The Denton City Council is poised to consider a major policy change that would remove a seven-year prohibition on developers using public money for construction financing.
RED Development, the current developer of Rayzor Ranch, asked the city nearly two years ago to form a public improvement district for the south side of the 410-acre, mixed-use development. Now, the developer is asking to use bond money from the district in ways the city has not allowed before.
With a public improvement district, in essence, a developer can bypass a bank loan by asking the city to be a financier. A city creates a district in order to issue bonds and holds that money in escrow, reimbursing the developer as the project is built.
The financing could cover the cost of grading and drainage work, streets and sidewalks, water and sewer lines, and street lights and traffic signals. The developer has also expressed an interest in using bonds to pay for improvements required along the freeway frontage road.
If the council approves construction financing as an eligible use, it would remove a prohibition put in place by Denton city leaders in 2007. Proponents of district financing say it is low-risk because the debt is guaranteed by the value of the land, but critics say that the public backing of such financing, when done without requiring performance bonds, could increase risks if the development runs into financial trouble.
The city’s economic development director, Aimee Bissett, explained the request to the City Council during its work session Tuesday, when she reminded members that the city’s guidelines for such districts must be updated every two years. The city’s next update is due in April.
Under state law, construction finance is an allowable use of district money, even though Denton currently doesn’t allow it as a matter of policy.
“We’ve got to be adaptable,” Mayor Mark Burroughs said after Bissett’s presentation. “PIDs [public improvement districts] aren’t a big deal for the rest of the city. They are just taxing themselves.”
To repay the bonds, businesses and homeowners who purchase property inside a public improvement district would be required to pay an assessment (in addition to city, school and county taxes). The city currently caps assessments at 40 cents per $100 valuation, with some exceptions. Bissett told the council that RED Development said it would need the assessment set at 50 cents per $100 valuation.
Property owners would have to pay those assessments in addition to city, school and county taxes, which are currently about $2.50 per $100 valuation. In other words, property owners in the district would pay about 20 percent higher property taxes than other property owners in the city.
Moreover, collecting those assessments would be the city’s responsibility. Although the city would have the power to foreclose in order to collect, too many defaults inside the district could affect city finances.
Rayzor Ranch encompasses about 410 acres, and its original developer negotiated economic incentives for the project that are still in place for RED Development.
That agreement provided for the developer and the city to split sales tax collected at businesses there, reimbursing the developer up to $62 million for the public infrastructure.
With the opening of stores in Rayzor Ranch Marketplace on the north side, about $20 million in reimbursements have begun under the original, sales-tax sharing agreement. Another $42 million remains available under the original agreement for the south side.
In 2012, the City Council had agreed in principle to the district, provided that the city amends its original, sales-tax sharing agreement so that projects paid for by the bonds would not also be eligible for sales tax reimbursement.
Council members provided no feedback on the request to change the city’s policy and increase the cap. Instead, Burroughs summed up the council’s direction.
“All nods,” he said.
PEGGY HEINKEL-WOLFE can be reached at 940-566-6881 and via Twitter at @phwolfeDRC.