Metro District Legislation, Lawsuits Could Radically Impact New Development in Colorado
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Metro District Legislation, Lawsuits Could Radically Impact New Development in Colorado

Brownstein Client Alert, Feb. 13, 2023

For the second straight year, metropolitan district reform legislation is moving through the Colorado House of Representatives. If the proposed legislation passes—or if resident-controlled metropolitan district boards set new legal precedent in pending litigation—it could profoundly impact the power developers have over future development, homebuilding and metropolitan district governance in the state.

Metropolitan districts, of which there are more than 2,000 across the state, are an important tool for new development in Colorado. They are independent quasi-governmental entities formed to finance, construct and/or maintain public improvements. Rather than rely on a municipality, a county, state agencies or a homeowners’ association to construct public improvements, developers and other interested entities may instead form a metropolitan district. The structure allows for development to fund new infrastructure, as the property owners who directly benefit from the infrastructure pay through mill levies and other taxes to offset bonds issued by the metropolitan district. Metropolitan districts support new housing in Colorado by providing an efficient tool for constructing infrastructure such as roads, water and sewer lines, and parks and trails, and thus help meet housing demand. New housing in Colorado is largely built via metropolitan districts.

However, metropolitan districts have come under increased scrutiny in recent years. Residents have claimed that they lack an adequate voice with respect to how metropolitan districts’ property taxes are calculated and that these taxes are not adequately disclosed to potential home buyers. Often, the developers who formed the districts decide how much debt future residents will pay to cover the infrastructure costs. Interest rates can be high. In response, metropolitan district proponents note that the interest rate and terms of bonds issued to fund these costs are confirmed as being market reasonable by an independent and external financial advisor as required by approved service plans and that the property taxes and debt for infrastructure bonds are within the maximum limits set by the approving local government.

Currently, metropolitan district financing is largely regulated by the cities and counties in which the metropolitan district exists. In order to form a new metropolitan district, municipalities and counties approve a service plan, which includes a cap on mill levies, maximum debt limits and maximum interest rates. New legislation seeks to create statewide uniformity of these limits.

Last year, the Colorado House of Representatives approved HB22-1363, but the bill stalled in the Senate. Among other features, this legislation would have required each developer-affiliated board of a metropolitan district to disclose that conflict of interest in a mailer before each scheduled meeting. The mailer would have to include a self-nomination form that a resident can submit to take over the seat of a board member who does not live in the district and has ties to the developer. The board then must terminate the developer-affiliated position and immediately appoint the resident who submitted the self-nomination form to that seat. The bill ultimately was killed after heavy opposition from developers and metropolitan district proponents.

This past Tuesday, though, two new bills passed the House Transportation and Local Government Committee. HB 23-1090 would prohibit a local government from approving a service plan that permits the purchase of metropolitan district debt by an entity with respect to which a director on the board has a conflict of interest necessitating disclosure under current law. It also would prohibit a director authorizing metropolitan district debt from acquiring any interest in that debt individually or through that director’s affiliated entity. When developers purchase some of the issued debt, they are essentially loaning money to themselves for the future residents to pay back at usually higher interest rates. Bill proponents contend this is practice has too many inherent conflicts of interest; opponents of the bill say it facilitates development of necessary housing and infrastructure because early-stage development cannot borrow from many sources other than the developer. The bill provides that proof of an improper purchase of district debt by a developer suffices as proof that the violator breached his or her fiduciary duty and the public trust.

Relatedly, HB 23-1065 would place special districts, including metropolitan districts, under the authority of Colorado's Independent Ethics Commission. The commission then would have jurisdiction to hear complaints, issue findings, assess penalties and issue advisory opinions on ethics issues concerning metropolitan district directors. If these bills pass the House, they will then move to the Senate.

A bipartisan group of legislators recently introduced another bill containing a package of metropolitan district reforms similar to HB 22-1363. SB 23-110, which is set to go before the Senate Local Government and Housing Committee this week, would:

  • require cities and counties to impose a mill levy cap for debt and a maximum debt limit in the service plan;
  • require annual townhall meetings for metropolitan district boards with residential units;
  • mandates developer debt checks and balances and establishes parameters; and
  • requires real estate disclosure for resale of residential property during the early due diligence process before escrow monies become

In addition to pending legislation, numerous lawsuits have been filed in Colorado questioning the legality of developer-controlled metropolitan districts and challenging the financing mechanism for these districts. In each of these cases, conflict has arisen after control of the metropolitan district board transitioned from developers to residents, with the new resident-led board attempting to nullify the debt agreements entered into by the prior developer-led board and developers seeking to enforce these agreements. These cases are striking because the residents are attempting to ignore or alter previous, existing debt repayment agreements. If these resident-controlled metropolitan districts are successful, these lawsuits could not only shift how districts repay developers in the future but also leave developers holding the bag for debt they have already acquired to fund district infrastructure.

The laws governing metropolitan districts are likely to change in one form or another over the coming months and years. Developers, metropolitan district board members and residents, and potential homebuyers all should be aware of these potential changes and how they could impact financing of development, property taxes and more.

This document is intended to provide you with general information regarding metropolitan districts in Colorado. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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