Zombie Developments

October 8, 2010
Many of you may know that the permits developers receive to construct residential subdivisions have expiration dates by which the developer is required to start and effect the completion of the development.  When a developer defaults on the completion of a residential subdivision there are many losers.  Two primary losers are the buyers of the subdivisions lots, and the governing authority that granted the subdivision approval.
A halted subdivision means the completion of utilities, roads, amenities, and entrances that collectively give value to lots may go unfinished.  Lot buyers can be left with land they can not use and the value of the lots can be decimated.
When land is subdivided into residential lots, tax values and the anticipated tax revenue to the governing authority escalate.  However, when the developer defaults on the subdivision completion, values plummet and the tax revenues become nothing more than an uncollectable forethought.
To assure the completion of subdivision construction, counties and municipalities have long used surety bonds.  The developer is generally required to post a bond that is based on the estimated cost to construct the improvements multiplied by 125 percent.
Unfortunately, it is uncertain at best that the purpose for which these bonds were posted will be served.  Bonds in every state are being called into question.  With the vast amounts of construction insured by surety companies and the contemporaneous nationwide suffering of the financial markets, real estate markets, and real estate developers, there is a growing concern, and in some cases recognition, that surety companies will not be financially able to meet all of their bonded obligations. 

Jim Adams, Broker, NAI Carolantic

Now enters The Permit Extension Act of 2009, Senate Bill 831.  This bill provides for the extension of any real estate related entitlements and approvals by counties and municipalities in the State of North Carolina that are current and valid at any point during the period beginning January 1, 2008, and ending December 31, 2010.  As the statute states in Section 2. Paragraph 14, “It is the purpose of this act to prevent the wholesale abandonment of already approved projects and activities due to the present unfavorable economic conditions by tolling the term of these approvals for a finite period of time as the economy improves, thereby preventing a waste of public and private resources.”

The irony is that the statute that was intended for the public good (and perhaps to provide some aid to the real estate development community in a very difficult environment) has perhaps put lot owners in a lurch and taxpayers in the position of having to pick up the pieces of failed or failing developments.  Seizing on wording rather than the intent of the statute, developers and bond companies are contending that incomplete, stagnate developments are not in default on completion requirements.  They contend that the effect of the extension provisions of the Act was to also extend their completion requirements.  Bond companies are challenging the claims of municipalities and counties in court to avoid having to pay on bond obligations. 

The net result of the strategy buys time for both the developer and the bond companies.   In the meantime, it means that there are no funds to complete the developments that have come to be known as “zombie developments”….developments that are neither alive nor quite dead yet.  It is both unfortunate and interesting that our “best laid plans” don’t always work out as we intended them. 

 

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Posted by Kerry Saunders