Hundreds of Wichita property owners, mainly developers and builders, owe the city about $4.8 million in unpaid and delinquent special assessments, according to Sedgwick County records.
About 1,270 property owners are delinquent on the specials that pay off bonds the city issues to borrow money to fund streets, sewers, flood control and other improvements on behalf of private developers.
The developer is supposed to make the bond payments until the lots are sold, at which point responsibility shifts to the new homeowners. Most specials are paid off over 15 years.
Special assessment bonds are backed with the full faith and credit of the city. So when developers and other property owners don’t pay, taxpayers are on the hook for the debt.
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Wichita is nearly unique among U.S. cities in fronting the cash for public improvements to boost private developments, experts say.
Mayor Jeff Longwell acknowledged that delinquency is a problem, but said it’s not as bad as it was at the height of the recession.
“This is a battle that has partially been brought on by the economic conditions we’ve lived through for the past eight years,” Longwell said. “In the last seven or eight years, we’ve seen an incredible decline in home building in this city.
“If there was an opportunity to restructure our policies to encourage payment, I’m all for that.”
City Manager Robert Layton said much of the delinquency results from “builders who are still trying to recover from the recession but are still trying to hold on to their properties,” where others simply gave up.
“These are the ones that weathered the recession and are hoping the economy will allow them to jump-start their construction,” he said. “It’s in our best interest for them to maintain ownership of those properties so that they can satisfy the delinquencies.”
A long list
The delinquency list ranges from prominent development companies owning hundreds of lots, to small-time builders with a couple of properties, to individuals unable to pay the specials on their own home.
The majority, about 815 of the nearly 1,270 delinquent owners, owe less than $1,000.
Nearly half of the $4.8 million in delinquencies is owed by the 20 developers at the top of the list.
The company that owes the most in delinquencies is Caywood LLC. Business records on file with the secretary of state show the company is owned by prominent Wichita developer Jay Russell and Realtor Mathias Eck.
Five other Russell partnerships are also on the delinquent list, totaling about $650,000 in owed specials.
Russell said he’s been working through it.
“The list was twice that two years ago,” he said. “You’d really see we’ve not let the city hang out there. It just took some time to get some things restructured.
“I’m just a step or two away from getting my problems taken care of.”
Russell said the problem persisted “from the downturn in the real estate market until about two years ago.”
“The problem that we got into was that several partners in these LLCs refused to pay their part of the taxes,” he said. “That’s because most of them are retired or they’re in some kind of position of ‘I don’t care, let them (the properties) go back for taxes.’
“But what I’ve done the last 2½ to three years is keep working on the system to get them paid.”
He said he’s paid down most of the past-due specials either by refinancing or splitting up the project and paying the specials on the properties he now owns by himself.
He said he’s negotiating with the city to get the remaining delinquent specials paid, either with his own funds or with the city tapping letters of credit he has on deposit for his projects. He said he expects to have the issue resolved within a month.
Six of the top 20 delinquencies belong to companies that have gone out of business, according to state records. The biggest are Chase Development LLC, owned by Robert Lobato of Oklahoma City, with $305,000 in delinquent specials; and Malone Construction LLC, owned by bankrupt Wichita developer Tim Malone, $242,000.
Despite the business failures, the city may be able to collect at some point, Layton said.
Special assessments are attached to the property, and when it’s sold, the new owner becomes responsible for the payments, he said.
The $4.8 million in current delinquency is more than twice what it was at the end of 2014, according to the city’s annual comprehensive financial report. Officials expect that to decline somewhat as developers make payments through the end of the year.
Last year, the city ended up with $2.14 million in defaults on debt service payments of $34.8 million, the financial report showed. In 2013, the city made $30.3 million in debt service payments with $2.7 million in defaults.
There are safeguards to help ensure the city gets paid when developers default on specials, officials said.
Wichita requires the developer to post a letter of credit from a bank for up to the estimated cost of the improvements, said Shawn Henning, city finance director.
