By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
When the day to close the deal came, the couple had a typically large number of documents to read and sign. One involved the disclosure of taxes on the property, and that's when Cheryl Bass noticed that something wasn't right. What exactly are these two odd taxes? they asked the closing agent. The mysterious taxes, almost as high as the city and county taxes combined, were for roads and levees and would decrease every year and then go away when debts were paid, they were assured. The surprising appearance of the extra tax load on their future home was unnerving but not enough to quash the deal, Bass says.
So, they signed the papers and bought their house. And, just like their neighbors who had moved into the 1,344-acre subdivision about 19 miles north of Dallas, they started paying the obscure taxes for two specially created entities: a road district and a levee improvement district.
What the Basses didn't know when they bought their house is that the two tax districts had been quietly racking up debt for 12 years. During that time, until the road district's new residents figured out what was going on, district directors were never challenged, so no elections were held. Road district directors gave legally required public notice of their meetings by posting a note at a pump house few people ever frequented. The other notice was posted at the official district meeting place, which was at the offices of the neighborhood's developer, Centex Development Co., until 1998, when homeowners took over the board and Centex kicked them out.
The Basses didn't know they were paying a premium for their house just because it happened to be located inside the boundaries of the two special taxing districts. They didn't know that property owners a couple of miles away didn't have to pay for major highways and in truth got their property much cheaper. They didn't know that Centex soon would be demanding millions of dollars from taxpayers for land the developer first promised to donate to Texas. And, they didn't know that millions of dollars in more debt were tucked away and slowly called in so that future homebuyers and commercial property developers wouldn't be scared off too soon by a big tax burden, one homeowner advocate says.
The Bass family and others who moved into the area should have paid more attention to the details when they bought their property; they admit that. But even if they had asked more questions about the odd tax districts, they probably would not have been able to figure out how much they would owe once they bought district property. That's because even the people running the districts today, Cheryl Bass among them, don't know for sure and can't find out. The "road utility district" that encompasses the Bass family home and about 600 others, owes $14.5 million in outstanding bonds, and Centex wants at least $9 million more that would not show up on the tax disclosure statement given to homebuyers at closing.
The levee district owes $1.9 million in outstanding bonds. The district also owes Centex another $8.6 million--a debt that will fall directly on the shoulders of about 600 homeowners when Centex comes for it. Bass says that last year when her board of directors tried to figure out how much tax burden the road district could take and what the district's total debt was, Centex sued them.
"Reasonable, that's what we thought we were being until we were sued," she says. "We were blindsided."
Meanwhile, just to the north, developers acting with the blessing of developer-friendly politicians in Denton County scrambled to snag a similar kind of deal that lets them spend millions of dollars of public money with no real oversight from those who will eventually foot the bill. They want to use taxpayer money to pay themselves back for developing their own property. Eventually, homeowners will move in. When they do, Bass might have a word of advice about buying a house in developer-friendly Texas.
"The developers say we're only going to do what's good for us today, and we're not going to worry about what's happening tomorrow," she says. "The developer is going to do what the developer needs to do to make more money."
In the mid-1980s, the 1,344 acres south of Round Grove Road was a mix of swampy pasture and woods. Developers, who called themselves Vista Mortgage and Realty Corp. at the time, hoped to make the area suitable for a mall, light industry, and houses. But, unlike conventional developers who typically obtain private financing to build roads and sewers and then get their money back when they sell lots at market prices, Vista Mortgage looked to new legislation that would let them do things very differently.
Vista Mortgage, headed by Wayne Ferguson (who did not return telephone calls) and others, used a law that allowed them to create a road utility district, a political entity that can collect taxes from its residents just like a school district can. Once that kind of district is created, it can borrow money, millions of dollars, to pay for roads and sewers. The Department of Transportation must approve the creation of a road utility district. But, after the district is formed, it's up to the district's "elected" officials to make sure taxpayer money is being wisely spent even if the taxpayers haven't arrived at their new houses yet.
To get the state's blessing for the district, Vista Mortgage had to say it would give the state property for major highways, including what would become the State Highway 121 bypass just west of Interstate 35E.
