On September 30, 1988, the Arizona Community Facilities District Act (the “Act”) became effective. The Act, which was passed by the state legislature, was created to allow Arizona municipalities to create special taxing districts for the purpose of financing the installation, operation and/or maintenance of public improvements. The Act, which was styled after similar legislation in California and Florida, addressed a critical issue for developers and home builders; that being the financing of increasingly costly public infrastructure without unduly burdening the end users of property.
Under the Act, the following types of public improvements may be acquired and/or constructed with Community Facilities Districts (“CFD” and/or “District”) bond proceeds:
– Water and sewer projects
– Police and fire facilities
– Public buildings
– Flood control and drainage projects
– Public parking structures
– Landscaping and lakes
– Lighting and traffic control
– Parks and recreational facilities
– Pedestrian Malls
– Enhanced public services (in redevelopment areas)
The Act allows for the issuance of general obligation bonds, special assessment bonds and revenue bonds or any combination thereof. The security for the repayment of the bonds is as follows:
General Obligation Bonds – The security of the general obligation bonds is the tax revenue generated by an increase in the ad valorem property taxes of property contained within the CFD. A general obligation bond payment is passed through to the end users of property through an increase in the secondary tax rate via the county property tax bill.
Special Assessment Bonds – Security for the special assessment bond is a special assessment lien placed upon the property determined to be benefiting from the public improvements funded by the CFD. Special assessment liens are repaid through a separate special assessment billing issued by the District.
Revenue Bonds – The security for revenue bonds is the revenue stream generated from the public improvement financed by the CFD. Revenue bonds are repaid by the users of the facility through usage fees. For example, a CFD may construct a public parking garage and a portion of the revenues generated by the parking garage are utilized to repay the bonds which were issued to construct the parking structure.
Bonds issued by a CFD have a term of 25 years and carry a tax exempt interest rate which is usually much lower than what developers can achieve in local financial markets.
Formation of CFDs have a beneficial impact on property owners within the boundaries of the District in that CFD bond proceeds are made available to allow for the construction of public improvements and related infrastructure at a much faster rate than that which would have otherwise been possible and in some cases, provides public amenities that otherwise may not have been possible. Property owners in the District also benefit from having higher quality improvements that are maintained at a higher standard than would otherwise be the case. Because end users participate in the repayment of the bonds via an increase in the ad valorem property tax and/or a special assessment lien payment, a portion of such payments are deductible for federal and state income tax purposes (NOTE: Please consult with your tax advisor on this issue).
For persons involved in the sale of real estate, the existence of the CFD must be disclosed to potential end users of the property. At present, developers and home builders provide CFD disclosure statements to perspective buyers of property contained within a CFD. The disclosure statement explains the structure of the CFD, the improvements to be financed by the CFD, and the estimated financial impact of the additional tax and/or assessment on end users of the property. Additional disclosure documents are also signed by the buyer of property during the closing process to ensure that the buyer is aware of the fact that the property which they are purchasing is located within a CFD.
At present, there are approximately 35+ CFDs in the state of Arizona with an additional 40+ CFDs encompassing 150,000+ acres, in the process of being formed from Bullhead City to Sierra Vista. Some of the larger real estate developments employing CFDs include: DC Ranch, McDowell Mountain Ranch, Vistancia, Verrado, and Estrella Mountain Ranch. As the cost of providing public improvements escalate, the use of CFDs will continue to increase as a means of providing, maintaining and operating public infrastructure, public open spaces and public recreational amenities.