If the developer defaults, the city can call in the letter and get paid. The city releases the developer from the obligation to carry a letter of credit when the development reaches 35 percent occupancy, Henning said.
The city seldom draws on a letter of credit, Henning said, usually only when officials suspect the developer is about to declare bankruptcy.
Once the letter is released, there is no further security for the city, except: If the developer is delinquent on specials three years in a row, the property can be sold at a sheriff’s auction.
Often, developers or property owners will “pay the oldest year that’s out there to prevent the property from going to tax sale or foreclosure,” Henning said.
System has advantages
In most cities across the country, developers pay up front for the improvements to prepare their sites for building and then pass the cost along to the customer as part of the home price, said Stan Longhofer, a professor of real estate at Wichita State University and an expert on special assessments.
Kansas communities are near unique in using special assessments to finance the infrastructure for new developments, he said. North Dakota is the only other state he knows of to do that.
When it works as designed, special assessment financing has advantages for developers, the city and even the future homeowners who have to pay it off with their property tax bills, he said.
The system means developers don’t need to borrow as much money as they would if they had to pay for streets, sewers and other improvements up front, he said.
In addition, they can sell lots and completed homes for a substantially lower price, by shifting part of the development costs to the future homeowners. A Wichita residential lot costing $25,000 could cost as much as $50,000 to $60,000 if the developer had to pay for infrastructure, he said.
The advantage for the city is that it helps spur new development, which is good for the city coffers because the new homes generate more property tax revenue than undeveloped land.
Homeowners regularly grouse about having to pay specials, but they gain an advantage as well, Longhofer said. No matter what happens, the cost of new streets and other improvements will be built into the cost of home ownership, so they’ll end up paying it one way or another.
Using specials, the city can borrow the money for infrastructure at a lower interest rate than private developers can, so in the long run, the homeowner benefits from the city’s credit.
In addition, 100 percent of the public infrastructure is financed through the special assessment, so homeowners can get into the house with a smaller down payment than if the cost was added to their mortgage, Longhofer said.
The system works fine “as long as they can sell the lots before the specials kick in,” he said.
But there is risk, especially for smaller cities. If a development fails, the city has to come up with cash to keep paying the bondholders if the developer doesn’t, Longhofer said.
For example, Junction City was particularly hard-hit by that when developers took out specials for new projects in anticipation of a massive expansion at Fort Riley that never happened.
Change is hard
Layton said special assessment is a system that would be very hard to change.
“It’s a tool that the developers have relied on for a number of years, and whether you agree or disagree with it from a policy standpoint, I think it would be very difficult for the housing industry today if you were to suddenly take that tool away and shift all the cost to the developer and property owner,” he said. “I don’t think that the industry is strong enough today to take that over.”
However, City Council members said they would consider tweaking the system.
“I’m not opposed to trying to look at our procedures for battling this (delinquency),” Longwell said, but added that he has no specific ideas on what changes could be made.
“There has been a concerted effort to do what we can to recoup and encourage payment without going to a sheriff’s sale, which typically doesn’t get you as much,” he said. “That’s probably not the best way to try to remedy the situation. Those are kind of last-resort opportunities”
City Council member Pete Meitzner said he’d be open to discussion of whether there’s a better way to fund public infrastructure for new development.
“I don’t think we can just do it overnight,” he said. “But is there a way to get there over time? Is there a goal or a way to migrate towards that?
“I’m sure there are some developers, both commercial and residential, who are saying if you didn’t have specials, we’d be a cow town or a ghost town, or whatever.”
Contributing: Kelsey Ryan of The Eagle
Reach Dion Lefler at 316-268-6527 or firstname.lastname@example.org.
Top 10 delinquencies
Here is a list of the top 10 special-assessment delinquencies owed by private developers to the city of Wichita:
Chase Development LLC
Malone Construction LLC
R & R Realty LLC
New Era IV LLC
Harvest Ridge LLC
Country Hollow Investments LLC
JLH Holdings LLC
Premier Holdings LLC
Source: Sedgwick County Clerk’s Office, as of Aug. 14, 2015