Unlike other developments, which are usually built adjacent to existing highways, Vista Mortgage would improve or build 7.7 miles of major roadways that would make their land accessible for new construction. Developers needed a board composed of directors who owned property in the road district. So, right before they named them as temporary directors, developers gave five men, non-Vista employees selected by the developers, small pieces of land in the district. The five pieces of property are adjacent to each other and are located in a creek. Because no one else lived in the district, the five subsequently became the district's de facto elected officials. Later directors, who were somehow found to replace the old ones, just became new owners of a piece of "director property," according to research by Rider Scott, a lawyer working for Cheryl Bass and other road district board members. Before homeowners took over the board in 1998, three of the directors were involved in banking, one in real estate, and one in public relations. (A Denton County judge appointed the original directors for the three-member levee district board. They were not required to own property in the district.)
Road directors, who were typically asked by Vista to serve and then just filed for a vacant post, would serve at their pleasure from 1986 until 1998. Because the road district maintained a low profile, nobody seemed to know about the district, and nobody ran for office. It would be 12 years before a bona fide district election would be held and real taxpayers would take over. That's partly because homeowners would not start moving into the district in large numbers until the late 1990s. As in the case of the Bass family, residents would complain they didn't know about the tax district until they closed on their house and even then were unsure what it was.
The idea for the new type of road tax district was praised. An article printed in 1986 in a trade publication called Engineering News-Record called the proposed roads in the district "no-tax roads."
"At no cost to Texas taxpayers, the Denton County Road Utility District No. 1 north of Dallas is constructing 7.7 miles of arterial and feeder routes, constructing a drainage system and improving existing roads," the article said.
The article said the district idea was great because all the roads would be constructed simultaneously and because tax-exempt municipal bonds, which have lower interest rates than conventional notes, could be used to pay for them. While the Department of Transportation monitors the quality of the construction of roads within its jurisdiction, the district's board of directors is the only "outside" oversight agency that is supposed to act as a watchdog for taxpayer money. So, while Vista Mortgage put up money up front for roads and sewers, once the district property became valuable enough to get an acceptable rating for municipal bonds, the district's taxpayers would pay Vista Mortgage back for everything and with interest. Vista began moving dirt, and by 1987 the district's directors had approved issuing $14.6 million in bonds to partially repay Vista Mortgage.
Scott, the lawyer, says it was up to the developer-appointed road district board to make sure developer spending and road district borrowing was frugal and appropriate. For that reason, Scott questions the way the directors were allowed to rack up district debt, particularly the "soft" money associated with the massive bond issue.
"When you issue the bonds, there is absolutely no check and balance on these bonds. There is nobody to say, well, that's much too much money to be paying bond counsel or underwriters, so they run up exorbitant fees, large, large fees for the bond issue," he says.
The terms of bonds are variable and so are the "soft costs" such as fees for lawyers and those who handle the bond sale, Scott says. Issuing bonds that are paid back in five years rather than 20, for instance, might be more frugal, but someone interested in making money off the deal could recommend lousy terms. If district officials aren't careful, they'll put much more burden on the tax district than necessary, Scott says.
Barry Pound, a road district director from the district's first day until 1998, was asked how closely directors were looking at what the developers were spending money on.
"What we were looking at was what was happening to the tax base and maintaining the solvency of the district and providing returns for those bonds," he says. "I think that was our key consideration."
For developers, the road district setup is ideal. Once lots are ready and accessible by road, they can be sold at market price. But, if you account for the road and levee debts, the lots inside the district are more expensive than lots outside the district. That's because houses outside the district, for the most part, already have the costs of new roads and sewers wrapped into the purchase price.
Buyers like the Basses, for instance, didn't fully realize that because of the road debt, the sale price of their house is actually thousands of dollars more than the price of a house outside the district just a mile or two away. With the extra tax load of the two special districts, the Bass family is looking at an extra $20,000 to $30,000 at least in taxes over the next 20 years. Scott claims developers count on the ignorance of future homebuyers to sell their tax-burdened houses.
According to the Denton Central Appraisal District, the road district today is worth about $449 million. The district has 611 homes, two apartment complexes, Vista Ridge Mall, and several corporate property owners. The levee improvement district, which maintains a system of levees that keep district property from flooding, is worth $185 million. The levee district has 649 homes, according to the appraisal district.
