“Basically, we’re just trying to gain our independence”
A lawsuit between the town of Mt. Crested Butte and part of Crested Butte Mountain Resort’s Prospect subdivision is revealing how a persistently slow real estate market can strain a once-promising relationship between property owners and a developer, and can lead to an accrual of millions of dollars in debt and tens of thousands of dollars in legal fees.
In the lawsuit, filed in District Court February 1, the town and the developer of the Prospect subdivision are trying to stop a group of Prospect homeowners from levying and collecting a higher tax on Prospect property than is allowed by a 2000 agreement between the developer and Mt. Crested Butte.
The Prospect homeowners, calling themselves the Property Owners Alliance, want separation from the developer and in the process hope to see the dark cloud hanging over real estate in the subdivision lifted, along with property values. The price of independence: an allegedly illegal tax to pay for legal counsel they feel was being denied them.
But the developer isn’t going to let them go without a fight, urging property owners in a February 22 letter to petition Gunnison County for an abatement of taxes to avoid paying the Finance district’s legal fees.
In the letter, Prospect Development Company vice president and Crested Butte Mountain Resort’s vice president for real estate and development Michael Kraatz says, “Please keep in mind that the fee imposed … is a lien against your property until it is paid and can be foreclosed if not timely paid.”
In response, Prospect homeowner Bob Orlinski accused Kraatz of being “misleading” and made a statement of his own that was sent to property owners.
“We encourage you not to request abatement as suggested by Mr. Kraatz,” Orlinski says in the letter. “I believe a dark shadow has been cast upon the Prospect Metro District as a result of the high taxes imposed … I believe this shadow can be lifted with openness and communication.”
The Prospect subdivision sits on the eastern side of Crested Butte Mountain that was once part of the Gunnison National Forest. Then, in the late 1990s the owners of the ski resort acquired land prized by the U.S. Forest Service and proposed a swap for the roughly 400 acres that would become The Reserve, where the Prospect subdivision is located.
At the time, the county assessor valued all of that property at $678,000, less than the asking price of just one prime Prospect lot in 2008.
Nearly 300 residential units, mostly free market and some deed restricted, were envisioned and the developer hoped to complete the project this year. When the real estate market came crashing down in 2008, any hope of filling those spaces did too. To date the town has granted just 45 building permits in Prospect.
But long before any dirt was ever moved in Prospect, the developer—which was, and is, essentially Crested Butte Mountain Resort—sought and got an annexation into the town of Mt. Crested Butte, which would provide water and sanitation services to the subdivision.
The two entities also hashed out a consolidated service agreement that stipulated who was responsible for what inside Prospect. To provide a framework, the agreement created Reserve Metropolitan District No. 1, known as the Control District, and Reserve Metropolitan District No. 2, the Financing District.
As their respective names imply, District No. 1 is responsible for controlling operations and providing the subdivision with services—from residential utilities to accounting and legal services. District No. 2, which is where all of the people would live, would finance those services. No. 1 interfaced with the town and handled the business. No. 2 paid the bills.
As a starting point, before any roads or homes were built, CBMR appointed its own employees on the governing boards of both districts and went to work developing the infrastructure. The Control District was comprised of a parcel less than an acre in size where members of the board held contracts to purchase pieces of property, without actually completing the sale.
“That just makes us eligible to sit on these boards,” says CBMR vice president for real estate and development Michael Kraatz, who sat on both Prospect boards. “It has to start somewhere.”
And start they did, breaking ground on road paving projects in 2002. By 2005, a $10 million bond was issued to pay for the ongoing improvements. Then in 2008, a second series of bonds totaling $18.4 million was sold to pay off what was left of the $10 million debt and a loan from the developer and to pay for more roads, power lines and sewer and water pipes.
Because it was their responsibility per the service agreement, the Control District issued the debt and the Financing District went about paying it.
Such an arrangement wasn’t uncommon in parts of Colorado where new and potentially large subdivisions were cropping up next to small towns all over the state. Today, almost half of the 1,300 metropolitan districts in the state are built around a similar structure.
Conflict of interest?
It’s also part of the rub in the recent lawsuit between Mt. Crested Butte and the Financing District, whereby a group of homeowners is questioning the legitimacy of a process in which two boards, comprised largely of the same people and controlled by the developer, can impose a debt on a group of people who had no representation on either of the boards that approved the bond sale.
In the developer’s defense, Kraatz points out, homebuyers in Prospect are given the service plan as a disclosure document. That service plan explains there will be debt and the debt would be paid off through property taxes.
