The Unlevel Playing Field of Real Estate Development
Below chronicles the troubled path of small town residents mired in a legal-financial morass at once simple — flawed legislation — made numbingly complicated (the town’s 2015 foreclosure lawsuit exceeded 1500 pages).
While specifics pertain to one community, boutique legislation, and a discrete property, the larger picture offers insight into the vulnerability of towns and neighborhoods dependent on expert counsel they are unqualified to assess or challenge; local leadership, similarly constrained, in over their heads and possibly complicit; savvy developers with no community skin in the game; and a financialized development process leveraging public money for private gain, scaled to maximize fees, and timed to minimize investor/lender exposure — not evolved in response to community needs or shifting markets.
Real estate development, at its core, is a democracy project. Community self-determination is at stake.
The narrative below recounts a perfect storm of legal mojo, developer hustle, and small town hubris for a blindsided community slumped on the real estate ropes, one that plays out over the heads but deep in the pockets of local people outmaneuvered in an era of global real estate.
With the planet at ecological brink and communities struggling for economic purchase, how we transact and produce our built and natural world can no longer be pegged to “highest and best use” benchmarks defined by the players with the most to gain and the least to lose.
The standard going forward must be sustaining value for communities and the land, not extractive wealth for the financialized few and a closed loop of service providers for whom deal flow = fee flow.
Millions of Dollars of Private Debt
In 2005, the Connecticut General Assembly, the state’s legislature, for the first time in the history of the state, passed a law enabling a private corporation — the Georgetown Land Development Company — to create a special taxing district, a quasi-municipal entity, to finance its own speculative real estate venture in the Town of Redding.
With this new law, Special Act 05-14, the private development company would be able to issue debt, to be serviced by taxes levied on future residents, to finance its own development costs. As sole landowner, the developer selects his own governing board of directors, with one representative from the host municipality. All board members have a fiduciary obligation to the special taxing district.
S.A. 05-14 only enabled the district to be formed; it was yet to be created. This would be achieved three months later when, in an exercise of democratic form without substance, the out-of-town developer, backed by an out-of-state investor, cast his sole vote to establish the special taxing district, thus creating a separate municipal entity within a municipal entity — the Town of Redding — without a single vote cast by community residents or taxpayers.
In fact, few residents were fully aware of the financial instrument being set up in their community; fewer — if any — understood the unprecedented scope of its powers and implications for the future as more than a decade later, town taxpayers would find themselves backed into a corner, their only way out negotiating a buyout of millions of dollars of private debt over which they had had no say.
“In fact, few residents were fully aware of the financial instrument being set up in their community; fewer — if any — understood the unprecedented scope of its powers and implications for the future as more than a decade later, town taxpayers would find themselves backed into a corner, their only way out negotiating a buyout of millions of dollars of private debt over which they had had no say.”
Special Taxing Districts: From “DIY Government” to “Impracticable”
How did they get here? The archives of the recently defunct town newspaper provide a comprehensive record of the Georgetown Land Development Company (GLDC) from inception to the ongoing foreclosure law suit, filed by town attorneys on July 24, 2015. The firm has been town counsel for more than 30 years and provided comprehensive legal services at each stage of the GLDC redevelopment, navigating the town through: (1) planning and zoning, (2) special taxing district formation; (3) bonding (with additional counsel), (4) tax increment financing, and (5) foreclosure. Highlights from their work on the mill site redevelopment are featured on the firm’s website.
The firm touts being “the ‘go to’ firm for brownfield development in the State of Connecticut” and is well connected statewide. The chair of the firm’s Real Estate and Land Use Department serves as co-chair of the state’s Brownfield Working Group, a focus group leading cleanup of the state’s vast inventory of tens of thousands of contaminated landscapes. The state has invested $220 million in brownfield redevelopment since 2012.
Town residents would have been wise to be wary, had they known and understood. Special taxing districts are under increasing scrutiny at the state and federal level for their lack of transparency and administrative and fiscal autonomy (hilarious John Oliver segment on special districts). Host communities are also seeking fuller disclosure and accountability. Even “the ‘go-to’ firm” now faults quasi-municipal organizations as “impracticable” for the challenges of economic development they exist to deliver.
