Home building is a “cash and carry” business. The business doesn't create long-term and dependable cash flows that can carry a company through tough times. We purchase inventory, use labor to create a finished product, and when we deliver, we get paid. Then we do it again.
Wouldn't it be nice if you could create an asset that would generate long-term and regular cash flows as homeowners move into and live in your homes? Infrastructure Financing Group (IFG) believes it has.
IFG, founded by David Earl and Greg Youngs, has received a business methods patent for its private improvement district (PID). According to Earl, the senior partner of Earl & Associates, a San Antonio-based law firm, a PID is a “creative solution that responds to the needs of a difficult economy.” By its nature, a PID does not require government approval, and it can be put in place in less than a week and “in all 50 states.” The PID instrument is recorded in the public record, and the documents are fairly standard.
Youngs, IFG president, says a PID “emulates a traditional government-sponsored improvement district; they just eliminate the politics, time, and expense.” A PID reimburses the developer for improvements such as grading, streets, curbs, sidewalks, sewer, water, common area landscaping and parks, as well as other amenities. Soft costs, such as engineering and design, can also be included.
The asset and long-term cash flow is created from the rights to an annual assessment levied on each homeowner, usually $0.10 to $0.50 per $100 of assessed value. The rate is fixed as is the time frame, typically 30 years. The assessment is secured by the property providing for a high-quality, long-term residual cash flow.
Imagine—if your company is private—years from now, in your retirement, you'd receive annual payments for PIDs you put in place decades earlier as reimbursement for the funds you expended to provide improvements. Public companies also can use PIDs to generate a sizeable residual asset for the benefit of shareholders.
The accounting and tax treatment for these future cash flows will need to be investigated. They're new, so no accounting treatment has become standard. Since it is a reimbursement of funds expended, there is an argument that the costs associated with the PID reimbursement should not be run through the income statement as each home closes. In this case, a deferred asset would be created. If the costs being reimbursed by the PID are run through the income statement at the time of closing, income would be recognized as funds that are received over the life of the PID.
The ability to be assured of future reimbursement of improvement costs benefits homeowners as well. As Earl indicates, with a PID, “developers can reduce the cost of lots allowing for lower home prices, or they can provide a greater level of community amenities. The end result is the same: These districts allow developers to provide a better standard of living in more sustainable communities.”
To date, nearly 20 PIDs have been put in place by IFG. IFG establishes a formal partnership with developers in the sharing of the PID's residual cash flows. IFG manages the invoicing, collection, and enforcement on behalf of the partnership. There are no up-front costs incurred by the developer to form the PID.
Earl believes these future cash flows can be factored or sold once the PID is completed providing a multitude of benefits to PID beneficiaries.
How many builders might be enjoying reimbursement today for improvements they put in place years ago? Establishing a PID today cannot undo today's difficulties. Yet, if history repeats itself, as it always does, putting a PID in place today may provide a significant benefit during housing's next downturn.