Metro district developers would be barred from purchasing their own construction bonds, a key profit center for builders of nearly every new housing development in Colorado, under a reform bill introduced in the Legislature late Thursday.

House Bill 22-1363 would end a longstanding practice in which developers purchase some of the public financing bonds they initially approved as board members for the metro districts they created. Metro districts are governmental entities independent from cities that are established to finance infrastructure for developments. 

The move often allows a developer to exchange a promissory note they signed with the metro district to repay their costs of installing a development’s infrastructure, a deal in which the developer sits on both sides of the contract, with the tax-free bonds.

The bonds are known as junior bonds and are generally designed to remain unpaid for decades, during which the unpaid interest compounds on itself, exploding the payoff amount by multiple increments.

“This is a potential game-changer because this model is so lucrative to metro district developers,” said Jim Gibson, an out-spoken advocate for reform. “Developers have the control over issuing high-interest-rate bonds and then turn around and live on the earnings of those bonds. We will now see whether they’re willing to bar this outrageous practice or fight to keep it.”

All the self-dealing typically happens long before any house is built or any resident moves into the metro district when the developer sits on the metro district board of directors and sets all its rules. But the deals are entirely reliant on the future homeowners to repay bonds through their property taxes.

The bill, co-sponsored by Rep. Mike Weissman, D-Aurora, and Rep. Andrew Boesenecker, D-Fort Collins, takes aim at other metro district practices that reformers say take advantage of unwitting homebuyers.

“In the years that I have worked on this issue, I have heard many concerns from district residents – and some from people with connections to the industry itself – about the extent and structure of indebtedness created by some metro districts, and whether the extent of indebtedness is really proportional to the expenses to be paid off,” Weissman told The Gazette. “The hope is that removing the incentive for entities very closely associated with the district issuing the debt in the first place to then profit from that debt via interest payments will help keep metro district debt at more reasonable levels.”

County and municipal governments that approve the creation of a metro district would be prevented under the bill from signing those deals without a prohibition against a developer purchasing their own bond financing.

Additionally, the bill would make it a crime, breach of the public trust, for any metro district board member with ties to the developer to approve any bond financing that the developer later purchases.

The Special District Association of Colorado, a trade group that represents metro districts as well as other special districts such as for libraries and fire service, said it’s studying the bill to determine its approach.

“Our initial reading is that there are significant and potential costly changes … that will impose additional financial burdens and increased workload for special districts,” executive director Ann Terry told The Denver Gazette in an email. “It is important to note that of all the local government types in Colorado, special districts have the most comprehensive transparency requirements already in place under Colorado law.”

Metro districts are virtually the exclusive method of meeting Colorado’s burgeoning housing demand, with more than 2,000 of them across the state.

In nearly every instance, developers vote themselves, family, friends and associates onto a metro district board of directors when the district is first created and long before a single home is built.

Acting as the metro district board, the developer and associates then establish a debt ceiling for the project, sometimes for billions of dollars, all of it to be funded through municipal bonds that are leveraged by the property taxes of the homes that are eventually built.

When bonds for metro district construction are issued, they frequently are in differing amounts with the largest sold on the open market, frequently to investors such as banks or pension funds. Smaller bond amounts are also issued, a second-tier of debt that is only repaid after the first but at much higher interest rates.

It is that second tier of bonds, sometimes even a third or fourth, that developers frequently purchase.

“The conflict of interest is a big issue,” said attorney Brian Matise, an expert on metro districts. “The developers and their affiliates who are on the board have one role to represent the district for the best interest rate, and they want to maximize that interest rate on the other hand as the purchasers of those bonds.”

The bill also would require metro district board meetings to be held on or near the development, ending the practice that allows them to be held within a 20-mile radius of a project. Residents have frequently complained of board meetings being held at a developer’s office far from their homes.

Additionally, the bill would prohibit metro district boards from splitting a project apart into a separate new district, a move developer-controlled boards have done just before residents have taken control.

It is the second effort at metro district reform this legislative session. The earlier bill, Senate Bill 22-136, primarily looked to give residents the power to instantly oust developers or their associates from metro district boards.

It died in a subcommittee after developers, bankers, finance experts and lawyers that work or control metro districts testified how any changes to current law would affect future home building in a state thirsty for it.

HB 22-1363 was assigned to the House’s transportation and local government committee. A hearing date has not been scheduled.