Sanitary and Improvement Districts (SIDs) provide a unique economic advantage to developers and a potential long-term investment opportunity for the local government. A SID is formed when a developer receives tax-exempt government financing (warrants and bonds) from the city, which covers the original expenses of a new community. These items include sewers, electrical systems, common grounds, and other amenities on real estate designed to be a housing development. The city provides the bond to a private developer who is responsible for the construction and initial success of the neighborhood. This method of organization benefits the developer and the city, providing the developer with low-cost financing for the construction of necessary infrastructure into the community. The city allows the private developer to supervise and own this undertaking, creating a legal entity with the ability to issue bonds, levy taxes and special assessments, and fix rates for services. The city benefits by not expending funds, but generally will reserve the right to annex the neighborhood once it is proven successful, fully inhabited, and profitable for real estate tax purposes.
Financing of improvements through SIDs occur in two stages. SIDs issue warrants in the initial stages of development to cover costs as they are incurred, which are paid by the landowners. Then, once improvements are completed, SIDs levy both general taxes and special assessments on the parcels within district boundaries that benefit from improvements, which are paid by the residents. Until a SID is annexed by the city, the cost is financed by the property owners, resulting in higher property taxes than a city neighborhood. Once a SID is annexed, the debts and operating costs are assumed by the city taxpayers, creating a reduction in property taxes.
As a resident of a SID, taxes are paid to the board governing the SID and not the city, consequently, residents are not city residents and are not eligible to vote in municipal elections. Rather, the trustee of the board is assumed to represent the interests of the community in the voting process. If a subdivision is never annexed by the city, the residents are forced to meet the financial obligations of the bonds themselves for the duration of the loan period.
As a legal entity, SIDs have powers of public districts even though they are a private entity. This provides the power of eminent domain and ability to levy taxes, while in a tax-exempt status. Developers are free to exercise this power anytime during development and construction, until they receive notice of annexation from the City. This latest requirement seeks to prevent a developer from waiting to engage in high value expenditures until just prior to the city taking financial responsibility for the subdivision.