Super-Liens to the Rescue? A Case Against Special Districts in Real Estate Finance
89 Pages Posted: 1 Mar 2015 Last revised: 24 Mar 2015
Date Written: February 28, 2015
In a time of limited resources and sluggish economic growth, competition between cities has become palpable, and the race for new investment often dictates the public agenda. To that end, the explosive growth of public-private partnerships between local governments and private investors has resulted in the creation of a myriad of special taxing districts, the purposes of which are limited only by the imagination. Of particular concern has been the growth of certain real estate development-related districts. Although first conceived to fund critical improvements where conventional credit was not available, in more recently years these special districts have been used to finance improvements for private developments in areas that do not suffer from economic distress in the least.
Of particular note, because special district assessments constitute super liens that are accorded priority on par with real property taxes, existing rights of secured parties are unjustly subordinated to the rights of the special district (the board of which is often controlled by the developer himself). This impact on priority has an adverse effect not only on the property rights of pre-existing lien creditors, but also on the overall availability of credit as lenders become more hesitant to make real estate-backed loans in special district areas (particularly low-income and blighted areas), and community lending as a whole suffers.
This Article argues for the reconsideration of the widespread delegation of municipal power to real estate-special districts by analyzing the private benefit-oriented nature of these public-private financing devices. This Article concludes by urging courts to adopt a flexible two-pronged test for the equitable subordination of special district liens. In adopting such a test not only are the property rights of private parties accorded needed protection, but also the legitimate use of real estate-related special district financing, including community lending more broadly, is preserved.
Keywords: common interest communities, property law, real property, liens, community development, commercial law, mortgages, taxing districts, public-private partnerships, real estate, finance, lending, banks, developers, cities, municipalities, incentives, homeownership
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