One Year In: Practical Insights from Tennessee’s Infrastructure District Frontier (Part 2 of 5)

Questions from the Council: The Three Questions That Keep Coming Back (Part 2 of 5)

This is the second in a series of blog posts about IDDs one year after REIDA. For the first blog post in the series, follow this link.

If you’ve attended a city council or BOMA meeting in the last year where infrastructure districts were on the agenda, you’ve almost certainly heard these three questions- often, word for word:

“How does an additional tax assessment make housing ‘more affordable’?”

“You need the infrastructure anyway. Why should the city/town help you pay for it?”

“What’s the catch?”

In our first post, “Education, Education, Education,” we discussed why early engagement with municipal staff and governing bodies is essential to infrastructure district success. In this Blog post, we’ll discuss the three questions we consistently hear during those early discussions and sometimes at the final hearing on our petitions seeking the establishment of a new infrastructure district.

Question 1: “How does an additional tax assessment make housing ‘more affordable’?”

This is the most fundamental question, and it deserves a clear answer.

The Answer: The additional assessment doesn’t make housing affordable by itself. The assessment, by placing the infrastructure cost on the end user rather than the initial developer and spreading out the cost of the per-unit infrastructure costs over thirty years, allows the developer to exclude the cost of infrastructure from its per-lot cost. Since single-family developers typically price their homes as a multiple of the per-lot horizontal development cost, removing the cost of infrastructure covered by the assessment from that calculation creates significant savings.

Let’s take a three-hundred-unit single-family development with $6,000,000 in infrastructure costs that could be financed through an Infrastructure District. Without the district, each unit would include the pro-rata share of common infrastructure in the per-lot cost, or $20,000. Assuming all other costs to complete each lot is $200,000, with the infrastructure included, the lot completion cost will be $220,000. In Tennessee, single-family developers use a multiple between 2.5 and 3 from the lot cost to determine the for-sale price of a completed home.

The comparative sale prices will therefore be (assuming a multiplier of 3 for simplicity’s sake) $600,000 with an IDD or $660,000 without an IDD.

With an IDD, the end user must put down $120,000 and finance a $600,000 home as pay an additional tax assessment to cover $20,000 at the interest rate established through a municipal bond (which is materially lower than a standard mortgage). Assuming a 7% mortgage rate and a 6% interest rate on the infrastructure bond, the monthly payment would be: 3,113.36.

Without an IDD, the end user must put down $132,000 and finance a $660,000 home using a standard mortgage. Assuming a 7% mortgage rate, the monthly payment would be $3,512.80.

In the end, the buyers of single-family homes without an IDD would have to put down $12,000 more than their IDD counterparts and owe almost $400 more each month.

Admittedly, this is not a simple explanation, which is another reason we want to educate municipal decision-makers early in the process!

Question 2: “You need the infrastructure anyway. Why should the city help you pay for it?”

This question reveals a critical misunderstanding—and a real opportunity to educate.

The unstated assumption: “The developer should pay for all infrastructure to serve its project.”

The reality: While this used to be the norm in Tennessee, and a source of ongoing tensions between developers and municipalities, infrastructure districts can place the cost of needed infrastructure improvements on the end-users of the Project, rather than solely on the developer or on the broad base of taxpayers in the municipality.

Here’s the distinction:

In a conventional development approval process, a city may condition approval on infrastructure improvements: the developer must widen the road, upgrade water mains, contribute to schools, etc. But these conditions are often negotiated downward, phased, or deferred. The developer minimizes upfront costs to maximize near-term returns. The community gets incomplete infrastructure, delivered slowly.

An infrastructure district creates a different structure:

• The full infrastructure plan is specified upfront. The public and private parties agree on what’s needed to serve the district—not just the initial phase of development, but future growth.
• Costs are allocated transparently. Public infrastructure that would be needed anyway (streets, water, sewer) is identified. Infrastructure that serves the development is costed out.
• Funding is locked in. Rather than relying on the developer’s financial health or evolving business model, financing for the development of infrastructure is secured to a fixed tax assessment on the property benefiting from the improved infrastructure.

The critical point: Infrastructure districts don’t ask the city to pay for infrastructure that the developer should fund. It asks the end users of the completed development, who are benefiting the most from the infrastructure improvements, to pay for needed infrastructure.

Question 3: “What’s the catch?”

This may be the most honest question a municipal leader will ask. It reflects healthy skepticism: If this is such a good idea, why isn’t everyone doing it?

The answer is everyone is doing it. Developers have secured billions of dollars of financing using similar tools in Texas, Colorado, Florida, and other states. REIDA is a compilation of best practices across those states – best practices that have fueled tens of billions of dollars of developments by supporting up-front financing for needed infrastructure. IDD bonds are without recourse and have no effect on the borrowing power of municipalities since they are secured by a tax assessment applied to the land within each district.

In a state facing $80 billion in infrastructure deficits, we desperately needed this tool. IDDs are not the sole answer to our infrastructure needs across the State, but they are one of the best tools we have now.