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Taxpayers may be on the hook for developers credit
Bonds and letters are taxpayer protection
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The fact that the housing market crashed is news that’s a few years old by now.

But as developers run out of money, years after promising Hall County officials they would finish building roads, sidewalks or retention ponds, there are emerging implications for taxpayers.

Developers must build roads in their subdivisions before county officials will agree to plat them as such, then allow the developer to sell individual lots.

Usually at that point in the development, those roads do not meet county road standards, but come with a promise from developers that they will “top” the roads in a way that meets county standards once the subdivision is built out.

To ensure this promise is kept, county officials make developers get an irrevocable letter of credit or an insurance bond to guarantee enough money from a bank to pay for the neighborhood’s infrastructure in case the developer never does it.

Developers later come back when the subdivision is built out and have county engineers inspect them; at that point, the roads become the responsibility of taxpayers.

Most of the time, developers fulfill their obligations, the roads and sidewalks pass muster and the county releases the developer’s bond obligations, according to County Engineer Kevin McInturff.

But as an economic recession has lingered, banks often are taking over these developments, and getting roads that are up to county standards takes more of a song and dance.

If a developer goes bankrupt and the roads or sidewalks aren’t finished, the bond or letter of credit holds the bank responsible for paying.

Most of the time — at some estimates, 90 percent of the time developers run into trouble — contractors or banks extend their bonds or letters of credit for another year or two, depending on the size of the project, according to County Attorney Bill Blalock.

“If there’s an intention to try to complete the subdivision, the county tries to work with the developer and the bank,” Blalock said.

But if not, the county does what McInturff calls “busting the bond,” or collecting on it to bring the roads up to county code.

“With the downturn, we’ve definitely seen more bonds that we’ve had to go through and collect upon,” than county officials did in the past, McInturff said.

Most of the time, the bonds and the letters serve as protection for taxpayers, keeping them from serving as a cleanup crew for developers’ failed ambitions.

“It’s basically a performance and warranty for the taxpayer that makes sure everything gets done in the subdivision and makes sure everything gets done properly,” McInturff said.

Each of these suits of armor designed to protect the taxpayers has its chinks, however.

In the case that a bank issuing a letter of credit fails, taxpayers are on the line. The Federal Deposit Insurance Corporation doesn’t consider a letter of credit a secured bond, meaning it can “pick and choose” whether it honors the letter, Blalock said.

“These kind of obligations are generally not recognized by the FDIC when they take over the bank,” Blalock said.

Such has been the case only a “two or three” times in county officials’ recent memory, including when county officials had to finish infrastructure at the Eagle’s Landing subdivision and the Park at Chestnut Mountain, McInturff said.

Hall County Commissioner Scott Gibbs said one incident with a letter of credit from a failed bank put taxpayers on the line for “hundreds of thousands of dollars.”

The memory caused Gibbs to ask at last week’s Board of Commissioners work session whether the county should change its code and only accept bonds. Commissioners were discussing whether to allow Blalock to begin collecting on a nearly $38,000 letter of credit for sidewalks in Ventura subdivision off Cronic Drive.

The commission approved this move Thursday, a “pretty routine” decision allowing Blalock to negotiate with the bank on the letter. He says that, most of the time, the negotiations end in the letter’s renewal.

But Blalock said bonds, too, have their weaknesses. While they are usually honored by the FDIC when a bank fails, bonds often require costly litigation and take longer to collect, Blalock said.

Letters of credit, on the other hand, are much easier to collect, the attorney said.

“But they’ve got to be there in order to pay it,” Blalock said. “You’ve got six in one hand and half a dozen in the other.”

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