity of Title Companies with District Liens: Rare for Districts to Actually Go Through with Foreclosure

19. Board Decision Making • 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.

20. Moving Forward • 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?

21. The Alternatives • 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: • 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

22. The Meeting of the Minds • 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.

23. Board Decision Making • Imagine you are a Board member and you get this news. • You have spent over $17,000 in foreclosure costs. • You have spent over $12,000 in consultant costs. • The plan that always works has not. • If you move forward you are moving into un-charted territory. WHAT WOULD YOU DO?

24. Action Plan • 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

25. A Distressed Property

26. Skeletons in the Closet • 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

27. Board Decision Making • 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?

28. Skeletons in the Closet • KDB Homes Memorandum of Agreement for Infrastructure Reimbursement • Unrecorded Underlying Agreement • What is This Cloud on Title? • Mechanics Lien? • Contract? • Does it Run With The Land? • Do Statutes of Limitations Apply? • Negotiations for Release

29. Skeletons in the Closet • ADM-BLT Entities Master Developer Deed of Trust • Requirements for Release of Deed of Trust • Missing Note – Lost Instrument Bond • Replacement Note

30. Title Companies • What Is Their Role ? • How Do They Make Decisions? • Considerations: Potential for Litigation • Redemption Periods

31. Staff Decision Making • 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?

32. Quiet Title Action • 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 • Target Specific Encumbrances • Provide Legal Justification for “Quieting” Against Challenging Claims to Title

33. Where Are We Today?

34. Keeping Everyone Focused • 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.

35. Keeping Everyone Focused • 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.

36. Some of the Questions You Will Get From The Public? • 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?

37. Where Are We Today? Wins Losses • 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. • The District wrote off a total of $755,000 for both phases.

38. Lessons Learned • 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.

39. Lessons Learned • 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.

40. Questions