By Jamie Cotter And Jacob Hollars, Spencer Fane
The short answer is because the distinctions between Metro Districts and HOAs are murky to say the least. Additionally, people who are not integrally involved with Metro Districts often don’t use precise language. All of this leads to understandable confusion around the similarities and differences between Metro Districts and HOAs.
Metro Districts v. HOAs – How each are created.
Putting aside all of the legalese that we lawyers are famous for, the decision to create a Metro District or an HOA usually goes something like this:
A developer buys a vacant piece of property where it intends to develop a new residential community. The developer has two choices at this early stage. First, the developer can fund the costs associated with constructing all of the infrastructure and then build those costs into the price of every new home, resulting in a higher price for the new homes. This option also usually involves the creation of an HOA that is initially controlled by the developer. The HOA usually funds maintenance and improvements on HOA property. That is, while the infrastructure is usually dedicated to either a city or town, the HOA remains responsible for maintaining community resources (open space, parks, etc.). HOAs also routinely adopt covenants that the HOA then enforces through a board of homeowners. Homeowners pay for the maintenance and covenant enforcement through dues and special assessments.
The second option is to create a Metro District. A Metro District is created by the approval of a “Service Plan” by the local municipality (usually a city, town, or county). The Service Plan outlines the guideposts for the development. The Service Plan recites what powers the Metro District has, how much debt the Metro District can incur, and whether the Metro District will continue after such time as the development is built and the debt is paid off. Once the locality approves the Service Plan, a court must create the Metro District as a quasi-governmental entity and an election is held to determine who will serve on the board of directors.
Now comes the “cool” part (and yes, I recognize that the bar for what constitutes “cool” according to we lawyers is VERY low): the Metro District can sell tax-exempt bonds to fund the infrastructure costs. Because the bonds are tax-exempt, the cost to fund the infrastructure is less than if the developer had to obtain private financing to construct the infrastructure. When the Metro District sells tax-exempt bonds, a mil levy is assessed against the property in the Metro District. The mil levies are paid as taxes by the residents based on the assessed value of their property. And in most circumstances, a homeowner’s payment of their annual property taxes is tax deductible. This arrangement results in a lower home price because the developer does not have to recoup the costs of a private loan. Once the bonds have been repaid (i.e. the costs of the infrastructure have been satisfied), the Metro District must decide whether to dissolve or continue in order to maintain the community and undertake covenant control. When a Metro District continues to provide maintenance and covenant control, it fills the role of a typical HOA, resulting in confusion.
With that background, let’s dive into a couple of topics where the powers and responsibilities of Metro Districts and HOAs differ. For purposes of this discussion, let’s assume that the community is managed and maintained by either a Metro District or an HOA. It is common for a community to have both a Metro District and an HOA, but for simplicity we are going to consider an either/or situation.
Ownership and Maintenance of “Common Areas”
The main difference between Metro Districts and HOAs with respect to common areas relates to how those services are paid for and the tax advantages available to Metro Districts as owners of property. If a Metro District owns and/or maintains property within its service area, it can charge the homeowners who benefit from that ownership/maintenance for the resulting costs. This can be done either by the imposition of an operations and management mil levy or fees. If these costs are paid by an O&M mil levy, those costs are typically tax deductible to the homeowners. If the costs are paid through the imposition of fees, those fees would be treated similarly to HOA dues. A Metro District can impose fees for services that are rationally related to the costs of providing those services. The Metro District must set its fees through a resolution adopted at a public meeting. However, there is no formal “vote” of the homeowners at an election. Conversely, HOAs can impose fees and assessments in accordance with their declaration and covenants and the provisions of CCOIA.
Building Additional Infrastructure or Public Improvements
After the development has been completed and the community is operational, it is possible for the community to need to obtain additional property for new infrastructure or public improvements. For example, this can happen when a community grows to such an extent that it needs a new rec center or park. In that instance, if the community is managed by a Metro District, Metro Districts have the power of eminent domain. That means that a Metro District can take private property without an owner’s consent. The Metro District must pay just compensation for the property, but it does not need the owner’s cooperation to obtain the property. Conversely, HOAs do not have the power of eminent domain. Therefore, the HOA would have to find private property to purchase. Any purchase would have to be done voluntarily. The ability to condemn property for a public purpose is a major benefit inuring to Metro Districts but not to HOAs.
Collection of Fees
Both Metro Districts and HOAs can engage in covenant control and can impose fees related to those covenants. When a Metro District assesses a fee for services and that fee is not paid, the outstanding fees automatically become a perpetual, statutory lien against the property served. That is, the Metro District obtains a lien against the property by operation of law. That lien is also considered a tax lien and is superior to all prior liens except prior tax liens. When an HOA assesses a fee for services and that fee is not paid, the HOA can also obtain a lien against the property served. While a portion of the HOA lien may have priority over prior-recorded interests, like mortgages, it is junior to any tax lien, any Metro District lien, and any liens recorded before the recording of the declaration. The portion of an HOA lien that is superior to a first mortgage on the property is limited to the extent of six months’ worth of common expense assessments that would have become due before the filing of a foreclosure lawsuit. In short, Metro District liens are “easier” to foreclose given their priority.
Conclusion
Metro Districts and HOAs are responsible for maintaining numerous residential developments in Colorado. They both serve important purposes and often work together rather than the “either or” situation discussed in this article. While Metro Districts and HOAs are similar, they have key differences of which developers and homeowners should be aware.
Jamie Cotter, Esq. and Jacob Hollars, Esq. Jamie and Jacob are both litigators at Spencer Fane. They specialize in helping municipalities, special districts, and other quasi-governmental entities that are facing litigation by advising them on how to pursue or defend against claims so that they can move through the litigation process as efficiently and successfully as possible. They have a keen understanding of the specific laws affecting these entities and represents them in the district court and appellate court level.
