Bond sale state­ments lacked flood pool warn­ing

Mu­nic­i­pal dis­trict didn’t tell in­vestors of risk from reser­voir

Houston Chronicle Sunday - - FRONT PAGE - By James Drew

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.

Lu­cra­tive work

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. james.drew@chron.com twit­ter.com/jamesj­drew

Craig Mose­ley / Hous­ton Chron­i­cle

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.

Mark Mul­li­gan / Hous­ton Chron­i­cle

Michael Ciaglo / Hous­ton Chron­i­cle

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.”

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