Developers Walk Away
Developers, on the other hand, love special taxing districts for the not difficult to understand reason that they deliver low-cost, tax-exempt public-sector financing opportunities to private sector ventures, requiring little developer skin in the game and effectively immunizing the company from risk. Special district financing is typically “non-recourse,” meaning if a development fails, the collateral for outstanding debts is the district itself; the developer walks away financially intact.
Host communities of special purpose districts have similar contractual protection from creditor claims. Should a district fail to pay debt service on its bonds, an alert resident might ask, is a host town in any way responsible? On behalf of a developer for another district proposal, town counsel offered this reply:
“No, the Town has no obligation to bondholders to pay the debt service on the Bonds. The investors will be told before they buy the District’s Bonds that the Bonds are not the obligation of the Town.”
Such disclaimer is printed in boldface, all-cap font at the bottom of the Georgetown Special Taxing District’s first bond issuance, a package of $14.5 million General Obligation bonds to finance a sewer plant expansion.
The Private Placement Memorandum for the GO bonds similarly underscored the speculative nature of the investment, citing the word “risk” 29 times in the 100-page document, including a section headlined “Bondholder’s Risk”:
“There are certain risks inherent in an investment in bonds issued by a public authority or governmental body in the State such as the District…including a complete loss of such investment.”
“Creative” and “Innovative” Financing
When the 2005 law enabling the Georgetown Special Taxing District was deliberated in the Joint Committee on Finance, Revenue, and Bonding, Committee members characterized the financing scheme as “creative” and “innovative.” In hindsight, these are dubious endorsements as communities, families, and individuals still struggle with the fallout of notoriously speculative subprime-era financial instruments.
“…Committee members characterized the financing scheme as ‘creative’ and ‘innovative.'”
Wary of the unintended consequences this novel legislation might trigger, as a safeguard against “unknowns,” Committee member Senator Judith Freedman (District 26) specifically addressed “legislative intent” in an exchange with Committee Chairperson Eileen Daly (District 33):
This is consistent with assurances given to townspeople:
- From the archives of the town newspaper, The Redding Pilot, in an article, “Selectmen Pass Resolution Favoring Special Tax District for G&B Land,” dated April 21, 2005, then-editor Susan Wolf writes:
“Marie Phelan, an attorney with Pullman and Comley LLC, is the town’s bond counsel. ‘She recommended the resolution,’ said [Town of Redding First Selectman] Ms. [Natalie] Ketcham. ‘It is her legal opinion there is no risk to the town with the creation of a special tax district.’”
- From the developer, Stephen Soler, Georgetown Land Development Co., quoted in The Redding Pilot, October 30, 2003:
“The debt incurred by the bonding would have no impact on the town.”
- From editor Susan Wolf, The Redding Pilot, February 26, 2004:
“Of particular concern to [Redding Board of Finance member] Mr. [Chuck] Mullaney is the Georgetown Special Tax District Mr. Soler has created for the G&B site. ‘I want the tax district explained in extraordinary detail,’ said Mr. Mullaney.
Ms. Ketcham said it is the same as the fire districts in town.
‘What’s evident is that we don’t know what a tax district is,’ said Mr. Mullaney.
The first selectman suggested a meeting with Mr. Soler on the Special Tax District and offered to have the town’s bond counsel’s firm provide an attorney for the meeting. She said the selectman had already met with bond counsel about this type of tax district.”
— But the Georgetown Special Taxing District is not like the fire districts in town, formed by democratic process of two-thirds majority of residents, where residents share a common bond of responsibility for costs and community maintenance. Living in the district, they have flesh-and-blood skin in the game, not to mention the significant asset of their homes.
“The debt incurred by the bonding would have no impact on the town.”
“Special Tax District Created” — in 2003?
Residents can be excused for paying distracted attention to these complicated deliberations amidst the myriad deflections of concern from the closed loop of town leadership, town attorneys, and developer.
Some Reddingites may have wondered why the matter of the taxing district was still on the table at all — hadn’t it already been created back in 2003, as the GLDC publication accompanying the town’s four-day planning workshop for the proposed development had pronounced?
“Some Reddingites may have wondered why the matter of the taxing district was still on the table at all — hadn’t it already been created back in 2003…?”
