Latest / The Land Development Podcast with Ryan Glick / How MUDs Work: Formation, Financing, and Reimbursement with Howard Cohen - TLP198

Transcript

How MUDs Work: Formation, Financing, and Reimbursement with Howard Cohen - TLP198 · The Land Development Podcast with Ryan Glick

• 0:00
  SPEAKER_01: In order for a MUD to sell a$10 million bond issue, it has got to demonstrate that it has at least$100 million worth of taxable value on the ground today to support the issuance of that debt.
• 0:15
  SPEAKER_01: And so we're not issuing bonds based upon projections.
• 0:19
  SPEAKER_01: We're not issuing bonds based upon a promise to build.
• 0:23
  SPEAKER_01: We can only issue bonds by state law based upon value on the ground today.
• 0:58
  SPEAKER_02: Thank you for having me.
• 1:00
  SPEAKER_02: Well, I'm going to set the stage here really quick for everybody before we get into our topic and we get into your background.
• 1:05
  SPEAKER_02: So about a month ago, we had an episode on the show where we dug into some high-level topics related to MUDs and special districts.
• 1:11
  SPEAKER_02: And today we're going to get a little bit deeper into those topics and maybe a little more technical in the forming of these special districts and the MUDs and everything, and also, you know, the infrastructure reimbursement.
• 1:24
  SPEAKER_02: And so this is going to be, it's not going to be the same as that other episode.
• 1:27
  SPEAKER_02: We're going to get, again, more into some of the details there, which is really interesting.
• 1:31
  SPEAKER_02: But before we get into that, I did want to start, as we always do, by getting into your background and how you got into the industry.
• 1:40
  SPEAKER_02: So could you walk us through your path getting into land development and into public finance on the legal side?
• 1:47
  SPEAKER_01: I'd be happy to.
• 1:48
  SPEAKER_01: So by trade, I'm a lawyer and uh I spent the better part of five or six years as a young lawyer mostly practicing general real estate law.
• 1:59
  SPEAKER_01: Been always uh very interested in real estate, uh, not necessarily land development, but my early practice consisted of real estate closings, uh, whether they be uh commercial or uh other types of industrial developments.
• 2:15
  SPEAKER_01: And then just through folks I know, and in fact, one of my current partners kind of introduced me to the to the mud world.
• 2:22
  SPEAKER_01: And, you know, as a real estate practitioner, I I really didn't know a lot about mud.
• 2:29
  SPEAKER_01: Uh every now and then it got brought up in a transaction, but I I think like a lot of real estate practitioners, they just they know enough to know what it is and and maybe some issues around it, but I didn't really know uh anything about it, but kind of got brought over here in the late 90s, and this is where I've been ever since.
• 2:48
  SPEAKER_01: And so uh my practice now consists of representing landowners and special districts of all sorts.
• 2:56
  SPEAKER_01: MUDs are one part of it.
• 2:58
  SPEAKER_01: In essence, it's uh cradle to the grave representation from the beginning to the end.
• 3:04
  SPEAKER_01: There is a very nuanced practice, uh, there's a lot to it, and there's a lot to know about it, and there's a lot of misunderstandings uh out there about uh MUDs, what they do, what they don't do, and how they operate.
• 3:15
  SPEAKER_01: So that's that's more or less my background, my firm.
• 3:18
  SPEAKER_01: All we do is special district work.
• 3:21
  SPEAKER_01: Uh we've got uh more than 20 lawyers here, and that is our specialty.
• 3:26
  SPEAKER_02: Well, I do want to ask on the since you've been working in this space for a while now, has your view on MUDs changed at all over the years?
• 3:36
  SPEAKER_01: I think it has, maybe not so much changed, but uh again, to have, I think, a clear understanding of MUDs and the role that they play in land development, especially in the Houston area.
• 3:50
  SPEAKER_01: It is uh somewhat geographically differentiated throughout the state, but uh especially in the Houston area, it is an absolute integral part of how Houston has developed and uh likely will continue to develop in the future.
• 4:07
  SPEAKER_01: Some of it has to do with politics, local politics, and then some of it has to do with uh availability of uh water supply in the Houston area versus some areas that may be in North Texas or Central Texas or even West Texas.