Developers were successful in their mission to make the swampy pasture valuable commercial and residential property, but Vista Mortgage didn't get to where it is today without a few problems. The real estate development market took a nosedive in the late 1980s, and the original company filed two bankruptcies, one in 1992 (when the company was called Lomas Realty USA) and again in 1995. During the second bankruptcy, the company became a subsidiary of Centex, which is a giant, nationwide homebuilder and property developer. At least some of the same people who were at the helm of Vista stayed with the new companies. Vista offices never even moved. Records show that the executive vice president and chief operating officer of Vista Properties Inc. in 1992 was F. Charles Emory and that he was chief executive officer for Centex Development in 1999, seven years later. Because he has left Centex, Emory declined to address the issues raised in this report.
"Centex just bought Lomas' stock so the guys that were doing the screwing before were doing the screwing after," Scott says.
The bankruptcies allowed the company to discharge debt and reorganize. During the first bankruptcy, the state agreed to let the financially troubled company out of a promise to pay for the $4.4 million Highway 121 bypass construction and the intersection at Highway 121 and Interstate 35E at the southeast corner of the road district.
Denton County's taxpayers ended up paying $1 million, and the rest of the state's taxpayers paid the rest. Developers were still promising that the road district would donate the right of way for the bypass.
"We are prepared to donate 59 acres of right-of-way for the 121 bypass and are completing the construction plans for the 121 bypass/I35E interchange at a cost of just over $600,000," a 1991 letter from the developers to the Texas Department of Transportation says.
So the Vista company says it will donate the property for the road, but that's not because the developers were feeling generous. The state says the right of way had to be donated to the state, or the road district wouldn't have been approved. So, the developers arranged to have the road district buy the land from the company and then donate it to the state--more debt for future homeowners.
David Fortune, a homeowner who is chairman of the district board, says the provision that the road district would pay for highway right of way was added at the last minute to the legal framework of the road district that was approved by the state. Developers added the language after they learned they couldn't charge the state for the property that would become highway right of way, he says.
At the time, developers didn't just say the new road district would buy the highway property, they set a price in 1986 that was $2.25 per square foot, or nearly double what most of the property is worth today, Scott says.
The arrangement meant that the road district would pay $5.4 million for the highway property. The trouble is, the district had no directors yet. It hadn't actually been created, so how could anybody agree to buy anything? Scott asks.
"Last year, Centex paid [taxes] on their unimproved property--not $2.25 a square foot; they paid $1.18," Scott says. "This is after the property has been developed for 14 years."
In 1986, when developers actually deeded the highway property to the state, it was bottomland subject to flooding and was "basically not worth anything," says Joe Rogers, chief appraiser of the Denton Central Appraisal District. Certain sections of the right of way (those with utilities and highway frontage) could be worth up to $5 a square foot today. But, most of the property is in a floodway, which means any value would have to take into account the need to raise it and get utilities to it, he says.
Centex says the road district still owes it the payment for the right of way for the main roadway of the future bypass, undeveloped property that is straddled by three lanes of service road today. Scott disputes the validity of the claimed debt for the main roadway partly because developers didn't claim the property as an asset during either bankruptcy reorganization.
While a bankruptcy allows a company to protect assets, the bankruptcy court must be told about them so that creditors know what they are dealing with, Scott says. The Vista company never mentioned its 1986 plan to recover money for the highway acreage from the district.
"Their original agreement was to donate the land, and they didn't exactly mention this as a receivable that they had coming in the bankruptcy actions," he says.
And then there is the levee district. In 1985, Vista developers formed the levee improvement district with the approval of the Texas Natural Resource Conservation Commission. The levee district owes only $1.9 million in borrowed bond money, but Centex claims to be owed $8.9 million more for improvements, according to a levee district lawyer. Since the levee district is mostly homes, the bulk of the bond debt will be up to homeowners to pay without the help of big taxpayers such as Vista Ridge Mall.
Scott says the levee district's expenses are questionable and points to a recent $1.9 million bond issue. The levee district, he says, gave Centex literally tons of clean fill dirt taken from dredged drainage areas. Levee district directors passed the bond issue that would pay to cut a channel that would keep their own homes dry, and they gave the dredged dirt away to Centex, which used it to elevate its properties, Scott says.