The newsprint edition, designed as a facsimile of the town newspaper, provided a detailed overview of the developer’s program for the site, with a history of the village, glossary of terms for those new to the planning process, team profiles, etc. — all testament to the developer’s vaunted commitment to a transparent and collaborative relationship with the town, commended in the front page feature, “Message from Selectmen.”
Another article, at the bottom of page five of the eight-page publication, was headlined “Special Tax District Created for the Development of Georgetown.”
Yet the date of the publication was October 2003. The legislation enabling the special taxing district wouldn’t be voted on by the Joint Committee of the General Assembly until June 2005, then signed by the Governor on July 1. The sole vote cast by the developer establishing the district would occur two months later. Pronouncement of the district’s formation in a publication prominently featuring endorsements by town leadership was two years premature.
The two-column article cites Sections 7-324 through 7-329 of the Connecticut Statutes that pertain to special district powers, a rather tedious litany of infrastructure responsibilities and amenities.
There is cursory mention of tax revenues and debt service. However, the potential legal and financial consequences of Section 7-329 is glaringly omitted:
“No district shall be terminated under this section until all of its outstanding indebtedness is paid unless the legislative body of the town in which the district is located agrees in writing to assume such indebtedness.”
This potential liability to district debts would have raised vivid concern among residents already anxious about being outmaneuvered by a cunning developer.
Section 7-329 explicitly contradicts a primary private sector financing benefit of special purpose districts — non-recourse financing, which is the norm in most states. Connecticut, however, is an exception.
Section 7-329 was introduced in 1989 by the Connecticut legislature seeking to enforce financial accountability of special taxing districts by making special district residents responsible for their district debt. This law applies to statutory districts, formed if two-thirds of the residents approve. This makes sense: residents incur debts and must be held responsible for them.
The Georgetown Special Taxing District, on the other hand, was formed by a Special Act, in which case, the 1989 law clarifies: “In the case of a Special Act, if it was specific, the Special Act would take precedent.”
“Section 7-329 was introduced in 1989 by the Connecticut legislature seeking to enforce financial accountability of special taxing districts by making special district residents responsible for their district debt…This makes sense: residents incur debts and must be held responsible for them.”
In the case of S.A. 05-14, legislative intent was explicit: “These are private bonds.” This is also logical — the townspeople were neither voters nor residents in the district; there should be no relationship between private developer debt and Town of Redding coffers. This is also consistent with the explanations and assurances provided by town leadership, town counsel, and the developer.
In their “Message from Selectmen,” town leadership fully endorsed the planning brochure, writing: “It is important for everyone concerned to review this special publication.”
The brochure presented the district as an innocuous administrative entity already in existence. How would a community member lacking expertise in Connecticut statutes know otherwise?
When the legislature began deliberating the “innovative” special taxing district legislation, another town, New Milford, had been included in the bill for another development, with legal representation for the developer, coincidentally, by the same firm representing the town in the GLDC/GSTD.
Skeptical residents of this second town hired independent counsel, Lowell S. Peterson, Community Law Practice, to review the special taxing district legislation. In his written testimony to the Joint Committee (p. 00815), this outside counsel strongly criticized the proposed district as a “super” special district “operating without the slightest accountability to any local or State official or agency.”
The second town rejected the legislation as too risky. The bill was then revised to apply only to the Town of Redding for the Georgetown Land Development Company.
“The second town rejected the legislation as too risky.”
Transparent, Reliable Communication
A co-sponsor of the bill, the state representative of neighboring District 111, is a real estate professional and protégé of a former governor, who had appointed him chair of the Connecticut Real Estate Commission, the youngest-ever chair. He would have been fully aware of the high risk Connecticut’s unique statutory mandate presented to Town of Redding taxpayers.
Relevant, too, is the governance system of Connecticut’s 169 home rule towns. Most towns with populations less than 20,000 are governed by the Selectman-Town meeting form of government, the traditional form of local government in Connecticut.
The duties of the First Selectman are the administration of board activities for town government. Voters are the town’s decision-making body; boards, commissions, and departments exercise administrative duties.
In the complex management of a large-scale real estate transaction, the specialist expertise required exceeds the local skill set of small town government. Legal and financial consultants are engaged to advise on the decision-making process.
This, however, is a fragile balance, easily exploited in the absence of sufficient public engagement and transparent and reliable communication.
