MUDs, PIDs, PUDs & TIFs: What is the difference and what do REALTORS® need to know in order to best represent our clients when selling or buying a property in a MUD, PID, PUD or TIF?
The 2020-2021 Legal Update CE Class includes a section dedicated to Municipal Utility Districts (MUDs) and the Law. In that section it states that “Chapter 49 of the Texas Water Code says IF a person is selling a property that is in a district created under the Texas Water Code or by an act of the legislature to provide certain utilities such as water, sanitary sewer, drainage and flood control, and any of these services or facilities have been financed with bonds that are payable by the persons who live in the district, THEN the seller must give notice to the buyer of those potential fees for owning this property. Furthermore, the law says the notice must be given to the buyer prior to the buyer entering into the contract OR as an addendum to the contract at the time the contract is negotiated. If the notice is not timely provided, the buyer can terminate the contract at any time.”
The main take-away is that “there is NO binding contract if such notice is not acknowledged by the buyer at or prior to executing the contract! Giving the notice after the contract is executed does not eliminate the buyer’s right to terminate the contract any time prior to closing.”
Real estate professionals often ask about the differences between MUDs, PIDs and TIFs. The most notable difference between the different types of districts are the projects they fund and how they are financed.
MUDs (Municipal Utility Districts) finance the construction of public infrastructure that does not yet exist, typically utility facilities and roadways. Over time, developers within a MUD can be reimbursed for water, sewer, drainage and sometimes road infrastructure through property taxes. The purpose of a MUD is to provide a developer an alternative way to finance infrastructure. Homeowners in a MUD receive a monthly bill from the MUD for water and sewer usage as well as an annual tax bill. This MUD tax will be in lieu of a city tax. MUD taxes are a deductible property tax. The MUD is a political entity that can levy taxes overseen by the Texas Commission on Environmental Quality.
Fun fact…there are over 900 MUDs in the state of Texas, approximately 65% of those are in the Houston area.
PIDs (Public Improvement Districts) can be used for the same purposes as a MUD (i.e. water, sewage and infrastructure) however PIDs can also be used for sidewalks, roadways, landscaping, parks and recreation, public safety/security, parking facilities, affordable housing, etc. PIDs are utilized to make these improvements authorized by Chapter 372 of the Local Government Code. Unlike a MUD, a PID is not a political entity.
Some developments use a PID instead of a HOA since PID assessments are tax deductible. Unlike tax rates for MUDs, these assessments are fixed once the bonds are sold.
PIDs are funded through bonds secured by liens against the property. Bonds are issued based on the property’s appraised value. Once issued, bonds are paid back through the collection of special assessment taxes. This assessment is in addition to property taxes. These special assessment taxes are only levied for a set number of years established by the PID’s service plan which is a minimum of five years. It is important to note that a public hearing must be held before a PID can issue bonds.
PID or PUD?
Although the acronyms are often used interchangeably, PIDs and PUDs are not the same thing. In addition, they are often confused with HOAs. Here is the difference:
A PID is an entity created by a city or county. A PUD (Public Utility District) is created by the community and operated under an elected board which may seem similar to a HOA, however it exists solely to provide electricity, water sewer and telecommunications. Although PUDs are controlled by the homeowners, they operate independently from the HOA.
TIF (Tax Increment Financing) is a public financing method used to subsidize community improvements such as new public utility facilities and area improvements. TIF is authorized at the state level and administered by local governments. TIF is intended for local government to designate areas or redevelopment to encourage economic development to create jobs and to increase the tax base. Both TIFs and PIDs are components of a city and governed by a city council.
Help Is on the Way
How do we represent our clients’ best interests when working a sale of a property located in one of these districts? In the past, listing agents needed to ask the Seller to request the appropriate Notice to Purchaser Form from the MUD or PID. If they did not have a form available, the seller could be directed to Chapter 49.452 of the Texas Water Code to obtain a generic Notice to Purchaser Form.
In the last Legislative Session, HB 1543 Sellers Notice (Public Improvement Districts) was passed revising the language of the statutorily mandated notice used in a real estate transaction. In addition, the Broker-Lawyer Committee met in June 2021 and decided to recommend the use of a promulgated addendum to the contract. The details of the bill can be found on TREC’s website.
HB 1543 Sellers Notice (Public Improvement Districts)
This bill revises the language of the statutorily mandatory notice used in a real estate transaction related to properties located in public improvement districts (PID). It requires the notice to be given to a prospective purchaser before executing the contract, either separately as an addendum, or as a paragraph of the purchase contract. If the transaction is entered into without the notice being provided, the bill authorizes the purchaser to terminate the contract, unless the seller provides the notice at or before closing and the purchaser elects to close.
The bill requires the purchaser to sign the notice and the notice must be recorded once signed.
This bill has an effective date of September 1, 2021.
The Broker-Lawyer Committee met in June to discuss the best way to implement these new requirements and decided to recommend the use of a promulgated addendum to the contract that mirrors the statutory notice. This draft addendum and corresponding contract form changes will be presented before the Commission at the August 2021 meeting for emergency rulemaking in order to allow for use within the statutory deadline. The Commission will also conduct concurrent rulemaking related to the draft addendum and contract form changes that will follow the traditional rulemaking timelines and public comment periods.
Remember when a license holder takes a listing, which is serviced by a MUD, PID, PUD or TIF, the Notice to Purchaser Form should be filled out by the seller at the time of listing and provided to the buyer at or BEFORE a contract to purchase is signed.
Additional resources for determining if a property falls within a water district can be found at Texas Commission of Environment Quality.
Author: Patty Stoner