Spotlight on Public Finance: Fall 2019
is prepared by an assessment consultant who specializes in this type of work. It is important that the issuer hire an experienced assessment consultant who works for the issuer directly and is an advocate for the issuer. As part of its continuing role, the assessment consultant updates the SAP each year and prepares the assessment roll, which is the document that identifies the assessment amount by lot or parcel for each year the assessment is levied. The assessment consultant will interface with the developer, the county tax assessor collector, the appraisal district, bond counsel and bond trustee (if PID Bonds are issued), and the property owners within the PID. The assessment consultant is paid from a portion of the assessments levied on the property as an administrative cost of the PID. The importance of an experienced and responsive assessment consultant cannot be overstated. The assessment consultant and their attention to detail can help to ensure that the collection and enforcement of the assessments is smooth process that requires as little time from the issuer’s staff as possible. The PID will exist for thirty years or more and the issuer will have to manage each PID and update the SAP each year. Trying to handle this process in- house can be very time consuming for the issuer’s existing staff. PID Financings A PID financing can be a bond financing or it can be an annual cash flow reimbursement to the developer. Typically, if possible, a developer will want the issuer to issue PID Bonds for the costs of at least a portion of the public improvements within the PID. Again, this “up front” cash is very valuable to a developer and reduces the cost of private borrowing. However, there are circumstances in which a PID bond financing is not possible because of political and/or market reasons. In those instances the issuer can levy assessments and enter into a reimbursement agreement with the developer and each year as assessments are collected, the developer could be reimbursed for the costs of the public improvements from the assessment revenues collected that year. The developer then often monetizes that reimbursement stream by selling it to a bank or other lender as security for a private loan. An issuer may want to ensure the development agreement and reimbursement agreement address this circumstance and that the assignment provisions are acceptable and do not bind the issuer to perform reporting or other onerous obligations in the event of such an assignment or otherwise make the administration of the PID and the reimbursement difficult. A PID financing that results in the issuance of PID Bonds often looks quite different than an issuer’s normal general obligation or revenue debt process. Typically, the PID bonds are issued pursuant to an indenture of trust with a trustee bank and the financing documents are more numerous than a typical debt offering of the issuer. These financings are also more expensive than those the issuer would typically incur for traditional debt issuances because more professional time and additional reserve and administrative funds are required to be funded at delivery of the PID Bonds. All costs are typically paid from the proceeds of the PID Bonds, but if the proceeds generated from the PID Bonds are not sufficient to fully construct the public improvements, then the developer should deposit the difference in cash at closing of the PID Bonds. The issuer will want to ensure that upon issuance of the PID Bonds they that the issuer will at least have completed public improvements and will not be short of funds to complete those projects. Collection and Foreclosure The PID assessments are a first and prior lien except for ad valorem taxes of the issuer or other political subdivisions. Best practices dictate that the developer file notice in the property records of the existence of the assessments so that they will appear on a title report, although this is not required by law in order for the assessment to be valid. The ultimate security for any PID bond financing or any reimbursement obligation to a developer is foreclosure on the property if the property owner does not pay their assessment. Unlike with property taxes, the issuer would not have the option to delay foreclosure on the property. The issuer will be required to covenant in the bond documents, or in a reimbursement agreement, to foreclose for nonpayment of the assessments. These foreclosure costs would be an administrative expense of the PID. Because foreclosure takes some time, in a PID bond financing, there are reserves that can be drawn upon to make bond debt service payments until foreclosure can be completed. In addition, foreclosure in one year does not extinguish the assessment for future years. If a property owner fails to pay again in a subsequent year, the issuer would have to foreclose again on that property. Risks of a PID Bond Financing The PID Bonds are payable solely from assessments levied within the PID, and an issuer is never required to pay those PID Bonds from any other sources of revenue. In other words, the issuer’s general fund is not at risk. The time period of the most risk with respect to a bond default is the time period when the developer owns the property and is responsible for payment of all or a majority of the assessments. Typically, the PID bonds will have a capitalized interest period where no assessments will be due and during this period the developer will construct the public improvements and complete lot development in order to sell to home builders.
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