Friday, April 29, 2016
Landmark Towers Association, Inc. v. UMB Bank, N.A. or: One Bad Apple Spoils the Whole Bunch
On April 21, 2016, the Colorado Court of Appeals issued an opinion that immediately drew the ire of the greater real estate development industry and those concerned about affordable housing in a state in the midst of unprecedented soaring rent and housing prices. The Landmark Towers Assn., Inc. v. UMB Bank, N.A., 2016 COA 61, decision is the result of protracted litigation arising out of construction and sale of the ill-fated European Village (“Village”) residential community. For a thorough summary of the origins of the development and the unfortunate story of the man behind the curtain, review the Denver Post’s article titled “Zachary Davidson, Denver Landmark developer, and his fall from grace.” (http://www.denverpost.com/ci_22656011/fall-from-grace-zach-davidson-landmark denver)
Despite the unique facts and circumstances relating to the questionable dealings by the developer, Mr. Zachary Davidson, the decision now stands to turn the Colorado real estate development business on its head. Specifically, a group of condominium owners, who did not live in the Village, learned that their properties had been included in a special district, the Marin Metropolitan District (“District”), to finance the Village. Prior to their purchase, Mr. Davidson failed to disclose to the condominium owners that they would be responsible for financing the Village’s development through previously issued bonds by the District to be paid for through their property taxes. Understandably frustrated by this discovery the condominium owners, through the Landmark Towers Association, Inc. (“Landmark HOA”), investigated the origin of these unforeseen property taxes.
The owners discovered that, prior to the construction of their condominium units; Mr. Davidson bought land near their units and created the District under Title 32, Article 1 of the Colorado Revised Statutes including their future units in the District. Mr. Davidson included their condominiums specifically to provide a sufficient tax base for the Village construction. Once the District was created, by means of misrepresentations to the city and fraud on the district court, Mr. Davidson and other organizers (his associates) then submitted a service plan for the District which provided that the District could issue up to $35,000,000.00 in general obligation bonds bearing an interest rate of as much as 12% which would be paid over a thirty-year period. The service plan also provided that the District would give notice of the special district to individuals under contract to the condominium units before conveyance of title. It failed to provide such notice. Mr. Davidson and the other organizers then filed a petition for organization with the district court which then instructed that an organizational election had to be held for the District’s service plan to be ratified.
So that Mr. Davidson could in effect ratify his own service plan, he and his associates entered into sham transactions to become “eligible electors” under C.R.S. § 32-1-103(5)(a). Specifically, they executed contracts to purchase 1/20th interests in ten-by-ten parcels in the District. They did so as a thinly veiled attempt to comply with the Tax Payer Bill of Rights (“TABOR”). Not surprisingly, the “tax bill,” Mr. Davidson’s concocted service plan, passed with voter approval. Skipping over a litany of fraud, the condominium unit owners then purchased their units without notice of their impending tax debt, discovered the tax debt, and then brought this case an attempt to recover taxes paid to the District. The Court ruled the organizers’ contracts did not make them eligible electors under TABOR. Thus, the organizers illegally participated in the election and their votes were void.
Unfortunately, the Colorado Court of Appeals in issuing its ruling appears to have used too broad of a brush to wipe away Mr. Davidson’s pervasive fraud and invalidated a common practice among real estate developers. In Colorado, it is common among real estate developers, when dealing with undeveloped parcels, to make themselves eligible electors through similar small transactions in the subject development. The reason for this being that it is an undeveloped lot and there is no one to vote. What is not common is concealing the impending tax liability from prospective purchasers and sticking them with the bill for pay for developments which do not benefit the district.
To fully appreciate the ramifications of the Landmark case it is important to consider the following: 1) there has been over $9,000,000,000 in local government debt issued in Colorado since 2001; 2) a significant portion of that debt is held by local investors; and 3) a perception that the debt is at risk due to potential legal claims could negatively impact Colorado’s credit rating. Further, in direct response to the Landmark case, seven transactions, worth in excess of $73,000,000 have been postponed due the financial uncertainty the case has created.
In sum, immediate legislative action is required to resolve the well intentioned, but perhaps financially devastating effects of Landmark ruling. Should nothing be done, Coloradoans can anticipate a significant reduction in housing development, construction layoffs, and small investors losing collectively large sums of money.
For more information regarding the Landmark case, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail at firstname.lastname@example.org.