"In heavy rain on the overflow, it backs up. There are two homeowners that back up to the original creek, and they're the ones behind the desiltation of this new channel," Scott says. "It directly benefited their property."
Tons of free, clean fill dirt is not easy to find. Scott estimates the district gave Centex dirt that the district could have sold on the open market for some $200,000.
Not only that, but the levee district hauled the dirt to Centex property and graded it, elevating about 127 acres of land and making it suitable for houses, he says. The district (also at no cost to Centex) hauled dirt to a site next to the I-35E/Highway 121 interchange, elevating that site by some 8 feet and making the previously unusable property valuable, Scott says. The hauling jobs were probably worth another $200,000, Scott says.
"They [directors] got themselves on the board, passed a $1.9 million bond election, desilted the channel, and gave the dirt to Centex," he says. "Centex is elevating this property almost 8 feet...That property is well below visibility from the service roads. You bring it up 8 feet and all of the sudden you've just got a bonanza of a pad site for a restaurant, convenience store, filling station. It's worth several hundred thousand dollars."
Scott says the levee district's actions are just another example of how the developers benefited by using what would eventually become taxpayer debt.
Julianne Bremer Kugle, a lawyer for the two levee district directors--the third seat was vacant when the deal was done--responded to written questions related to Scott's allegations. Directors Ben Carruthers and Eugene Eng would not talk to the Dallas Observer directly.
Bremer Kugle said the homes of the two directors did benefit from the $1.9 million bond issue, but those homes were among 40 that were in danger of flooding if the project hadn't occurred. The bond issue was discussed during "numerous" public hearings, she says.
As for the fill dirt, Bremer Kugle says the levee district couldn't find anybody to buy the dirt. By hauling for Centex for free (at a cost to the district of $116,000), the levee district actually saved hundreds of thousands of dollars in hauling and disposal costs, she says.
"The board believes the district saved approximately $626,000 utilizing Centex property," she says.
A Dallas-area construction project manager says it is difficult to say whether the district could have sold the dirt. It depends, he says, on whether the dirt is clean and how far the buyer would have to go to get it. In this case, the fill dirt was both close to Centex property and clean, Scott says.
One government attorney said the arrangement doesn't seem to pass the "smell test" because the proper procedure under Texas law would be to first declare the public property surplus and then to find out if anyone wanted to buy it. If nobody wanted to buy the surplus property, a public entity such as the levee district could then donate the property to a private party. In this case, the levee district directors apparently decided to give the property to Centex after asking "several public and private entities" if they wanted to buy the dirt. Then they used government funds to haul it to private property much to the benefit of Centex. A Centex representative agreed they got the free fill but said the levee district approached them.
Special taxing districts such as the Vista Ridge levee and road districts have been around for decades, and developers are quick to point out that the districts have worked well, with debt eventually retired. But, special use districts have also been the source of headaches for taxpayers who move in. The Las Colinas development north of Dallas is probably the best known of the troubled utility districts in Texas because of a massive debt that reached $650 million as the development floundered. In Las Colinas, developers spent thousands of dollars on what they envisioned as a grandiose commercial and residential area with a monorail, canals, and equestrian center. The Las Colinas project was badly affected by the same economic downturn that cramped Vista developers in the 1980s. When the Las Colinas property values didn't continue spiraling upward, the tax burden became so high that property couldn't be marketed.
An economic downturn like the one that plagued Las Colinas is another thing road and levee district residents such as Cheryl Bass say they fear.
"There is always the question of what happens if the market bottoms out?" she asks. "Therefore your schedule of payments is just shot to hell, and if property values start going down or staying the same, then the tax rate is going to start going up to pay those bond holders back."
Besides the districts they created near Lewisville, the Vista developers also presided over the creation of 10 other districts, called Municipal Utility Districts, or MUDs, mostly in the Houston area. The Texas Natural Resource Conservation Commission oversees any district like a MUD that involves the use of water or other natural resources. Of the 1,300 or so special districts under the conservation commission, more than 20 have gone bankrupt, according to state records. It is not possible to generalize the debt load of the districts because all of them are different. But, a conservation commission official says the districts are required to operate under rules that do not allow excesses in bond debt.
