ORIGINALLY WRITTEN DON RATZLAFF
Real estate professionals call them “specials,” but in reality assessing property owners their share of the cost of infrastructure improvements in new subdivisions is a widespread practice in Kansas.
The practice boils down to a common-sense truth: You don’t got something for nothing.
In a housing subdivision, that means someone has to pay for the new streets and water and sewer systems. Inevitably, it is the homeowner who picks up the tab because it is the homeowner who benefits from the improvements.
Jerry Rayl, the City of Hillsboro’s financial consultant, said cities follow one of two models for financing for those improvements.
Under one scenario, the city’s governing body requires the subdivision developer to pay for the improvements up front. The developer then adds a proportional share of those costs to the cost of each lot.
The more common model, and the one Hillsboro follows, is that a city’s governing body finances the money for the improvements. The costs are then recouped when the city requires the homeowner to repay them through an additional tax or “special assessment.”
Special assessments can be paid in one lump sum, or by monthly installments, generally over 15 years.
“Hillsboro’s approach is not unusual,” Rayl said. “I would say the other approach is more unusual from the standpoint that most smaller communities-even though Wichita does it, too-are so anxious for new residential development that they’re willing to do the financing for the infrastructure improvements.”
Mike Padgett is involved in special assessments both as president of the Hillsboro City Council, and as a lender through Central National Bank.
“I think the way we do it helps promote additional development in the community,” Padgett said. “There are some other communities that do add it on (to the cost of the lot), but I do think there are quite a few communities within the immediate area in Kansas that do it in a similar fashion to what we do.”
Bruce Kunkel, co-developer of the Willow Glen subdivision on the south edge of Hillsboro, said in their case it was essential for the the city to front the money for streets, water and sewer.
“One of good things about specials in Kansas is that it allows a developer to go in and be able to afford to build a subdivision,” he said. “Otherwise, we’d have to come up with a half a million dollars in cash, and nobody would do it.”
A public procedure
Rayl said the procedure a city and subdivision developer follow is carefully spelled out by state law with several opportunities for public input.
“It starts with a petition from the developer requesting the improvements,” Rayl said. “The city then accepts the petition, passes a resolution of advisability-whether it’s advisable to make those improvements-and passes an ordinance authorizing the improvements to be made.”
From the there, the city puts the project out to bid for construction. If the bids come back within the estimated cost spelled out in the petition, the city then authorizes the construction of those improvements and the work is then carried out.
“Because construction typically is bid on a per-item basis and not as a lump-sum bid, you don’t know what the final costs are until the project is complete,” Rayl said. “Once those final costs are known, we put together a final costs report and a proposed special-assessment report to the council.”
At that point, the local governing body calls for a public hearing on the proposed assessments and sends out notices to the affected property owners.
“The notices that go out basically tell them when and where the hearing is and what their proposed assessment is on their particular property,” Rayl said.
At the public hearing, complaints or objections are heard and, if necessary, modifications can be made based on what the council hears.
“The city then passes an ordinance levying those assessments against those properties and a second notice is sent out to the property owners affected,” Rayl said, “letting them know this is the final assessment against their property.”
Property owners than have a period of time to pay the total amount in a lump sum. If they choose not to pay the total amount, it will be included in a bond issue and collected over a 15-year period.
“Fifteen years is pretty typical as far as the term of the assessment,” Rayl said. “It used to be 10 years, but the cost of projects has gone up so much that most cities now have gone to 15-year assessments.”
Rayl said once the pay-in is complete and the city determines who has paid and who hasn’t, the city computes the size of the necessary bond issue and then sells bonds for that purpose.
“The interest rate the city receives on the bond is the interest rate we use to certify the special assessments each year to the county clerk for collection,” Rayl said.
A private advantage
Rayl said paying for streets, water and sewer through special assessments is actually an advantage for the buyer.
“It’s a lower interest rate and it allows them to finance those improvements with their mortgage,” he said. “Otherwise, they would be expected to come up with the cash.
“Conversely, using the other method, if the developer pays those costs up front, he includes it in the lot price when he sells the lot to the builder-and then they would essentially finance those same costs over the life of their mortgage, which is typically 30 years and at a much higher interest rate.”
For example, Rayl said the interest for special assessments in Willow Glen and Prairie Pointe were conservatively estimated at 5.5 percent. The average interest on a home mortgage, meanwhile, is around 7.5 to 7.75 percent.
Even if a buyer can pay off the specials in one lump payment, he or she likely would be better off choosing monthly installments.
“If you have that amount of cash up front, you’re probably better off paying down your loan because more than likely your loan is at a higher interest rate than what your specials are,” Padgett said. “But it’s up to each person’s preferences.”
Become informed
Even though the special-assessment process is common and mostly public, Rayl said it’s not uncommon for first-time property owners to say they were unaware of the additional financial obligation they accept when the purchase a lot.
“When the city adopts the resolution of advisability early on in the process, and that resolution is registered with the (county) register of deeds office, a notation is put on each piece of property that is going to be affected,” Rayl said.
Padgett said most buyers would find out about special assessments during the loan process.
“Special assessments are looked at just like normal taxes are,” he said. “It’s just an additional monthly payment that the borrower is going to need to be able to make. We do include that when we are looking at their debt-to-income ratios.”
Padgett said specials are going to show up when the buyer orders title work and the title insurance policy.
“We will then take those into consideration when we’re making that lending request,” he said. “Typically, but not always, the payment for specials is escrowed, just like taxes and insurance are, and that would be presented to them through that loan process.”
Padgett said every buyer ought to inquire about the possibility of specials when buying a home.
“It’s just something that when individuals are looking at a home, they should be aware of,” he said. “In some newer developments, there is a potential for specials. But it’s not strictly in new developments. There is potential for specials throughout a community. It’s a question they should probably ask.”
