Wednesday, November 11, 2015
Darien Shanske (Davis) has posted Local Government Finance as Integrated System: The Uneasy Case for Using Special Districts in Real Estate Finance (A Response to Odinet's Super-Liens to the Rescue? A Case Against Special Districts in Real Estate Finance) (Washington and Lee Law Review Online) on SSRN. Here's the abstract:
Local governments have long used special financing districts to build infrastructure. If a local project, say building a pocket park, is likely to increase the values of properties very close to the park, then why should those properties not pay for the park in the first place? Though efficient and fair in many cases, the use of these districts can also be problematic. For instance, it seems likely that wealthier residents, with higher property values to leverage, are especially likely to use these districts effectively. It has also been the case that developers have used these districts speculatively, which had serious repercussions during the last recession. Christopher Odinet develops an additional, and important, critique of these districts. Odinet observes that these districts obtain a lien on benefiting properties, and that this lien takes priority over the liens of conventional lenders. Odinet then argues that this super-priority should only be honored if the district has served some substantial public purpose.
In this short Response, I agree with Odinet that these districts are problematic, but wonder whether his solution is the best one. This is because traditional lenders will generally know about these districts before lending. Furthermore, his solution only kicks in if there is an event of default, which is unusual, and thus this solution does not do much to counter the run of the mill socio-economic stratification that these districts often enable. I argue that an ex ante approach limiting the use of these districts therefore seems preferable. I conclude with the argument that, despite all their flaws, these districts should not be abolished outright. Local government finance is a dynamic system and the absence of any tool, even one prone to abuse, can have severe consequences, as illustrated by the recent history of California.