Since 2003, there have been three town meetings (November 2014, September 2015, May 2017) to inform the public of the status of the development, which foundered in the 2008 financial collapse and failed to recover in the aftermath as the region and state as a whole struggled in the market shift from 20th-century corporate suburbs to 21st-century urban knowledge economies.
At the Town’s November 2014 Public Forum, residents had their first glimpse of the indebtedness of the failed development, with many likely hearing finance acronyms (TANs, TIFs, BANs) for the first time.
Town residents learned that foreclosure against the developer would not eliminate debt owed to “intractable” creditors of the special taxing district. Until this was resolved, the town would not be able to advance a new project and restore its fragile finances.
This is an odd claim for two reasons:
- bondholders have a fiduciary obligation to maximize return on investment — period, no matter their (pleasant or intractable) dispositions.
- what concern to the town is district debt?
“The bonds are private,” the State emphatically specified as legislative intent.
“There is no risk to the town of the special taxing district,” the town’s bond counsel assured as her legal opinion.
“The debt incurred by the bonding would have no impact on the town,” the developer said.
In May 2017, as settlement negotiations dragged into the second year of the town’s foreclosure suit, town taxpayers were offered three options for consideration, the most detailed of which proposed that the town and creditors share proceeds from a future sale of the site and subsequent tax revenue for 30 to 50 years to discharge district debt.
But “the bonds are private.”
— unless they aren’t.
“But ‘the bonds are private.’
— unless they aren’t.”
Host Towns Bear Ultimate Risk
In drafting the 2005 legislation — a Special Act with explicit legislative intent that neither the town nor the state would ever be liable for the debt of the speculative land deal — language from the statute applying to voter-approved special taxing districts, Section 7-329, was entered in Section 3 of the final text of a law enabling a district by act of state congress, not approval of two-thirds of town residents. The debt is actually still non-recourse — against the developer; meaning, creditors can’t seek to recover their at-risk investment from him or his company.
Special taxing district debt, however, is secured by real property in a real town. So creditors turn their sights there, requiring a municipality to either buy them out to regain control of the property (and determine the future of their community, a constitutional right under Connecticut’s home rule governance) or settle the balance owed with a market sale of the property, exposing the town to another high risk “highest and best use” benchmark determined by market players, not town residents and taxpayers.
Special taxing district debt, however, is secured by real property in a real town.
Host towns of a special taxing district bear the ultimate risk — which is why Section 7-329 stipulates approval of two-thirds of town residents for district formation.
S.A. 05-14 invited a fox into the municipality hen house — a debt-making instrument backed by unwitting town taxpayers.
Had town residents been made aware of this high-stakes risk, would they have agreed to host a financial instrument controlled by out-of-town, out-of-state agents with no community skin in the game, whose disinterested capital seeks one return — profit, whatever the community cost — with independent and opaque powers to raise public money and levy taxes, over whose expenses townspeople, who don’t even live in the special taxing district, would have no authority but whose debts they ultimately backstop? No.
Explicit Legislative Intent: These Are Private Bonds
On February 27, 2019, RJ Tax Lien, a creditor of the Georgetown Special Taxing District, appealed the judgement of strict foreclosure in favor of the Town of Redding — the last day an appeal could be made.
Translation: the multi-millionaire owner of the Georgetown Land Development Company credited the Georgetown Special Taxing District (via a shell company, RJ Tax Lien) a $750,000 loan at an 18% interest rate as the project was failing in 2009-10 — granting himself critical future leverage as a creditor of the taxing district, now positioned to demand a multimillion-dollar buyout.
In his 2005 review and assessment of the special taxing enabling act presented to the state legislature (p. 000801), independent counsel Lowell Peterson challenged:
“Is [Pullman & Comley] bond counsel [Marie] Phelan prepared to render her legal opinion that there will be no case in which bondholders may ever have recourse against the Town of New Milford for the default of the district?”
For the Town of Redding, endorsed by Town leadership — her answer was “yes.”
Pullman & Comley continues to represent the Town in its foreclosure suit against the Georgetown Land Development Co, approaching its fourth year.
This is precisely the wicked financial maneuvering state legislators sought to prevent through explicit statement of legislative intent culminating deliberations on the unprecedented 2005 special taxing district legislation:
It’s important that people do know that neither the municipality nor the State of Connecticut would ever be held liable for these bonds. These are private bonds.