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Private New Towns

A promising concept saddled with an old problem

By Tyler P. Berding, Esq.
Published: 2008

The City of Hercules, once known for The Hercules Powder Company, a manufacturer of dynamite, is redeveloping its old industrial properties into what has become one of the most explosive new ideas in housing and one of the finest communities of its type on the West coast. Call it the anti-suburb plan; Hercules has employed smart growth and green planning concepts to create commuter and retail-friendly spaces among new housing, commercial and office space. A whole new downtown — "Market Town" will rise from this once industrial area on San Francisco Bay. Various environmental groups, including The Greenbelt Alliance, have supported this new mid-density development.

As a way to counter the suburban sprawl that has consumed our farm and pasture lands at a dizzying pace (some of the fringes of which now lie half built or abandoned) incorporating housing with commercial spaces in a re-vitalized downtown can't be beat. You can add many times the density in a much smaller area. But more than that, bringing goods, services, and transportation within walking distance of residences cuts reliance on automobiles in a way unseen anywhere outside of a few big California cities in recent years.

The Problem with Privately Owned Public Spaces

But like all new ideas, there might be a dark side, one that we have seen and written about many times. While many of these new “transit villages” appear like traditional towns, in most cases, multiple private owners own them, just like in the more traditional residential condominium. Mixed-use common interest properties in high-density buildings require a way to manage and maintain them and the means to fund those repairs. Normally, a building owner who leases space in buildings in a typical downtown area pays for building maintenance from rental proceeds. The established municipality pays for street and utility maintenance from property taxes.

But with private co-op apartments, condominiums-both commercial and residential-and planned developments, maintenance is usually the responsibility of an owners' association, a fixture of new development. Small, private entities like homeowner's associations do not enjoy rental revenue or the authority to impose taxes that have priority over lender's deeds of trust. They must instead rely on assessments against members' property interests which are subordinate to the lenders' interests.

With a plan such as that of the City of Hercules, most of the new construction, stores, housing, and open space, will likely be privately owned and maintained after it is built. There will still be property taxes paid to local government entities, but the biggest part of maintaining this new "town" will fall most likely not to any single government entity but rather to a number of owners associations. This can work well enough when the economy is robust and property values are rising, but when the economy turns recessionary as is the case now, the lack of priority of these assessments over the underlying interests of lending institutions becomes important as assessment defaults grow.

The Failed Funding Model

We have seen and written of numerous incidents where older multi-owner projects are unable to raise the funds necessary for long-term — or even short-term — operations, maintenance and repairs. This inability stems not only in the short term from a weak economy, but also from long-term neglect and the unwillingness of boards of directors to keep fund raising at necessary levels over time.

But up until now those issues have affected individual projects scattered over a wide region. Apply that "uncertain future" to an entire town and the situation becomes very different. We have seen municipalities that have fallen into financial tragedy. The City of Vallejo, just north of Hercules, is one example having declared bankruptcy last year. But there it is the city-owned infrastructure — streets, public buildings, and parks — that will suffer from this financial neglect. When the new “town” is privately owned and the "municipality" is really a collection of owner's associations, the problem eventually will be much more severe because maintenance and repair involves structures as well as streets and sidewalks. Where a traditional city draws from a broad tax base to fund public improvements, in a private town that responsibility falls on the owners — a much smaller base with a much larger financial obligation.

Problems can begin with issues of coordination of the shared responsibilities between associations of commercial owners and residential owners occupying the same building. Their long-term interests may differ and so might their economic means. Over time, a collection of privately owned, high-density buildings, streets, and utilities will begin to suffer from the financial neglect that a system of voluntary assessments eventually brings.

None of this is intended to criticize the basic idea: that higher density housing co-joined with commercial and retail space near transit is a far better use of land than suburban sprawl. The problem is funding that good idea over time and we have found that the voluntary assessment model — unlike high priority property taxes — can eventually break down as those who have the responsibility to keep funding at appropriate levels allow short-term self-interest to intervene and take precedence over long-term financial stability. When a privately owned project consisting of multiple separate interest parcels approaches the size and complexity of a small town, assessments for its operation and repair must come from a very reliable source — one that is insulated from individual owner self-interest. The expense and complexity of maintaining a private small town demands it.

Other than the government buildings themselves, municipalities are rarely responsible for entire commercial or residential building envelopes, foundations, plumbing, electrical or any of the other systems found in a high-density mixed use condominium project. So we have a double-edged sword — a complex privately owned infrastructure relying on a voluntary assessment model for long-term maintenance and repair spread across a very narrow base of owners.

A New Funding Model

What is needed is a different funding model — something more akin to the system used by the municipal entities that the private associations replace. Priority is one example. Why should a lender escape the maintenance assessments leveled on a piece of property when it forecloses on its underlying security? Those assessments represent the cost of ownership of the property for a specific period of time. Why shouldn't the unmet maintenance obligation follow the property to the new owner, regardless of who it is? Property taxes survive foreclosure — why shouldn't maintenance assessments?

If private associations are to be responsible for all of this expensive and complex real estate, including buildings, streets and utilities, shouldn't some government oversight also be considered in order to save the municipality from having to instead become involved many years later when the project becomes financially obsolete?


The idea of a modern “new town” with high-density structures combining commercial and residential uses, close to transit and services is exactly what we should be doing. However, funding its long-term repair and maintenance using the old voluntary assessment model that lacks the taxing priority enjoyed by true municipalities is joining a very modern concept with an antiquated and ineffectual one. In this model we have neither a landlord's ability to increase rents nor a city's ability to collect taxes. If we are going to create private new towns, we need to fund them like the quasi municipalities they are and vest them with taxing power and the priority necessary to create a realistic financial structure. Building only the physical infrastructure is not enough—we have to also build in a funding model that works.

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