• 4:23
  SPEAKER_01: But yeah, it's changed really from the standpoint of just really understanding how integrated it is in the development business.
• 4:31
  SPEAKER_02: So we have listeners, you know, throughout the state of Texas, we have listeners around the country, of course, as well.
• 4:36
  SPEAKER_02: So for those who are not in the state of Texas, maybe they don't have this concept of special districts, and they may be curious how something like this even gets started in a state.
• 4:51
  SPEAKER_02: Is there anything you can speak to on that as far as uh if there is somebody out there in a state where this isn't even a thing?
• 4:57
  SPEAKER_02: But if they did implement something like this, maybe it could help them get more of these projects to pencil and more development growth.
• 5:05
  SPEAKER_02: Any thoughts on that?
• 5:06
  SPEAKER_01: There are some similar districts in in other states, similar tools, if you will.
• 5:11
  SPEAKER_01: California, Colorado, Florida, uh, and other states have it's an alphabet soup game, acronyms for everything.
• 5:19
  SPEAKER_01: But the unique thing about Texas, and it is very unique, is uh the regulatory environment here.
• 5:28
  SPEAKER_01: The MUDs here are highly regulated.
• 5:31
  SPEAKER_01: They are not allowed to do what we call fairland financing.
• 5:36
  SPEAKER_01: That is, spend the money and hope it develops.
• 5:39
  SPEAKER_01: You have to have a proven track record in order to do a MUD financing.
• 5:44
  SPEAKER_01: And so in other states, there have been a lot of trouble that comes with ups and downs of the market.
• 5:51
  SPEAKER_01: In Texas, we did have some trouble in the 80s.
• 5:54
  SPEAKER_01: We got that fixed, and we've been through several cycles since then, and it has produced a very reliable, stable uh bond market, which really is all hinged on the regulatory uh environment here in Texas, which again is very unique from other states.
• 6:13
  SPEAKER_01: We have had a lot of inquiries from other states and in fact other countries that look at Texas as a model for how this should work.
• 6:24
  SPEAKER_01: That includes uh places like Australia, which we recently met with a delegation, then wanting to solve housing crisis in that country.
• 6:34
  SPEAKER_01: And so, you know, they look at Texas as a good working example, and it is very true.
• 6:40
  SPEAKER_02: Well, let's dig into the concept of forming a MUD.
• 6:44
  SPEAKER_02: So say I'm I'm a developer and I have a piece of land that I'm putting under contract that needs a MUD.
• 6:51
  SPEAKER_02: What happens next?
• 6:53
  SPEAKER_01: You have the basis of the facts right.
• 6:56
  SPEAKER_01: Uh, a developer will usually come to us and want to prepare their land for development, and we look at a MUD as an entitlement to that property.
• 7:06
  SPEAKER_01: A MUD can be created through one of two ways.
• 7:09
  SPEAKER_01: One way is an administrative process.
• 7:11
  SPEAKER_01: The Texas Commission on Environmental Quality is a state agency that is empowered by statute to uh create MUDs.
• 7:21
  SPEAKER_01: That process entails an application.
• 7:24
  SPEAKER_01: That application is, I mean, it's not a two-page form that you fill out.
• 7:29
  SPEAKER_01: It is legally technical and an engineering study that has to be provided.
• 7:35
  SPEAKER_01: But in essence, a landowner can create a MUD upon land that they own.
• 7:40
  SPEAKER_01: Not land anybody else owns, but the land that they own, that application takes from the beginning to the end, it takes about 12 months, and the beginning being the time that the landowner says go, about a 12-month process.
• 7:56
  SPEAKER_01: The process is relatively certain.
• 8:00
  SPEAKER_01: It's gotten less certain in the modern context, but uh, if you comply with the rules and your application meets the legal requirements, it should be approved.
• 8:11
  SPEAKER_01: There is a public hearing process that goes along with it.
• 8:15
  SPEAKER_01: But again, about a 12-month process that includes a petition from the landowner, a financial feasibility study, an engineering report, some maps and other things, but but that gets packaged up and processed through that state agency.
• 8:32
  SPEAKER_01: The other way is through a special act of uh the legislature.
• 8:37
  SPEAKER_01: And of course, in in our state, they're they're not a full-time legislature.
• 8:42
  SPEAKER_01: They meet for about uh five months every two years.