The latest financing legislation favored by developers creates something known as County Development Districts, or CDDs. The enabling legislation says that a special taxing district can be created to finance a major tourist attraction in counties with populations of less than 400,000. The legislation was introduced as a way of developing the Panhandle's Palo Duro Canyon into a tourist attraction.
Typically, developers move a trailer and one or two people onto the land where the proposed development will be located. Then the trailer residents become the district's voting population, and they approve the formation of the new tax district.
Developers have been selling the idea in Denton County in a big way with promises of donations of school sites and upscale developments. Before the Texas attorney general issued an opinion that said the districts couldn't be used primarily to build residential lots, developers had an even better deal than they did with road districts. That's because the road district for the Vista properties paid for major roads, and homeowners paid for the residential streets, sidewalks, and sewers. With a CDD, the developer could pass on all kinds of infrastructure costs. Developers said golf courses were major tourist draws, and one even said that a home is like a tourist attraction because aren't people visited by friends and relatives.
Ken Leonard, a Kaufman County commissioner, is one of the few elected officials who spoke out against the development districts as a flawed way of building houses. He fought a proposed CDD in his county because, he says, taxpayers would have eventually been stuck with a bill for costs incurred without public scrutiny. He did not have faith that taxpayers would really know what they were getting into, he says.
"I think they're going to see their tax bill and their water bill and everything else and shriek," he says. "I think it's as basic as it gets. It's taxation without representation." He described a familiar scenario. "Developers argued that [homebuyers] will be signing a waiver that they understand they are going to be responsible for those taxes, but I don't think that's ever going to dawn on people until they get their tax bill."
Not only that, he says, but taxpayers who bought a lot or home at market value (just like the Bass family) may not realize they are paying full price for property that comes with additional debt. In a conventional development, everyone who buys a new home in a neighborhood is paying a share of the cost of sidewalks, sewers, etc. Those costs and any others that the developer paid aren't typically tacked onto a tax bill as they would be in a development district, he says.
"In essence, the homeowner ends up paying for infrastructure twice if he buys it at market value because he's paying for the lot as if he was paying for the infrastructure. He's buying it at market value up front, and then he gets slapped with a big tax bill to pay off the bonds for the infrastructure again," Leonard says.
Before the houses were built there, big taxpayers in the Vista road district such as Vista Ridge Joint Venture, owners and developers of the Vista Ridge Mall, and big stores such as Sears and Dillard's department stores, paid the road and levee district taxes. Headaches for Centex began in 1998 when people began moving in. After tax bills started arriving, a couple of residents like road district board chairman Fortune started asking questions and attending the little-known road district meetings. Cheryl Bass says the district's directors and Centex representatives seemed a little too "cozy" to her. Residents learned that district directors planned to issue $5.9 million in new bonds and that the tax rate to repay Centex would be going up again, and this was after they were told it would go down. One of the selling points for special districts is that the taxes will go down as the value of the district goes up and more property owners share the tax burden. It's not happening that way in the road and levee districts.
"If you go back and look at the record of how the RUD was formed, back when they formed the district, these guys said we're proposing that the tax rate not be over 43 cents per 100 [dollars in property value]," Fortune says. "At one point, the RUD tax rate was like $2.25 per hundred." The tax rate for the year 2000 is about 47 cents per $100 of property value for the road district and about 13 cents per $100 of property value for the levee district.
The money borrowed by the districts repays Centex, and all of the taxes that are collected repay the debts. Roads are deeded to a municipality such as Lewisville as soon as they are finished so the road district isn't responsible for the upkeep.
Sitting in the neighborhood's meeting room, which is not far from the swimming pool maintained by a homeowners' association, Fortune says the residents in 1998 were largely rebuffed in their efforts to "find out what was going on" in the road district.
More residents started showing up at meetings. They asked the RUD to delay issuing the new bonds for about a month, until after a real election could be held. In 1998, there were 307 houses in the road district and four houses in the levee district.
"We said, 'Look, we understand you guys are prepared to make a decision, but we're new here. We're residents. We're the people who could vote,'" Fortune says. "'We want to understand what's going on and we're asking you to wait.' They chose not to do that."
