Some clues as to how developer bankruptcy / failure to pay their M-R obligations can affect the M-R district can be gleaned by what happened in Santa Fe Hills (then called Paloma) in San Marcos in the mid 1990s.
When the M-R district was orginally set up in the late 1980s, it was set up such that the M-R on empty lots went up at a horrific rate every year. I don’t remember what it was, but it was very alarming. Baldwin was the developer and they apparently figured they could build out the 1500 or so lots in a hurry, so they weren’t worried. Once a lot was built upon, the M-R rate for that lot went up at 2% a year until the bonds were paid off.
Fast foward to the mid-1990s. At about 50% buildout, Baldwin went bankrupt and stopped paying M-R on the vacant lots. In fact, they left about 20 homes half-built – these homes became known as the “stick houses” for years until they were completed by another builder much later.
This left roughly 700 lots empty, tempting bait to other developers when the economy picked up in the late 1990s. KB Homes was interested, but wouldn’t buy those lots with the outrageous M-R that they had by then.
Developers began pushing the city to restructure the M-R on those vacant lots in order to make them marketable. Existing Paloma residents got wind of this and mounted pressure on the city not to leave them out of the restructuring: it would not be equitable to help the developer into a new agreement but not existing homeowners.
Eventually, the M-R did get restructured: the existing homeowners got a much lower M-R as did the vacant lots. They did this, as I recall, by issuing new bonds at a much lower interest rate (rates had dropped by that point) and paying off the old bonds.
KB Homes then bought the vacant lots, dropped the Paloma name and re-christened the area “Santa Fe Hills”, and the rest is history.
Were the original bondholders asked to accept a partial payoff to make this work? I don’t know, I don’t have any insight into that.
This may or may not be a template for what could happen to other M-R districts in the current downturn.
