By Duke Dennis
There has been a lot of buzz lately in commercial real estate about “Public / Private Partnerships” (PPP). Well, Municipal Utility Districts (MUDs) are the best example of PPP and have been around for years! Although MUDs are not well known public finance tool, they may very well solve many Clients’ capital requirements.
So, what is a MUD? It’s a political subdivision created by State law that applies to a defined area. It engages in the supply, conservation, irrigation, and drainage of: water, firefighting, solid waste collection, disposal and recycling, wastewater treatment, and recreational facilities.
State law gives MUDs the power to establish the authority, rights, and duties necessary to accomplish their purpose. MUDs powers/capabilities encompass the following:
- Incur debt and levy taxes
- Charge fees and set rules for services
- Enter into contracts
- Obtain easements
- Condemn and annex property
- fund, via debt, the creation of public infrastructure
The public infrastructure MUDs can fund include utility infrastructure, certain roads, and fire prevention facilities. In order to fund MUD infrastructure, tax-exempt municipal bonds are sold via public sale. In residential real estate MUDs are used by developers to subsidize the cost of horizontal utility, infrastructure, and roadways for large subdivisions and master-planned residential communities. Without the bond proceeds, these projects would just break even. Though, before debt can be issued to fund any such costs, the following four (4) criteria (set forth by the Texas Commission on Environmental Quality (TCEQ)) must be met:
- All water, sewer, and drainage facilities to be financed with the proposed bond issue;
- All streets and roads that provide access to the areas need to be served by the utility improvements;
- At least 25% of the projected value of houses, buildings and/or other improvements shown in the projected tax rate calculations need to support the bond issue; and,
- Land values and both existing and projected improvements must fully support a reasonable tax rate for debt service payments while maintaining competitive utility rates.
Once these criteria have been met the bonds will be sold and the funds from the sale will go to the developer. The MUD will then levy a tax on the newly developed homes and lots. The tax revenue generated will repay the bondholders. Over time as the MUD area is developed, the tax rate will decline as the bondholders are paid. Conceptually, MUDs are very similar to Tax Increment Financing Zones (TIFs), in that both financing mechanisms rely on the tax revenues generated from future development to subsidize the project or to repay debts.
Although relatively unknown to the majority of the development community, MUDs have had a dramatic impact on the landscape of cities throughout Texas and have been used for decades by numerous municipalities including: University Park, Highland Park, Conroe, Houston, Cypress, Katy, Cinco Ranch, Pearland, Spring, Kingwood, Sugarland, Round Rock, Pflugerville and Granbury. Park Cities has used a MUD to fund a water treatment plant. The Greater Houston-Woodlands-Sugar Land MSA has had most of its single-family residential development by using MUDs.
Like any other financing methods and/or structure, understanding the many nuances of using MUDs requires a well-versed capital markets background, especially when working to maximize the benefits of public finance inside the envelope of a conventionally financed real estate project. Through recently completed transactions, Metropolitan Capital Advisors has been on the cutting edge of Public / Private Partnerships and the use of MUDs in the real estate finance capital stack. For more information on MUDs and how Metropolitan Capital Advisors can help you finance your next project, contact us @ www.metcapital.com.
The author, Duke Dennis, is a Senior Analyst in the Dallas office of Metropolitan Capital Advisors. To learn more about MUDs and how they can be financed Duke can be reached at [email protected] (972) 267-0600.