Development costs eased by tax zones Counties use them to help pay for infrastructure

'Accommodating growth'

Some feel method favors developers, not homebuyers FTC

December 27, 1997|By Liz Atwood | Liz Atwood,SUN STAFF

The 500 acres near Route 100 in Anne Arundel County had everything a developer could want: access to major highways, proximity to Washington and Baltimore, a nearby international airport.

The one thing the site didn't have was sewer service, and the nearest hookup was nearly two miles away. Developers John Driggs and Charles E. Stuart knew the $3.5 million it would cost to build that sewer extension was apt to discourage prospective lenders.

So, in what has become a growing movement nationwide, Stuart helped persuade state and county officials to establish a special tax district last year to pay those infrastructure costs and offset the county fees that would be levied against his Dorchester Village project.

"This is good for the municipality, it is good for the homeowner, and it is good for the developer," Stuart said.

Eight Maryland counties have the authority to establish development tax districts, and that number is expected to grow in the face of increasing development costs.

Some residents and politicians question the fairness of this financing technique, which helps builders sidestep some of their development costs and creates disparate levels of taxation.

The idea of tax districts isn't new. Since the last century, tens of thousands of such districts have been created in the United States to help pay for public services such as schools, fire protection, roads, water and sewer.

In some cases, such as in Baltimore's Charles Village, districts have been created to provide services beyond those the local government is able to provide.

But tax districts to defray developers' upfront costs on projects are relatively new, starting in California as a response to the tax backlash in the 1980s that forced communities to devise ways to pay for public services.

"It's a way of broadening the burden without imposing it [the tax] on existing residents," said Douglas Porter, president of the Growth Management Institute in Chevy Chase and author of a book on special tax districts. "It is a way of accommodating growth."

Among the Maryland projects that are being helped with the creation of the tax districts are:

Dorchester Village in Anne Arundel, where a tax district has been created to offset the $16 million worth of sewer, roads and other services at the 2,000-unit development.

The Germantown area in Montgomery County, where a development district will pay for $12 million worth of services, including two parks at a 1,500-unit development.

The Woodview development in Prince George's County, where a tax district was created to pay for $8 million worth of improvements.

The immediate beneficiary of these districts is the developer, whose upfront costs are lessened. Not only is it easier for developers to obtain bank loans for their projects, but the impact fees counties have levied on developments sometimes are supplanted by the tax.

With a traditional financing plan, the developer passes along the infrastructure costs and any county development fees in the price of the home. With a tax district, the infrastructure costs and fees are financed by bonds, which then are repaid over several years by the development tax. The home prices and settlement costs are lower.

Take the example of a typical home purchase in Anne Arundel County. Ordinarily, a $168,600 house would require more than $23,000 at closing. A similar house within the Dorchester Village would cost $145,300 and require $21,484 at closing.

Another advantage, local officials say, is that the tax districts can allow the county to win concessions from the developers.

Prince George's officials, for example, cleared the way for a developer to build an upscale, mixed-use development outside Mitchellville using a tax district to help pay for the added 'N community benefits, including recreational facilities.

The tax districts also provide a means to pay for projects that might otherwise be too costly for the developer at a time when banks are reluctant to make loans for the infrastructure improvements that localities are demanding developers provide.

"It really has put developers into a squeeze," Stuart said.

Hoping to ease the burden created by its development regulations, Montgomery County created a tax district to encourage development in the Germantown area, said Timothy Firestine, county finance director.

"We've been a slower-growing county than the Northern Virginia area, and the county executive wants to encourage growth. This is one of those tools," Firestine said.

Because bonds pay for the cost of roads, parks and other services, the tax district ensures that such improvements are in place at the beginning of the project.

Critics of development tax districts question their fairness and effectiveness. Baltimore County considered creating a tax district for its Honeygo development area near White Marsh but decided against it.

"The county has a responsibility to meet certain demands," said Planning Director Arnold F. "Pat" Keller.

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