Municipal Utility Districts (MUD) 101

Sep 02, 2015

full service engineering and surveying firm
Jon VanderWilt, P.E.
 
Why create a MUD? We all know the answer to that question. Property taxes from developed land pays for water, sewer and drainage improvements. Lately, the list has grown to include roads and parks, too.

There is no place in the world I would rather be than Houston, Texas. It is the greatest place in the world to live, work, and raise a family. All of us involved in the business of working with MUDs are the privileged few that have the opportunity and honor, on a daily basis, to create neighborhoods from farmland, pastures, and forests, making it possible for others to live in the greatest place in the world. I thank God every day for this opportunity and enjoy it so much that I can't call it "work."

full service engineering and surveying firm

How do we do it? We team with developers, lawyers, financial advisers, utility operators, bookkeepers, tax assessors and collectors, accountants, contractors, and other engineers. The team transforms farmland, pastures, or forests into homes with city-like services in less than two years. I have been at this for 39 years and it still amazes me how fast we can get that first 10 - 15 homes in place, complete with families from all walks of life.


Recently, I heard on the radio that Houston will soon be the third largest city in the nation. Currently the populations of Chicago and Houston are 2.7 million and 2.2 million, respectively. The population of Chicago is shrinking and Houston's is growing. The expert quoted on the radio predicted that, a year or two after the 2020 census, Houston will be ranked third. Houston is surrounded by over 1.5 million people that are part of no city whatsoever. This "hidden" city is large enough to be the second largest city in Texas. The "hidden" city includes all of the MUDs that surround the city of Houston.


Why create a MUD? MUDs provide a way to finance improvements necessary to provide single family residential areas with city-like services. City's provide water, sewer and drainage improvements, curb and gutter streets on lots that usually range in size from 5,000 to 12,000 square feet, police, fire and EMS services, garbage collection and various other services. MUD's usually do not include police, fire and EMS services in the early phase of their development, but when fully developed, many times add these services in some form for their residents. MUD's typically do not pay for all of the curb and gutter streets.


Developers pay for all of the city-like improvements in the MUD and assume all the risk until the homes (the taxable value) are constructed in a MUD. Once the developer has completed construction of sufficient taxable value, the MUD sells municipal tax-free bonds to reimburse the developer for the water, sewer and drainage improvements and levees an ad valorem or property tax on the homes and improvements. The money collected from the ad valorem tax pays the debt service on the bonds over a period of between 15 and 25 years. The tax free nature of municipal bonds usually yields interest rates that are lower than prime rates.

full service engineering and surveying firm

The developer that is not in a MUD must include the costs for the water, sewer and drainage improvements in the price of the home. The cost for a home in a MUD will be significantly less than the same home outside of a MUD. The difference is that there will be an annual payment of an ad valorem tax for the home in a MUD and no MUD tax on a home outside of a MUD. Ad valorem taxes are usually less than the incremental mortgage payment a buyer would have for a home outside of a MUD. Further, the ad valorem tax payments made to the MUD can be excluded from individual federal taxable income, whereas the incremental mortgage payments cannot.


Who governs a MUD? Most MUDs are created by the Texas Commission on Environmental Quality and given authority to sell municipal bonds, levee taxes and be governed by its residents. Serving as a director of a MUD is "grass roots politics at its finest." A MUD is governed by a board of five directors who must own property in the District. The directors are elected to 4-year staggered terms by the residents of the MUD. The Board usually meets monthly to conduct the business of serving its residents with safe, dependable water, sewer and drainage services.


Now that you have had a brief introduction to what a MUD is, why they are created, and who governs the MUD, where would you rather live – a city, a MUD or in an area with neither governance? If the latter, ask yourself who will take care of the infrastructure once the developer is gone?


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