• 8:45
  SPEAKER_01: And so the timing of that has to be right.
• 8:48
  SPEAKER_01: That is a little bit uh more of a streamlined process, but a little more risky as well, simply because not everything that happens in Austin, you know, that there is no certainty there in terms of being able to actually pass that special act.
• 9:05
  SPEAKER_01: And so those are the two ways that they're created.
• 9:08
  SPEAKER_01: There are other types of districts, not MUDs, but other types of districts that can be created through the action of the county, not MUDs specifically, but other other types.
• 9:19
  SPEAKER_01: Uh, but basically two ways.
• 9:21
  SPEAKER_02: So you kind of led right into what I was going to ask next.
• 9:24
  SPEAKER_02: But before we do that, I shouldn't have made the assumption that everybody who's listening in right now listened to that other episode.
• 9:30
  SPEAKER_02: So I guess the first thing I'll have you um do for us is tell us what MUD stands for, number one, because people might not even know what what is a MUD.
• 9:41
  SPEAKER_02: So could you tell us what that stands for?
• 9:42
  SPEAKER_02: Sure.
• 9:43
  SPEAKER_01: It stands for a municipal utility district, and it is one of many types of districts that we have in the state.
• 9:52
  SPEAKER_01: And the purpose of a MUD really is to be able to have a governmental entity, and it is a true governmental entity that is responsible for constructing, financing, and ultimately operating the water, sewer, and drainage that will serve a very defined geographical area.
• 10:15
  SPEAKER_01: They also can operate and construct roads as well as recreational facilities.
• 10:20
  SPEAKER_01: So those are the kind of the five types of facilities that you normally and typically see a MUD responsible for.
• 10:30
  SPEAKER_01: But it is a mechanism to ultimately have utilities owned by a governmental entity as opposed to private entity.
• 10:39
  SPEAKER_01: And there are some areas in the state that are operated and served by private entities, which is a different model that, you know, the major differences there, and we can talk about that if you like as well.
• 10:51
  SPEAKER_02: So you had said before that there are other special districts that can be created besides MUDs, as you know, MUDs is one of them.
• 10:58
  SPEAKER_02: But for those other ones, you just I guess you just listed out, I think, the five different things of where MUDs are typically used.
• 11:05
  SPEAKER_02: And I would assume that any other scenario would then be a look to other types of special districts for other use cases.
• 11:12
  SPEAKER_02: Like what are some examples of use cases where you might use a different uh special district?
• 11:17
  SPEAKER_01: Yeah, there are some other types of districts that are similar to MUDs and may be used in lieu of a MUD.
• 11:23
  SPEAKER_01: You know, in North Texas, I think they historically preferred freshwater supply districts, uh, which is very similar, but not exactly the same uh as a MUD.
• 11:34
  SPEAKER_01: But really, it really centers around what is the purpose and what is the need that you're trying to fulfill.
• 11:41
  SPEAKER_01: A mud is is kind of basic utilities.
• 11:44
  SPEAKER_01: Uh, you may have a lid or a levee improvement district that is designed to build and operate levee systems in Fort Bing County, it has a lot of lids.
• 11:57
  SPEAKER_01: Water control and improvement districts are generally dealing with drainage only.
• 12:02
  SPEAKER_01: You have other specialized districts such as navigation districts, but really you're looking at what what is the need and what is the problem that you're trying to solve.
• 12:13
  SPEAKER_02: Well, let's look at the the funding mechanism for this then next.
• 12:16
  SPEAKER_02: So let's say that a mud is created.
• 12:20
  SPEAKER_02: How does the developer then you know fund the infrastructure and you know eventually get reimbursed if that's how it works?
• 12:28
  SPEAKER_01: Yes, it it is how it works.
• 12:30
  SPEAKER_01: And and this is one thing that that is fairly unique, I think, to Texas and what I call the Texas MUD model.
• 12:37
  SPEAKER_01: And the reason why, uh, as I described earlier, it is so safe and stable is you know, land development is a risky business.
• 12:47
  SPEAKER_01: There are cycles that change, and and when the market moves one way or the other, it can be really good or really bad.
• 12:55
  SPEAKER_01: But the mud model, in essence, keeps the risk of development and the success of development where it should be, and that is on the developer.