Pound says he doesn't recall the specifics of the decision but believes the road district board had a "window of time" to approve the bond sale. The board issued $4.5 million in bonds.
Shortly after, the majority of board members was replaced in an election that Fortune says attracted "something like 75 percent" of the district's eligible voters.
"We felt like we needed representation," Fortune says. "We needed people who didn't have a vested interest in leaning one way or another."
Centex told the new board to find a new meeting place, Fortune says.
"After our meeting when we were sworn in, Centex said you guys are no longer welcome to have these meetings in our offices," Fortune says.
In the fall of 1999, Centex came to the board and asked the district to issue another $4.5 million in bonds. Centex representatives said that a 1997 agreement entered into by the previous board requires that the road utility district issue bonds whenever the developer asks and for whatever amount the developer asks. Although the agreement was drafted by the district's lawyers, the language in the 1997 agreement changed an original agreement that gave the road directors some discretion in the terms of debt payments to one that leans heavily in favor of Centex, the lawyer Scott says.
"The '97 agreement was actually so slanted it allowed the developer to decide when to pay and how much to pay," Scott says.
The new board refused to issue any more bonds because of questions related to the right of way and the amended agreement, so Centex sued. In the lawsuit, Centex claims it is rightly owed the money for roads and the highway right of way. The lawsuit, filed in Dallas County early last year, names the road utility board and some other big property owners in the district who also questioned the bonds. Scott says the district board was trying to figure out a way to pay, but the increasing taxes were not in line with what residents were told. The debt wasn't new, Centex says, but money the district owes for road construction ($3 million) and the right of way for Highway 121 ($6.5 million).
"Our tax rate is supposed to be going down. The taxes have been going up for 14 years. We want to think about this. We are trying to stay competitive around here," Scott says the board was reasoning. "We are trying to pay you guys. We owe some bills. We know that, but we can't drive the tax rate much higher. So they turned around and sued."
The lawsuit, which was filed by Vista Properties (a.k.a. Centex Development Co.) against the road district board, E-Systems Inc., Carbon Development, and others, is in the pretrial phase with no court date set. Joel Reed, an attorney with Centex Development Co. in Dallas, says the reality is that the entire Vista Ridge development would not have been possible had the developers not put up the money and created the special districts. He says the heart of the dispute with the road district is not disclosure of debt to homeowners but the outstanding debt itself.
"Our goal as a company, we are involved in home building. We want to take care of homebuyers. We are not out to jack up tax rates. We're just asking the district to repay the obligation they made. We'll find reasonable ways of making that repayment happen, but it needs to happen," he says. "The dispute is sort of silly because at the end of the day they are going to have to pay us back, and board members will have wasted a bunch of money fighting us for no good reason."
The buyer has the responsibility of doing homework on a purchase and should insist on receiving closing documents a few days in advance of the closing date, he says. He also recommended buyers let a lawyer review the documents.
"The fact that homeowners bought homes and if some of them were not adequately disclosed, that's a shame and that's not the way it should be, and certainly they have every right to be upset about that," he says. "But, they enjoy the benefits of what was done there."
Fortune says that for now, the road district board is left with trying to explain the increasing road tax again and again to new and ever more incensed property owners.
"Every year, we have an annual homeowners' association meeting. I usually get up and give a quick history of the RUD again because it's always new people, and they're always pissed because they don't understand what this tax is," he says.
Real estate agents marketing property in the district today say up front that the area has special taxes. The taxes are even listed on fliers that describe houses. While that appears to be an improvement, even today someone buying a house in Bass' neighborhood would not be clearly told that Centex is claiming to still be owed some $18 million, which will turn into more property taxes when approved by district boards. One state official who even suggested potential homebuyers "read the local newspaper" to find out about potential future taxes, says there is nothing illegal or improper about a developer asking to be paid back for development costs.
"Most purchases in the state of Texas are 'let the buyer beware,'" Susan Walton, a utilities specialist with the conservation commission says.
It may be legal, but Bass and others remain unconvinced that homeowners should be stuck the way they are in the Vista development.
"We'll be paying for these roads...oh my God, the bonds are amortized for 20 or 30 years," Bass says. "We're going to be paying for these roads forever and still owe more."