Bond sale statements lacked flood pool warning
Municipal district didn’t tell investors of risk from reservoir
Homeowners in the Canyon Gate neighborhood say they were never told that their homes had been built in the flood pool behind Barker Reservoir, despite warnings in official subdivision maps that they could be subject to “extended controlled inundation.”
Nor was any mention of the warning made in a series of disclosure statements prepared for investors who purchased tax-exempt bonds that were sold by Canyon Gate’s de facto government, Cinco Municipal Utility District 8.
Since Cinco MUD 8 first sold bonds in 1996 to reimburse developers for infrastructure costs, none of the bond prospectuses prepared by the MUD’s lawyers have referred to the warning, which Fort Bend County officials have included since 1994 in these records: “This subdivision is adjacent to Barker Reservoir and is subject to extended controlled inundation under the management of the U.S. Army Corps of Engineers.”
The only reference to flooding for nine years in the prospectuses, required by the Municipal Securities Rulemaking Board to protect investors, was one paragraph that said none of Cinco MUD 8’s land was within the 100-year flood
plain, except for the banks of drainage channels. Subsequent prospectuses, issued from 2005 to 2012, referenced drainage and flood plain studies, but still said nothing about how the neighborhood was right next to Barker Reservoir and could be inundated for long periods of time by the Army Corps of Engineers if it rained long and hard enough.
That is exactly what happened during Hurricane Harvey to all 721 homes in Canyon Gate.
Coats Rose, a Houston law firm, prepared all of Cinco MUD 8’s bond prospectuses. The firm said it wouldn’t answer questions about why no reference to the “extended inundation” warning was made unless the MUD’s board gave its approval later this month. “Cinco MUD 8 gives all the notification required by state law; notification of flooding or potential flooding would typically be a matter of information for a seller of real property to a purchaser of real property,” W. Dickinson Yale, a partner with Coats Rose, said in an email.
Hugh Durlam, 40, who works at an engineering firm in Houston, is typical of a Canyon Gate homeowner. “When we purchased our home in Canyon Gate in 2005, I did not know that we were part of the Barker Reservoir,” he said.
Not on ‘risk factors’ list
Barbara Bisgaier, a former managing director at Public Financial Management, a Philadelphiabased company that provides financial advice to governments around the nation, said Cinco MUD 8 should have disclosed the flood threat in the bond prospectuses, especially since the documents include several “risk factors” that investors should weigh before buying the bonds.
“Since they went to the trouble of listing risk factors, it really became incumbent upon them to disclose this potential flooding. Because the bonds are secured by property taxes, theoretically people will be flooded out and they won’t be paying their real estate taxes anymore, and that goes to the security of the bonds,” said Bisgaier, who is retired.
Martin J. Luby, an assistant professor of public affairs at the University of Texas at Austin, said it was his “sense” that the threat of inundation from the reservoir should have been included in the bond prospectuses. He said he couldn’t definitely say it should have been because he wasn’t part of the transactions.
“Obviously it’s relevant; it seems germane and it seems material, especially in light of what happened with Harvey,” said Luby, who works as a financial adviser for the city of Chicago and the Chicago Transit Authority.
By contrast, the Willow Fork Drainage District, which works in Canyon Gate on drainage projects because its jurisdiction overlaps with Cinco MUD 8, disclosed the threat of potential flooding when it sold $8.9 million in bonds for construction projects in 1992. Both Willow Fork and Cinco MUD 8 levy property taxes on Canyon Gate homeowners to pay off the bonds they have sold.
In the 1992 bond sale, Willow Fork’s lawyers from another Houston law firm, Allen Boone Humphries Robinson, disclosed that the drainage district’s eastern and southern boundaries were formed by the Barker Reservoir and Barker Dam. The drainage district also noted that in a July 6, 1992, letter, the Fort Bend County Engineering Department “expressed concern about potential flooding of non-government land upstream of the Barker Reservoir” from extreme rainfall.
Hundreds of MUDs and other so-called special purpose districts have for years powered explosive growth in Harris, Fort Bend and Montgomery counties. Developers strongly defend MUDs as key entities in developing formerly rural land, enabling them to build affordable homes for which Texas is known.
Some taxpayers’ advocates question the transparency and accountability of MUDs and other so-called special purpose districts. These advocates contend that they often remain beholden to developers and are at least partially responsible for escalating
“Since they went to the trouble of listing risk factors, it really became incumbent upon them to disclose this potential flooding. Because the bonds are secured by property taxes, theoretically people will be flooded out and they won’t be paying their real estate taxes anymore, and that goes to the security of the bonds.” Barbara Bisgaier, a former managing director at Public Financial Management
local government debt, given their sweeping powers to sell bonds and levy taxes to pay off hose bonds.
After several MUD-financed subdivisions flooded, Hurricane Harvey has raised fresh questions about transparency, accountability, and whether developer-created MUDs can effectively represent the interests of homeowners, particularly when it comes to protecting neighborhoods from flooding.
The two Houston law firms responsible for disclosure in Canyon Gate, Coates Rose and Allen Boone Humphries Robinson, have turned their expertise in creating and representing MUDs and other districts into highly lucrative law practices.
Coats Rose is a major player among law firms representing special purpose districts in Texas. The firm’s website says it represents more than 150 of the districts.