• 13:05
  SPEAKER_01: It doesn't transfer that risk to either uh the state or to the bond-buying public.
• 13:11
  SPEAKER_01: Uh, there is some risk there, but generally the risk of a successful district is on the developer.
• 13:18
  SPEAKER_01: So the financing in a typical MUD is the developer pays for everything.
• 13:24
  SPEAKER_01: They pay for the creation of a MUD, they pay for the operations of the MUD in the early days, they pay for the construction of all the facilities that the MUD is going to operate.
• 13:38
  SPEAKER_01: They build those facilities, they have to be built based upon approved plans and specifications.
• 13:45
  SPEAKER_01: And by approved plans, they have to be approved by the state, they have to be approved by the county.
• 13:50
  SPEAKER_01: If you're in a city extraterritorial jurisdiction, you got to get the approval of the city.
• 13:56
  SPEAKER_01: So all the regulatory approvals have to be uh had and the MUD has to approve them.
• 14:02
  SPEAKER_01: And if they're built in accordance with approved plans and specifications, and if the value the vertical improvements, the taxable value that is ultimately kind of the goal, if the value is sufficient then to support the issuance of bonds, then and only then will the MUD reimburse the developer at its cost, not cost plus profit, it's it's a reimbursement system, it's cost of those improvements, and the MUD is the one that owns and operates those improvements, which you know puts it in the hands of an elected board of the residents that live in that MUD.
• 14:51
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• 14:55
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• 15:56
  SPEAKER_02: All right, let's get back to the show.
• 15:59
  SPEAKER_02: So can we talk about the issuing of the bonds?
• 16:01
  SPEAKER_02: Um I'm not I'm not entirely sure how that all works and everything.
• 16:05
  SPEAKER_02: Is that something where the developer is paid out over time or at the time, you know, as the bond is actually purchased by the people, or how does that process work?
• 16:18
  SPEAKER_01: Yeah, so building of infrastructure is not inexpensive.
• 16:22
  SPEAKER_01: It is a significant undertaking, both in terms of the dollar investment and actually getting it uh in the ground and physically implemented.
• 16:33
  SPEAKER_01: For a developer to do that, they have to have the experience and the financial wherewithal to do it.
• 16:39
  SPEAKER_01: And the agreement, if you will, and there is an agreement with the developer that basically says, and I'll put this not in legal terms, but if, as and when you build it, and if you build it in accordance with the contract, then if and only if we we're able to pay you, we'll pay you.
• 17:01
  SPEAKER_01: So that that's the basic agreement with the developer.
• 17:03
  SPEAKER_01: Now you may say, well, that's not a that's not a very uh solid promise, but it is the developer understands what they have to achieve.
• 17:13
  SPEAKER_01: And so at a certain point in time where you've got all the infrastructure in the ground and vertical improvements have start to be developed, and the value of those vertical improvements create a tax base, then there is a market that exists for mud bonds, Texas mud bonds, and it's a very, very well-regarded market.
• 17:43
  SPEAKER_01: And the district is able to go out to the bond-buying public and say, we will sell these bonds to you.
• 17:52
  SPEAKER_01: The security for those bonds are the mud taxes that the businesses and the residents will pay on their vertical improvements, and and those taxes are then levied and collected by the MUD and promised that that is the security for the bonds.
• 18:10
  SPEAKER_01: And so that market is very well recognized.
• 18:14
  SPEAKER_01: In a startup development, it might not be what we call rated paper.
• 18:19
  SPEAKER_01: And by rating, uh there are groups like Standard and Poor's or Moody's that will provide uh rating to certain districts based upon their finances and history.
• 18:30
  SPEAKER_01: Uh, but in the early days, probably not.
• 18:32
  SPEAKER_01: And then again, as it matures, you might get a rating, or you might get municipal bond insurance, which guarantees the payment of those bonds.
• 18:41
  SPEAKER_01: In essence, it is it is a promise to pay the developer or repay the developer for the infrastructure that they have built, and that infrastructure is then owned by the public to serve the public and the people who live in uh the district.
• 18:59
  SPEAKER_01: And it may be beyond the scope of your question, but I want to relay a very important point.
• 19:05
  SPEAKER_01: You know, when a person buys a home, they're obviously buying an interest in land and they're buying the structure on the land.