By the time of the second bond sale in 2008, the property that had been valued at less than $700,000 was now worth more than $32.6 million. Then, with the tax burden on property owners exponentially greater than it had been a few years before, the market started to slide and things started to change.
In the fall of 2010, CBMR wanted to continue its development of Prospect and the town approved a further subdivision of the Financing District, according to court documents, that were called Reserve Metropolitan Districts Nos. 3 through 8.
By pulling the undeveloped land out of District No. 2, the developer relieved the homeowners of an additional burden of debt to install infrastructure that was farther up the mountain and away from the established residences.
But it gave members of the Property Owners Alliance the impression the developer was walking away from its obligations to the Financing District.
By the middle of 2012, frustrations among the Property Owners Alliance in Prospect had reached a critical point and in May, they mounted an effort to win the majority of seats on the board. Subsequently, three property owners—Jim Pike, Paul Pike and Bob Orlinski—were elected to the board of directors for the Financing District.
At the following meeting, with the majority in their favor, both Pikes and Orlinski voted to dismiss the attorney the Financing District shared with the Control District.
“We’re encumbered with an $18 million bond indenture that paid for infrastructure all the way to the top of the mountain. So it’s paid for, charged to us. We feel [the Control District] jeopardized us [the Financing District] financially,” Orlinski says. “Maybe they see the writing on the wall. Maybe they see that we’re weaning ourselves from them and they’re going to let us be independent.”
In a show of their newfound independence, over the objections of CBMR’s Kraatz, the board of the Financing District in late 2012 established its own bank account and approved a mill levy that included 3 mills that would be used to pay for independent legal counsel.
Crested Butte Mountain Resort “did decline to pay for an attorney,” Kraatz says. “They couldn’t tell us why they needed independent counsel and they couldn’t tell us how they would pay for it, because there is no room in the mill levy available to pay for that.”
The problem was that the service agreement that brought the Financing District into being forbade the property owners from raising a tax of more than 50 mills, as adjusted by the Gallagher Amendment, and the additional tax for legal counsel would push the total to 55.676 mills.
“They could have asked us for those extra mills, but they didn’t,” town manager Joe Fitzpatrick says of the town’s involvement. “We just can’t have people willfully violating the terms of an agreement that was signed long ago. These agreements are in place for good reasons and that’s not the way we do business up here.”
Fitzpatrick says the town became involved in the suit after the 2013 budget—which earmarked $40,000 for attorney fees and nothing for “other litigation”—was finalized.
But to gain find the necessary expertise in municipal law, the town hired Jim Collins, of the Denver-based firm Collins Cockrel & Cole, who “is an expert in metropolitan districts and the Town has hired him in the past to assist with metropolitan district questions,” Fitzpatrick says.
The town’s financial involvement in the suit should also be limited with the help of the Control District.
“Our part of the situation is small and Reserve Metropolitan District Number 1 is assisting with the expenses,” he says.
At the first meeting in 2013, CBMR’s Kraatz was removed as the Financing District’s board president and a week later, the town and CBMR filed suit to stop the additional 3 mills from being levied against the Prospect homeowners.
But the Property Owners Alliance has already racked up almost $80,000 in legal costs in 2013 and the bills to pay for it, at $165 a month, have already been sent to 137 lots in Prospect.
“The suit came about and now the attorneys are looking at if we lose that, how are we going to be able to keep going, how are we going to get paid?” Orlinski says. “That’s when they came up with the idea of billing the landowners $165 a month and that all got approved this month.”
Because Gunnison County approved the additional 3-mill levy, the Board of County Commissioners is named as a defendant in the suit. But county attorney David Baumgarten explains that the work the county did to land them in the suit— approving the mill levy—was ministerial and not related to whether the tax was right or wrong.
Now, Baumgarten says, the county will just collect the tax money comes in and hold it until the court rules one way or the other. “We’re not contesting what Mt. Crested Butte says,” Baumgarten says.
The county might also see a wave of petitions for tax abatement in response to Kraatz’s letter to homeowners. Petitions are due to the Gunnison County Assessor’s Office by June.
In his letter to Prospect homeowners, Orlinski hoped for another outcome, saying, “We are not on a litigation campaign as [Kraatz] has suggested and we do not represent a few property owners. We serve all property owners and we have not initiated any litigation and will only do so if all resolutions and other mediation fail.”
And while the court weighs the evidence in deciding the outcome of the lawsuit, two new homes are going up in Prospect.
“If the market had stayed robust like it was back in 2005 to 2007, we probably wouldn’t be having this conversation,” Kraatz says.