Special tax districts gaining popularity in county
Later this month, developers of The Estuary, a 1,052-home community tucked beside the Assawoman Wildlife Refuge, will ask Sussex County Council to create a special tax district to finance infrastructure costs. A tax would only be imposed on lots within that development, which has been approved but not yet broken ground, to pay for projects like road improvements that sometimes cost developers millions and tack extra money onto the price of a home.
Those taxes could also be used to help fund public projects, like park enhancement or to expand public safety departments stressed by development. The move is anticipated only weeks after Millville sought the power to impose such a tax within town limits and as Millsboro town officials wrapped up a process to create a special tax district within Plantation Lakes, a 2,500-home community there.
“It can mean a lot of money,” said Jack Haese, project manager for The Estuary, who has worked on special tax district projects in California, Texas and Maryland. Haese is vice president and chief financial officer of Michael T. Rose Development Company in Laurel, Md., and has already discussed a potential Estuary tax district with Sussex County officials. “You can expand public services. You can expand the emergency medical services, add onto schools,” Haese noted.
Almost three decades after California officials introduced the then-unprecedented taxing system, the concept is gaining popularity in Delaware among developers, who are being asked to pay astronomical amounts for public improvements, and town officials who historically have relied on development dollars to expand infrastructure after the fact. Haese said taxing districts have almost become the “standard” in California as a financing vehicle and have gained widespread popularity in Maryland and other states across the country.
The towns of Millville and Milford, following the leads of Bridgeville and Millsboro, asked the state legislature earlier this year to approve charter changes to allow them to create special tax districts. Those bills were not acted upon before the General Assembly adjourned its six-month session early Sunday and will wait until January for potential approval. Sussex County would need a similar change to create a special district.
In creating such a tax district, governments can sell bonds to pay for public projects and repay those bonds with taxes levied on homes and undeveloped lots within large-scale communities, like The Estuary or Plantation Lakes. Towns and counties can reimburse the developer for road and sewer improvements, for instance, and put that tax money toward other public projects, like adding more police vehicles or building a park. Haese said that some special taxes in Maryland helped pay for asbestos removal in an area school.
Local town and county officials have relied on development-related funds after the fact — like transfer taxes, which are collected after the sale of a property — to fund growing public safety budgets and other infrastructure projects. Many were left to raise taxes when the real estate market staggered in the area about 18 months ago.
Many officials praise the concept because it allows officials to provide infrastructure before developments are fully built and relieves the upfront financial burden on developers, a move that can take thousands off the listing price of a home. And the bonds themselves are protected by liens on the property, not governmental funds.
Some, though, have worried that administering the district would burden small towns like Millville, whose administration departments are not large or experienced enough to deal with the work. Others expressed concern that adding another tax could hurt real estate sales in those districts at a time when the market is already seeing difficulty.
Millville Councilwoman Joan Bennett, one of the area’s many transplant residents, voted against pursuing the charter change that would allow officials there to create a special taxing district.
“I think they’re an appropriate revenue sources for those towns and cities that are already pretty developed with infrastructure,” Bennett said. “In a town like Millville, where we only have three or four people staff, a special tax district will require additional administration. I see that as something that the town of Millville should be very considerate of.”
Millsboro Town Manager Faye Lingo, who recently completed the process that involved a plethora of consultants and attorneys, agreed that administering the project might be difficult for a small town like Millville, though such costs are generally born by the bonds themselves and included in their costs to property owners.
Developers from Millville by the Sea, an approved Route 17-based 4,000-home development, first approached town officials about pursuing a special tax district. Bob Harris, a Gulfstream development official overseeing the project, said state transportation officials are asking Millville by the Sea developers to pay more than $25 million for road improvements, including millions along Route 26 and its back roads.
Still facing a nearly $1 billion shortfall in the six-year capital transportation program, the Delaware Department of Transportation has sought additional contributions even on projects like one to expand Route 26, which was deemed necessary before plans were submitted for the large Millville development. Developers on the Millville project are also helping pay for sewer expansion along the Route 17 corridor.
“It makes sense because the state, for whatever reason, is unable to meet its obligations to make these kinds of improvements,” Harris said. “But they’ve got to be made. You have to have roads. You have to have schools. Special taxing districts are one way to do that.”
DelDOT spokesman Darrel Cole said the department only asks developers to pay their “fair share.”
In Bridgeville, where officials created Delaware’s first special taxing district in a 2,000-home development, $28 million in bonds were sold to pay for general infrastructure costs associated with the development like road improvements and sewer expansion and other needed projects.
Saying they would not be necessary without large-scale development, Bridgeville town officials used $500,000 in bond funds, which are set to be repaid through the taxing district, to help pay for the town’s first-ever street cleaner and police vehicles. Millsboro plans to use special taxing district funds to help build a park and purchase a street cleaner. Bridgeville Mayor and Delaware’s resident expert on special taxing districts Joe Conaway talked with enthusiasm about the concept this week.
“If there is something wrong with this, I haven’t been able to find it,” Conaway said. “Smarter people than I have been involved in this process and they haven’t been able to find it.”
Each single-family home in Heritage Shores, the Bridgeville community where the tax district was enacted, is responsible for $1,040 annually, compared to a little more than $700 owners of townhomes owe each year. Undeveloped lots in the development, mostly still owned by the developer, contribute anywhere from $900 to $1500 annually. Tax assessments would vary by area. In the Indian River School District, that money would be added to the roughly $700 the average single-family-home owner pays in taxes annually.
Bennett and other Millville officials wondered this week if residents would avoid the districts when buying homes in the area. Real estate agents within Heritage Shores did not return calls seeking comment on whether the additional taxes have hurt sales. George Farnell, a competing Realtor who works out of Seaford, said he has not heard complaints about the taxes in Heritage Shores.
“I haven’t heard too much concern,” Farnell said. “Taxes don’t seem to be hurting them at all.”
Frank Parks, another Seaford Realtor and owner of Home Town Realty, disagreed, saying that he “has heard not real good things about the hidden fees up there.” Parks’ company has sold a “couple” of homes out of Heritage Shores, he said this week.
Developers are not concerned, though. Harris agreed with Haese in noting that transplants from metropolitan areas like Washington or others from New Jersey who have grown accustomed to tax bills in the thousands will not shutter when faced with the additional tax. They also noted that without developers paying upfront costs toward infrastructure projects, house prices would fall. Some estimated this week that removing those costs could drop the price of a home up to $20,000.
“It’s a vehicle or financing,” Haese said, adding that homeowners can also opt to pay their share of the tax in one lump sum. “It keeps prices of houses lower. Now I have $20,000 coming in over a tax bill that is spread out over time. It makes houses more affordable.”
Haese said officials are currently working on drafting legislation they plan to present at the July 24 county council meeting in Georgetown. County Council heard a similar proposal several years ago but did not pursue the option. Some were worried about how the money would be spent, according to Dave Baker, Sussex County administrator.
Baker confirmed that the county would hear the proposal but he said no date for that discussion had been established as of Tuesday. The July 24 agenda will be posed at www.sussexcountyde.gov on July 17.
“I think that it would be something to look at especially given the state shortfalls,” Baker said. “It maybe makes sense to look at this as an option to help with infrastructure funding.”