Copyright © 2012 Albuquerque Journal
Everybody says they didn’t see it coming.
Not High Desert Investment Corp., the award-winning developer that launched a luxurious master planned community in Rio Rancho three years before the worst economic crash since the Great Depression.
And certainly not the homeowners who bought property in Mariposa on the strength of High Desert’s sterling reputation and its connection with the iconic Albuquerque Academy, and who now fear ruinous tax increases.
At the heart of the drama is the $16 million in bonds High Desert sold in 2006 to build a water treatment system and other infrastructure using public improvement district, or PID, financing. The mechanism allows developers to sell bonds for infrastructure backed by taxes from the homeowners who benefit.
Mariposa sits on 1,465 acres of former ranch land a few miles southwest of U.S. 550. Lavishly produced brochures tout Mariposa as a “community defined by natural beauty.” Amenities included a fitness center, swimming pool and playground.
The development opened during the peak of the housing boom in 2005. That year, the city of Rio Rancho issued more than 3,000 housing permits. By 2007, lots at Mariposa were selling for between $140,000 and $400,000. Custom builder Steve Nakamura of Rachel Matthew Homes sold his 3,757-square-foot model home for $784,900 within an hour of its viewing debut.
When the bonds were sold in 2006, High Desert projected the taxable value of homes built at Mariposa would reach an estimated $107 million by the fiscal year that began July 1, 2011. But in 2008, the boom turned to bust, and by March this year, the taxable value stood around $23 million.
Gary Gordon, a member of the High Desert board of directors and treasurer of Albuquerque Academy, said recently the company hasn’t sold any land in “years,” despite reducing lot prices by 33 percent last fall. He said an uptick in home building in recent months is the result of land sold to builders in the past and isn’t bringing significant revenue to High Desert.
With no land sales and home building at a fraction of the projected level, High Desert was helping support the community center and faced a $1 million tab to cover the $1.2 million in annual bond payments.
Last month, High Desert representatives told the roughly 100 homeowners that HDIC couldn’t make the bond payments, or support the amenities and had listed the roughly 700 acres in remaining unsold land and lots it still owns with an Arizona land specialist.
The news provoked alarm and outrage among homeowners who fear a 10-fold tax increase if they are left to shoulder the full bond burden.
“You’ve got a community of extremely frightened people,” said homeowner Martha Greenleaf.
She worries the annual PID tax on her $355,000 Mariposa home could jump from $1,100 to $11,000 — on top of city, school and other property taxes she pays.
The board that oversees the bonds claims High Desert is walking out on its agreement to make up the property tax shortfall and is considering legal action.
Residents have publicly expressed shock, disappointment and a sense of betrayal.
“We bought there because of High Desert’s reputation. We feel the rug has totally been pulled out from under us,” said Mariposa resident Bryan Norman.
He said he was informed before deciding to buy the house that there would be a monthly “public improvement district” payment.
“But we had no idea of the specific setup and unlimited liability. We would never have bought there if we had known,” Norman said.
Gordon said High Desert sold to builders and didn’t deal with home buyers directly. However, he said people who bought homes at Mariposa were alerted to the PID obligations.
“If you close on anything here, as the buyer, you sign a form of disclosure that discloses the PID and its basic attributes,” Gordon said.
Most residents willing to talk about the situation say they found out about the PID tax at “closing,” when buyers must review and sign a stack of documents relating to their mortgage and the details of the home and property involved.
Greenleaf, a Realtor who has sold a home at Mariposa, said the disclosure is “typically buried in hundreds of pages of documents.” Unless someone specifically goes over the PID details, they may not be aware of the implications, she said. Unlike most PIDs, the tax structure set up for Mariposa does not have a fixed rate.
The disclosure document says the PID tax will “initially not exceed” $9.50 per $1,000 of a home’s taxable value (which is one-third of assessed value). It says High Desert agreed that if a tax rate of more than $20 per $1,000 of taxable valuation is required to cover the bond payments, High Desert will pay the amount necessary to make up the difference between the revenue generated by that tax rate and the amount due on the bonds.