• 19:15
  SPEAKER_01: And the cost of that house is not just the land and the house on it, but the cost of it is also the infrastructure that was put there to serve that house.
• 19:26
  SPEAKER_01: And so one of the reasons why Texas has the robust, affordable housing market that it has, and costs have increased over time, but you know, historically we've had some of the lowest cost housing in any metropolitan area.
• 19:44
  SPEAKER_01: And the predominant reason is the mud financing, because a developer is going to make a return on their investment one way or the other, and they're either going to charge the homeowner their pro-rata share of the infrastructure costs in the initial home price, or that infrastructure cost can be paid out over a period of time through a tax.
• 20:08
  SPEAKER_01: And not only are they getting the benefit of deferring to that cost, but they're not going to pay the entirety of that cost because that cost typically, you know, you live in a home, I don't know, 10 years, let's say, you'll pay that share of the cost, but the second homeowner will also pay a share of that cost.
• 20:27
  SPEAKER_01: But it also allows that infrastructure cost to be financed at a tax exempt rate.
• 20:33
  SPEAKER_01: These mud bonds are tax exempt, which means the cost of borrowing is lower.
• 20:39
  SPEAKER_01: And so ultimately it goes to reduce the cost of housing.
• 20:44
  SPEAKER_01: And that is a really important point.
• 20:46
  SPEAKER_02: Yeah, I was going to ask you on that.
• 20:48
  SPEAKER_02: A couple things I wrote down here as you were you were talking through that and describing it.
• 20:51
  SPEAKER_02: One thing, and you may have already said this, but I just want to make sure I understand it.
• 20:56
  SPEAKER_02: When are the bonds issued?
• 20:57
  SPEAKER_02: Does the project have to be completed before bonds are issued, or at what stage are the bonds actually issued?
• 21:03
  SPEAKER_01: Yeah.
• 21:03
  SPEAKER_01: So the bonds are issued in tranches over time, and they're issued at a point where there is demonstrated taxable value there in an amount sufficient to support uh the bond.
• 21:17
  SPEAKER_01: So in order to develop an area, let's say that there's$100 million of infrastructure costs, the developer will be reimbursed in tranches, and perhaps we can just take that number and divide it by 10, and they may, the district may sell an initial bond issue for$10 million.
• 21:37
  SPEAKER_01: And this is an oversimplification, but in order for a MUD to sell a$10 million bond issue, it has got to demonstrate that it has at least$100 million worth of taxable value on the ground today to support the issuance of that debt.
• 21:56
  SPEAKER_01: And so we're not issuing bonds based upon projections.
• 22:00
  SPEAKER_01: We're not issuing bonds based upon a promise to build.
• 22:04
  SPEAKER_01: We can only issue bonds by state law based upon value on the ground today.
• 22:12
  SPEAKER_01: And that is really a distinguishable factor.
• 22:15
  SPEAKER_01: So it's issued in tranches over time as the development proceeds, but only based upon what's on the ground.
• 22:23
  SPEAKER_02: So does that mean that if you're a developer that's not doing vertical construction, you're selling the empty lots to builders?
• 22:31
  SPEAKER_02: Do the builders have to have completed construction to the point where they've been sold to generate taxable, um, enough taxable revenue for the, you know, for that bond to be issued?
• 22:44
  SPEAKER_02: Or I'm just trying to figure out, you know, if you're a developer that's not doing the vertical construction, are you kind of at the mercy of the builders getting stuff done before you can prove that you have that taxable revenue in place?
• 22:54
  SPEAKER_01: You are, and that's why it's incumbent upon the developer to have those relationships with quality builders who they know are going to perform, who have a track record uh of performing.
• 23:04
  SPEAKER_01: The value of a house, even constructed in a builder's hand, is typically less than it is in a resident's hand because you have some different appraisal valuations.
• 23:17
  SPEAKER_01: One is an inventory uh value, the other one is true retail value.
• 23:22
  SPEAKER_01: And so, yes, the developer really, and it's all on the developer's back.
• 23:27
  SPEAKER_01: Uh, and so they're gonna be reliant upon a good contractor, uh, they're gonna be reliant upon good quality builders that they know that if they take down, i.e., buy uh 100 lots, if they're gonna build on those hundred lots, and they have a marketing program that can sell those hundred lots to homeowners.
