(Originally published in the August 2008 Housing Journal)

Special Assessment Districts (SADs)

The Housing Journal has featured articles explaining the Tax Increment Development District (TIDD) and Development/Impact Fees mechanisms for funding infrastructure development in new subdivisions. But what happens if an area is already partially developed and now more infrastructure services are wanted/required by either the residents or the community? That’s where Improvement Districts and their funding mechanism, Special Assessment Districts (SADs), enter into the picture.

This funding mechanism is routinely used to go back and provide utility improvements or to update roads in areas where homes were built without developer-supplied infrastructure. These subdivisions may have been platted and sold to multiple private owners as “premature subdivisions,” and usually are missing standard infrastructure, such as street improvements, drainage easements, adequate park, recreation or open space area, or overall drainage features. This type of subdividing was popular in the 1970s in New Mexico, and large tracts in Silver City, Placitas, the mountain communities east of Albuquerque, and the entire City of Rio Rancho were originally subdivided in this fashion.

Improvement districts may be set up to provide a variety of infrastructure improvements, but everyone within the district’s boundaries must pay their assessed share because they all receive the benefit of the improvements. Each parcel of land within the district is assessed its share based upon the “amount of maximum benefit” estimated for each parcel. That means there is an estimated increase in value for each parcel due to having the infrastructure improvements constructed. Even if the actual costs for constructing the improvements increase, State law says the assessments cannot increase beyond the original estimate of “maximum benefit.”

SADs are different from other infrastructure financing options in New Mexico because they are the only method that allows the governing body to pay the cost of the improvement up front, and then levy the assessment on the landowners at a later date. SADs may also be funded by the issuance of general obligation bonds and tax increment bonds after being approved by voters in the District. SADs may qualify for NM Finance Authority funding and, if financed through bond sales, must have high investment grade rating.

It is common for the SAD to be financed through assessments added onto landowners’ property taxes. Payments may be paid in lump sum, or may be spread over 10, 20, or 30 years, and include interest on these delayed payments.

A new SAD may be requested by landowners in an area who sign a petition, or by local government, as recently when the City of Rio Rancho began the SAD process to address storm water runoff issues due to the excessive damage to dirt roads caused by the 2007 monsoon season.

If there is one drawback to utilizing SADs, it is when the provisional order option is used. This is where the city or county decides to impose a SAD on landowners to install the necessary infrastructure instead of the residents petitioning for an improvement district. The provisional order option is politically unpopular. In Rio Rancho this has cost at least one City Council member their seat in the 2008 primary election. Landowners often resist raising their own property taxes, even for basic improvements such as paving over dirt roads. The lots where SADs are imposed generally started out with cheaper land prices because the developers did not provide full infrastructure. Home and lot prices in these areas were often much lower because they were in a “partially developed” area and there can be a great deal of resistance to paying for improvements. Residents often feel improvements should be simply “provided” by the government. Emotions usually run high, and in an election year, this can create a great deal of upheaval.

SADs have been the traditional solution to provide infrastructure in “premature subdivisions”, but as the Rio Rancho example shows, the political climate has shifted so this financing option is becoming harder to utilize. In today’s economic climate the municipalities have less money to spend, fewer special projects are able to be funded by the state, and the federal government traditionally has not become involved in paving local residential roads. Like many local governments, Rio Rancho doesn’t have the funds to provide new infrastructure, and there is no other funding mechanism available except for the SAD. Yet, homeowners in these areas of Rio Rancho where there are no drainage facilities feel it is the city’s responsibility to provide these facilities and pave the roads. Because this disconnect in reasoning exists and homeowners refuse to pay for the infrastructure improvements, large areas of the third largest city in the state will probably continue to go without drainage improvements. That means we can all look forward to more news stories about roads washing out and homeowners complaining about government inaction because they can’t access their property.

This article is part of a series on infrastructure financing options in New Mexico. You can view the articles about development/impact fees from the April, May and July 2008 Housing Journal issues online at www.nmhba.org. If you would like a pdf file of the Development Fees Act e-mailed to you, call Melanie Teeter at the NMHBA office at 505-344-7072, or e-mail to her at melanie@nmhba.org.

You can also see an explanation of the Tax Increment Development District infrastructure financing law from the January 2008 Housing Journal online at www.nmhba.org. Coming in the September 2008 issue will be the last of this infrastructure financing series, on Public Improvement Districts.