Loan defaults might lead to change in Janesville city policy
The losses might cause the city to reconsider a “pro-development policy” that has the city acting as a bank for developers and assuming the risks, said Jay Winzenz, assistant city manager.
Cities usually charge developers upfront for improvements, or developers build the improvements and turn the maintenance over to the city, Winzenz said.
Janesville borrows money to make improvements such as streets, curb, gutter and water mains. The developers are then assessed the cost and expected to reimburse the city over five years plus interest.
But “the economy’s gone south, developers haven’t been able to sell lots, and therefore they don’t have the cash flow to pay us back, but we still have to pay the bondholders,” Winzenz said.
In the next few years, the developers of 129 Janesville lots have or are in danger of defaulting. The lots would be sold at public auctions handled through the county treasurer’s office unless the developers begin paying the special assessments and taxes, Winzenz said.
After at least three years, properties can go up for auction.
The first of the lots go to auction Friday, Oct 15.
The nine lots are owned by Kenwood Apartments, and they are in Hickory Hills subdivision just off Afton Road on the south side of Rockport Park Drive. Ten lots were improved, and one lot sold.
Delinquency dates to 2006.
Total assessments due the city for the nine lots are $126,974. Of that, the developer has defaulted on four years of payments. Payments for the fifth year, totaling $24,000, are not yet due. Anyone who buys a lot at auction is responsible for that lot’s portion of the assessment.
In other subdivisions, a total of 61 lots could go to sheriff’s sales in 2012 and another 59 in 2013 if special assessments and taxes aren’t paid.
The city could be forced to cover up to $2.76 million in loans developers have not repaid, including those defaulting this year.
When the subdivisions were platted, the downturn in the economy and the loss of major employers could not be anticipated, Winzenz said.
Anything can happen between now and the looming defaults, Winzenz said. The economy could pick up. People might begin buying lots so developers would pay their debt.
The city does not make money on the loans, Winzenz said. For instance, the city today is borrowing at a rate of about 3 to 4 percent and charges developers 6 percent. Any extra money covers staff time and the cost to issue debt, Winzenz said.
Sometimes, developers refinance to take advantage of lower rates and pay the city back early.
The city collected the money up front for several recent large projects, including Kennedy Homes, Arbor Ridge and Menards.
Staff was wary of the Kennedy development because the company proposed doing “a number of things that were different,” Winzenz said. Even though the subdivision eventually failed, the city did not lose money because the company paid for improvements the city made.
Now, the council must decide whether to buy the nine defaulting lots outright from the county for $212,180, a cost that covers the land, delinquent taxes, interest, penalties and the special assessments.
Staff recommends against that option.
“If we just go out and buy them, we don’t know how long we’re going to have to hang onto them,” Winzenz said. “We’d much prefer that a private individual buy them, so they have to maintain them and pay property taxes on them.”
Or the city could allow the properties to go up for auction at a minimum bid of $5,000 each. Any money realized would be split on a prorated basis between the city and the county. The county already has paid the delinquent taxes to the different taxing jurisdictions.
The council might opt to bid up to a certain amount at auction to protect at least some of the city’s investment, Winzenz said.
“We’ve invested a substantial amount of taxpayer money in these properties,” he said. “We want to drive the bidding up to a certain point. There could be $10,000, $20,000 in special assessments and back taxes, and if (the bidder pays) $5,000, that’s all they pay for it.”
Winzenz said staff has had internal conversations about the policy and expects it to be up for discussion at some point.
“We just haven’t had any subdivisions that have come forward within the last couple of years,” he said.
“We may very well be changing the way we construct improvements.”
Last updated: 2:50 pm Thursday, December 13, 2012