• 23:47
  SPEAKER_01: And if the market slows down and home sales are light, or the builder has problems, the developer is at risk of not being paid back that money, or at least not being paid as soon as uh they expect it.
• 24:06
  SPEAKER_02: So if, you know, going back to something you said earlier in the conversation, if a project is delayed, gets delayed, you know, significantly, or let's say a project just never gets completed, you know, which I'm sure happens, in those scenarios when that happens, is you know, I guess what what does that look like to the developer?
• 24:28
  SPEAKER_02: What does that look like if they've already issued bonds and the the rest of the project never gets completed?
• 24:33
  SPEAKER_02: I would assume that the bond's not going to get issued unless there is some taxable revenue.
• 24:39
  SPEAKER_02: So those should rewash, hopefully, and there's not anything lost to the bondholder.
• 24:44
  SPEAKER_01: Yeah, the existing bonds that are outstanding again were based upon value in the ground.
• 24:50
  SPEAKER_01: So those bonds have been sold and are fully supported by the value on the ground.
• 24:57
  SPEAKER_01: If there's no additional value, the bond program stalls or stops until that value is created.
• 25:04
  SPEAKER_01: There are rules that the Texas Commission on Environmental Quality has that basically says a district cannot sell bonds if they cannot uh demonstrate based upon a no-growth basis, that is, not one more house is put on the ground, that the tax rate will not exceed certain threshold amounts.
• 25:30
  SPEAKER_01: And so there are what we call feasibility rules that have to be complied with, otherwise the bond program stops, and the developer is left holding this uh receivable, if you will, for some period of time, perhaps many years.
• 25:49
  SPEAKER_02: So let's say that a development is completed and bonds have all been issued, develop uh developer's been fully reimbursed, and everything's basically done.
• 25:59
  SPEAKER_02: The the MUD lives on.
• 26:02
  SPEAKER_02: How does how does the funding of the MUD continue after the developer is out of the picture?
• 26:10
  SPEAKER_01: Great, great question.
• 26:11
  SPEAKER_01: So uh every MUD has a life cycle, and that life cycle begins uh obviously upon creation, you have a development phase, and then you have a phase where development is over, and what the tax rate for your average MUD looks like is they begin very high.
• 26:37
  SPEAKER_01: I say very high, a high tax rate at the beginning, because you're in the stages of development, value is being created, costs and construction are also increasing.
• 26:50
  SPEAKER_01: But as those facilities get constructed and as the value creates, you see this slow, steady decline of the tax rate over a period of time.
• 27:01
  SPEAKER_01: Once the infrastructure is paid for, then you go into a maintenance mode and the MUD operates and maintains a system with a fairly nominal tax rate.
• 27:15
  SPEAKER_01: Obviously, they have other revenues like water and sewer revenue that helps them operate and maintain that system.
• 27:23
  SPEAKER_01: And so at some point it will level out to fairly low nominal rate.
• 27:29
  SPEAKER_01: And uh the folks that are quote unquote in control of the mud are your neighbors, board members that literally are your neighbors.
• 27:38
  SPEAKER_01: And if you've got a complaint about uh the mud or the quality of water or level of uh drainage, go right down the street and complain to your neighbors.
• 27:51
  SPEAKER_01: So it's a very localized uh system of governance, perhaps the most localized uh system of governance.
• 27:59
  SPEAKER_01: But it used to be that the model was originally designed to have cities like the city of Houston swallow up these muds once they're fully developed.
• 28:14
  SPEAKER_01: Over time, that has uh become after the Kingwood annexation, which uh was kind of a very distasteful uh episode in the late uh 90s, where the city of Houston annexed Kingwood, kind of uh adverse to a lot of the residents that live out in Kingwood.
• 28:35
  SPEAKER_01: Under today's law, cities can't just involuntarily annex an area.
• 28:41
  SPEAKER_01: They've got to have buy-in from the general public.
• 28:44
  SPEAKER_01: And so whereas the muds of yesterday were really designed to go away at a certain point today, uh, we we may be seeing a world where they're they're kind of left in perpetuity to operate those systems.
• 29:01
  SPEAKER_01: Um, and and we'll kind of see how all that works out.
• 29:06
  SPEAKER_02: Do you have different special districts that overlap a certain area?