“People bought on that iconic faith,” Greenleaf said.
The original schedule for the bond payments projected the PID rate going down to $5, based on the expected level of home building, Gordon said.
In 2007, when Greenleaf bought, the market was booming and she thought $20 was some kind of worst case scenario, plus there was language saying that High Desert would step in.
“That’s why we felt confident about the purchase,” she said.
In an email, Gordon said High Desert “is unable to honor the contractual obligation, because the company has had no sales revenue for years.”
He pointed out that the agreement also says that if High Desert fails to cover the bond payments, the PID board has a legal obligation to raise the taxes sufficient to do so.
But Gordon also doesn’t think that increasing the taxes to cover the debt is a realistic proposition and High Desert has been working with the bond underwriters to renegotiate the terms to mitigate the impact for homeowners and ensure bondholders get paid.
“The reality is that if you raise rates high enough to cover the debt or even approach covering the debt, my opinion is that you will drive revenues further down because you will have non-payment on a grand scale,” Gordon said.
Gordon said there are other potential solutions but declined to comment on them.
He said the agreement that High Desert would step in was never meant to address a situation where the shortfall topped seven figures.
“The reality of that is the bondholders would have never purchased the bonds if they would have thought that High Desert would ever be in a situation where they needed to come up with as much as $1 million a year to make good, because that tells you the deal is totally wrong,” Gordon said.
Gordon told the Journal that in 2006, the many entities involved in crafting the bond financing — High Desert, the city of Rio Rancho, bond underwriters, attorneys, bond holders — were all convinced of the feasibility of the Mariposa project.
He said the city was motivated to have an upscale community within its limits provided with a water system that it didn’t have to pay for, and High Desert had a profit motivation to build Mariposa.
High Desert is the investment arm of Albuquerque Academy, which is the company’s sole shareholder. Any profits High Desert makes are, after tax, delivered to Albuquerque Academy in the form of dividends, which help the school provide financial aid for students, said Gordon.
Local financial experts say most New Mexico PIDs have been a successful way for local governments to get needed infrastructure. Passed into law in 2001, there are around 10 such districts statewide, including Cabezon communities in Rio Rancho, and Ventana West in Albuquerque, according to a list provided by the state Department of Finance Administration.
However public records show in 2010 the Quay County Commission dissolved a PID established for Ute Lake Ranch, a development near Tucumcari, because the developer hadn’t built out the promised water infrastructure.
Mariposa PID board chairman James Jimenez, who is also Rio Rancho city manager, hopes High Desert land could be sold to pay down the bond debt. High Desert and the bondholders would have to agree to such an arrangement, he said.
Gordon said via email that High Desert is willing to “sacrifice certain assets” to mitigate the bond situation but added that negotiations are ongoing.
If such a sale didn’t cover the full amount, Jimenez hopes the bond holders would agree to renegotiate terms on the remaining balance, including a fixed tax rate for property owners.
And the PID board is still mulling legal action to hold High Desert to its replenishment agreement, he said.
The Mariposa PID differs from others in the state in that the tax rate is not fixed, and Jimenez has said publicly that the city would not approve another PID that used the same type of taxing structure.
Jimenez and Gordon have said they are still trying to negotiate a solution for the bond payments. High Desert recently sent a letter to Mariposa homeowners offering them four scenarios for taking over the cost of operating the amenities like the community center, pool and landscaping services.
The costs ranged from $187 to $685 per quarter, per household in association dues, depending on the menu of services provided. If residents aren’t willing to support the services, the community center will close on July 9, the letter said.
Jimenez has said the PID board has enough reserves to pay the bonds in September and March. But it needs to notify the Department of Finance and Administration by September if a tax increase is needed. Any increase would be reflected on property tax bills sent out in November, he said.