310.01: Special Assessment Districts

Special assessment districts (which may also be called special tax districts or municipal utility districts) provide a specific service to homeowners living in a designated area.  They are most often established to provide water or other utilities in areas that are not served by existing city or municipal utility services.  The need for these districts arises when an existing utility service does not have sufficient capacity (or may not find it economically feasible) to provide services for newly created subdivisions that are located beyond its current operating area.  State law governing the establishment of special assessment districts varies greatly, as does the financial strength of the individual districts.  The districts are granted the authority to assess owners of properties within their boundaries for funds that will be used to cover their operating costs and debt service.

Special assessment districts that are established to serve newly developing subdivisions with utilities often base their financial plans (and the amount of the assessment charged to each property owner) on the expected number of properties in the area to be served.  The district then depends on the continuation of development to maintain its budget expectations.  If, for any reason, development stops short of the degree of development that the district anticipated in preparing its budget, the district can become financially distressed and may need to impose an additional assessment on the existing homeowners.

When the property being appraised is located in a special assessment district, the lender should request the appraiser to report on any special assessments that affect the property.  If the special assessment district is experiencing financial difficulty and that difficulty has an effect on the value or marketability of the subject property, the appraiser must reflect that in his or her analysis and note it in the appraisal report.  To assure that the reaction of the market to the potential liabilities that may arise within a financially troubled special assessment district is reflected in his or her analysis, the appraiser should consider current and expired listings of properties for sale within the district and any pending contract sales and recent closed sales within the district.  There may be some instances in which the financial difficulty of a special assessment district is so severe that its actual effect on the value and marketability of a property is not measurable because there is no comparable market data available to enable the appraiser to arrive at a reliable opinion of market value.  When this is the case, a mortgage secured by a property in that district will not be eligible for delivery to us -- at least until such time as an active market develops that will enable the appraiser to demonstrate the value and marketability of the subject property.