• 29:10
  SPEAKER_02: Like could you have a MUD and then also one of these other districts or multiple districts in the same spot?
• 29:16
  SPEAKER_02: And then secondarily to that, is it a different board that manages each of those then?
• 29:23
  SPEAKER_01: Yes.
• 29:23
  SPEAKER_01: Yes, you do have overlapping district.
• 29:26
  SPEAKER_01: It's not uncommon.
• 29:28
  SPEAKER_01: Most of the master planned communities, and by master planned, I would tell you communities that are several thousand acres uh will have a number of muds, perhaps an overlapping levee improvement district or uh an overlapping water control and improvement district.
• 29:48
  SPEAKER_01: Those are somewhat similar in nature in that they're drainage functions uh only.
• 29:54
  SPEAKER_01: Some areas and counties have countywide drainage districts, which are a little different as well.
• 30:01
  SPEAKER_01: But yes, you do have overlapping districts, and they each have an independent board that operates independent from each other, but working with each other for the community as a whole.
• 30:14
  SPEAKER_02: So you mentioned that some large projects will have multiple MUDs within that project.
• 30:20
  SPEAKER_02: Is there a certain maximum size that they like to try to keep the MUDs to before they would say, like, this single MUD for this entire thing, or it's like, no, you have to have two here because of the size of it?
• 30:30
  SPEAKER_01: There's no legal limitation either on the smaller end or the larger end.
• 30:35
  SPEAKER_01: There are practical limitations on the smaller end.
• 30:39
  SPEAKER_01: Obviously, you've got to have enough bandwidth there to create enough value to support the improvements that are necessary to serve that mud.
• 30:50
  SPEAKER_01: And generally, I would tell you, and there's exceptions to every rule, but generally 200 acres is kind of the minimum if you're going to have standalone facilities that serve that mud.
• 31:03
  SPEAKER_01: On the larger side, it really is about how big can it be?
• 31:08
  SPEAKER_01: It can be, uh, I think Clear Lake City Water Authority is the largest mud type entity, and that's 16,000, 17,000 acres.
• 31:17
  SPEAKER_01: That's very large.
• 31:19
  SPEAKER_01: You wouldn't see that done in the modern day and age.
• 31:22
  SPEAKER_01: Uh the woodlands community, which is about 30 plus thousand acres, is comprised of uh about a dozen muds and an overlapping uh management district, which really is responsible for a lot of the city type functions that you might see in the woodlands, uh, and that's town center improvement district.
• 31:48
  SPEAKER_01: That's an overlapping uh district.
• 31:51
  SPEAKER_01: But but generally speaking, on the large end, I would tell you, you know, 700, 800 uh acres in a single mud is from a practical standpoint, you can have larger, but may get a little unmanageable.
• 32:07
  SPEAKER_02: Well, I think looking at the time here, uh be good to shift into the last segment, which is the lightning round.
• 32:12
  SPEAKER_02: So I've got five questions for you.
• 32:14
  SPEAKER_02: First one, what is the biggest mistake developers make when forming a mud?
• 32:20
  SPEAKER_02: Not doing it soon enough.
• 32:22
  SPEAKER_01: And by that I mean whether it be a developer or a landowner, uh, as I explained in the first few minutes, the creation of a mud upon a piece of land is an entitlement.
• 32:37
  SPEAKER_01: It is a way to serve the ultimate development of that land.
• 32:44
  SPEAKER_01: And the sooner you can do that, the better off you are because that mud is in existence and will be, if you're farming that land, your family might want to sell that land to a developer.
• 32:57
  SPEAKER_01: That timeline uh may be somewhat uh out there, and you think, well, I don't need it now.
• 33:02
  SPEAKER_01: But I think not doing it soon enough and not understanding that uh it can be political, it can be time consuming, uh, it's never as easy or as quick as one might think.
• 33:16
  SPEAKER_01: And but but you have to spend a little bit of money to get it done.
• 33:20
  SPEAKER_01: But I think that is the critical mistake is not doing it soon enough.
• 33:24
  SPEAKER_02: All right, second one.
• 33:25
  SPEAKER_02: What is one question every developer should ask about special districts before buying a piece of land?
• 33:31
  SPEAKER_01: How do they work?