Allen Boone Humphries Robinson represents 350 such districts, the most in Texas, according to state data. The Chronicle reported last year that ABHR ranked first in campaign contributions among law firms that do special purpose district work, contributing $1.4 million since 2001 to legislators who have sponsored special purpose district bills or served on committees that approve them.
ABHR, Coates Rose and other firms specializing in MUDs are typically retained by developers to create the districts, either through legislation or an administrative process before the Texas Commission on Environmental Quality. Developers pick an initial board with “temporary” members. That board then calls for an election to ratify creation of the districts and to obtain authorization for the sale of bonds, with electors typically approving tens, even hundreds of millions, of dollars in potential indebtedness.
One of the most controversial aspects of MUDs is the use of so-called “rent-a-voters” — individuals paid to live temporarily on land to be developed so that they can vote to authorize creation of a MUD as well as the sale of bonds. They also vote to make the “temporary” board members picked by the developer into newly elected ones. MUD bond sales
The state Legislature created Cinco MUD 8 in 1985. Four voters in 1990 authorized the sale of up to $16.5 million in tax-exempt bonds. Because the state did not promptly release public records, it is not clear whether they lived on the land that became Canyon Gate or the other subdivisions in the district; or whether they were “rent-a-voters” hired by the initial developer.
Records that were publicly available list the district’s initial developer as Cinco Ranch East Development Inc., an affiliate of Houston-based American General Corp. Two American General executives signed subdivision maps for South Park, the subdivision adjacent to Canyon Gate, that bore the “extended inundation” warning.
As Canyon Gate was developed in phases, another developer, Land Tejas Development LLC, also was reimbursed for their infrastructure costs with bond dollars borrowed by Cinco MUD 8. Land Tejas signed several subdivision maps.
Executives listed in state business records didn’t return messages seeking comment or couldn’t be reached.
Cinco MUD 8’s bond prospectuses disclosed several “risk factors” about the sale of the bonds. The 1999 official statement, for example, cited the Y2K problem as a potential risk. But no mention was made of the Fort Bend County warning that the subdivision was “subject to extended controlled inundation …”
Yale, the Coats Rose attorney who represents Cinco MUD 8, referred questions about the prospectuses to the district’s financial adviser, Rathmann & Associates. Craig Rathmann, the firm’s managing partner, didn’t return messages seeking comment.
When the MUD in 1996 sold bonds for the first time, the five-member board consisted of James R. Thompson, a construction manager; Mark Baird, an equity trader for Fidelity Investments; John Bourg, a computer consultant; Jay W. Jones, an account executive with Dean Witter Reynolds Inc., and Jack P. Miller, an engineer.
Their occupations were listed in the bond prospectus. Thompson and Jones lived in the district, but Baird, Bourg and Miller owned what are called “developer lots,” slivers of land sold by developers that made them eligible to serve on the board. People who run for MUD boards and serve on them are required to either be a qualified voter in the district or own taxable property within its boundaries. Baird is the sole holdover from the 1996 board on the current board. He lives in Houston and still owns a developer’s lot. The current board president, Douglas Brewer, is a former sales manager in the pharmaceutical industry and financial adviser for Wells Fargo.
The Cinco MUD 8 board meets at noon on the fourth Tuesday of each month at the Houston office of Coats Rose on East Greenway Plaza, a 20-mile drive from Canyon Gate. Unaware homebuyers
J. Robert Hunter, director of insurance for the Consumer Federation of America, an advocacy group based in Washington, said potential bondholders have the ability to do research and could have found out about the proximity of the reservoir to the homes being built. But he said he couldn’t say the same about homeowners.
“You can’t expect consumers to do due diligence like that,” he said. “I don’t feel as sorry for the bondholders as I do for Aunt Jane who goes out and buys a house and doesn’t know about the risk. It’s amazing they built houses in there.”
Durlam, who lives in Canyon Gate with his wife and two children, said he and his neighbors are scrutinizing whether any title companies have liability for not alerting homebuyers about the subdivision map warning about the adjacent reservoir. He said such warnings should be a separate page among the title documents.
“When I bought my house, I had no idea about a reservoir or it being built within the reservoir confines. On the map, it’s George Bush Park. If it was George Bush Reservoir Park, that might be more aptly named. We knew it held water, but we didn’t know it was the reservoir,” he said.
Brewer, the Cinco MUD 8 board president, said he didn’t learn until recently that the warnings about “extended controlled inundation” by the Army Corps of Engineers was on the Canyon Gate subdivision maps. He said development of the subdivision was completed when he joined the board about 15 years ago. Brewer, 57, moved to Canyon Gate in 2000. Harvey sent water that reached 2½ feet high into his home.
“We were able to save our closing documents and I’ve had time to review them. There was nothing in the documents or in the title search about any flood pools or inundation by being at the back of the reservoir,” he said.
Yale, the attorney for Cinco MUD 8, said he suspects that in the coming year the district’s board may consider putting some additional information about flood control on its website. firstname.lastname@example.org twitter.com/jamesjdrew
The top of a truck is barely visible in floodwater along South Mason Road in the Cinco Ranch and Canyon Gate subdivisions on Aug. 29. During Harvey, all 721 homes in Canyon Gate were flooded.
Canyon Gate residents gather on Sept. 4 for a candlelight meeting to press for action regarding their still-flooded subdivision. Residents were upset that their homes were allowed to be built in the flood pool for Barker Reservoir and that they were not told they could be “subject to extended controlled inundation under the management of the U.S. Army Corps of Engineers.”