Editorial

Guest editorial prepared for Hank Harenberg, CEO, Capital Concepts, Inc.

Better Developments, Better Financing - Better Hurry!

Land Development. To most readers, this means little more than the process of converting an empty lot into an occupied one through the addition of houses or other buildings.

To property owners and developers, however, land development encompasses an extensive range of construction activity and expenses far beyond the primary dwellings.

Consider just some of the infrastructure requirements of, say, a subdivision, municipal complex or industrial park. These may include water and sewage systems, electrical transmission facilities, cable and other telecommunication lines, drainage and flood control systems, roadways, pedestrian walkways and landscaping. Large community developments might also include parks, other recreational facilities, open space, fire and police stations, and even a library and schools.

Until now, infrastructure funding came from the landowner or developer itself, through personal assets, bank loans, or high-interest-rate private loans. Marginal projects and those that don’t otherwise qualify for traditional financing have struggled for approval. Still others have been suspended due to financial difficulties.

Recent legislation can alter this scenario. In 2001, New Mexico enacted Senate Bill 755, which creates a unique approach for the financing of land development projects. In effect, it allows private landowners and developers to tap into the vast resources of outside investors to fund local projects.

They may now petition city and county governing bodies for the authority to form Public Improvement Districts (PIDs) on their land. PIDs may then issue and sell bonds to private or institutional investors throughout the country to raise money for infrastructure expenses. PIDs thus attract an entirely new source of funding for New Mexico land development projects.

By placing new projects under the PID program, lending institutions eliminate the highest-risk portions of the loans. The lender also achieves a higher equity position from the infrastructure. Furthermore, foreclosed projects may qualify for PID funding through another developer, thereby allowing the lender to recover its loan loss and to establish new loans.

With more funding, New Mexico developers can accelerate their projects, extend their scope, and upgrade the quality of the development. These property enhancements will help secure conventional mortgages, as well. Projects that have been on hold because of the lack of local funding for utility extensions may now move forward.

The law also benefits city and county governments -- and, therefore, the taxpayers -- which no longer need to guarantee the bond debt. In fact, no financial liability is imposed on the local governing body when a PID project is undertaken. The bond debt is specific to the land and passes to the lot purchaser, with a 20- to 30-year repayment term. PID projects also qualify for tax-exempt status, acquiring the most favorable interest rates on the debt.

Through PIDs, New Mexico’s smaller communities can increase their property tax base rapidly without assuming the exorbitant infrastructure expenses. Special Assessment Districts, which are expensive and can take years to complete, could be eliminated altogether.

As a result of similar laws in other states, many banks and small-to-midsize developers are benefiting from this mechanism. In fact, the largest developer in Arizona will no longer utilize traditional methods for financing land development projects. Thus far, however, only one PID has been formed in New Mexico.

The opportunity to bring new capital into our state should appeal to local governing bodies, lending institutions, developers, landowners and taxpayers alike. The only question is: Why aren’t New Mexico developers and lenders taking advantage of it?