• 33:33
  SPEAKER_01: And how do I get paid?
• 33:35
  SPEAKER_01: I think really the basics of how these districts work, they need to understand it.
• 33:42
  SPEAKER_01: They need to know what the expectation is of them, and they need to know what to expect in terms of repayment schedule.
• 33:51
  SPEAKER_01: Many developers are sophisticated.
• 33:54
  SPEAKER_01: Many developers might be sophisticated in a certain type of development or development in a certain geographic area where they don't have a lot of experience with MUDs.
• 34:04
  SPEAKER_01: And I think just having a sit-down uh with a professional who does understand it is a very critical item.
• 34:13
  SPEAKER_02: All right, third one.
• 34:14
  SPEAKER_02: What do you think is the biggest challenge facing MUDs and other special districts over the next 20 years?
• 34:21
  SPEAKER_01: So I think right now we live in uh a time where we have experienced tremendous growth in the state of Texas.
• 34:31
  SPEAKER_01: And that growth has been prompted by leadership in the state, a call, if you will, to come to Texas.
• 34:38
  SPEAKER_01: We're open for business.
• 34:39
  SPEAKER_01: We want your business, we want your folks, and we have been tremendously successful.
• 34:46
  SPEAKER_01: Right now, I think uh there is a big pushback against growth.
• 34:52
  SPEAKER_01: And so I think the biggest threat that we have is a lack of understanding that uh MUDs are a way to accommodate the growth that we've experienced and that I think we will continue to experience.
• 35:07
  SPEAKER_01: If we do something that undermines the MUD model, I think what we're going to have is a different type of growth.
• 35:15
  SPEAKER_01: We're gonna have growth, but it is not going to be the good quality growth that we've experienced, and I think it will be very bad for the state.
• 35:25
  SPEAKER_02: All right, mixing it up with these last two here.
• 35:27
  SPEAKER_02: So, fourth one, what's the best piece of advice you've ever received in your career?
• 35:32
  SPEAKER_01: Be the first one in the office and be the last to leave.
• 35:36
  SPEAKER_02: All right.
• 35:36
  SPEAKER_02: All right, last one.
• 35:38
  SPEAKER_02: If you weren't an attorney, what other career path do you think you would have gone on?
• 35:43
  SPEAKER_01: Doing something with my hands, either working on you know something mechanical or building something.
• 35:48
  SPEAKER_01: I love what I do, so it's hard for me to really imagine uh doing anything else.
• 35:53
  SPEAKER_01: But uh, at some point, we all have to find a different hobby.
• 35:57
  SPEAKER_01: But right now, my work is my hobby.
• 35:59
  SPEAKER_02: There you go.
• 36:00
  SPEAKER_02: All right.
• 36:00
  SPEAKER_02: Well, Howard, that is all for the episode.
• 36:03
  SPEAKER_02: What's the best way for people listening in to you know connect with you and learn more about your company?
• 36:08
  SPEAKER_01: Well, I'm not a big social media person.
• 36:11
  SPEAKER_01: Uh, I think my goal in life is for someone to Google me and not not find anything at all.
• 36:16
  SPEAKER_01: But uh our firm does have a website and feel free to call me uh with any further questions.
• 36:22
  SPEAKER_01: I am always happy to talk about MUDs.
• 36:25
  SPEAKER_01: Problem may be to get me off the phone, not necessarily on the phone.
• 36:29
  SPEAKER_02: All right.
• 36:29
  SPEAKER_02: Well, if you guys look in the description for this episode, you will see a link there to the show notes page, and on the show notes page will be a link to the website.
• 36:38
  SPEAKER_02: Uh Howard, thanks again for hopping on here and sharing your knowledge and everything about MUDs and special districts.
• 36:44
  SPEAKER_02: Uh, I learned a lot here, a lot of detail that uh we've never gotten into before on the show.
• 36:48
  SPEAKER_02: So I really do appreciate you taking the time to do this.
• 36:51
  SPEAKER_01: My pleasure.
• 36:52
  SPEAKER_02: All right, guys, that's all for this episode.
• 36:53
  SPEAKER_02: If you're not already subscribed, please click that button.
• 36:56
  SPEAKER_02: We'd love to have you back for the next one.
• 36:58
  SPEAKER_02: Otherwise, we will see you all back here next week.