CHICAGO - Michigan is poised to allow special assessment districts, and state officials say they will be structured to prevent the problems that have occurred in Colorado.

Last month, Gov. John Engler signed into law a bill allowing for creation of the districts and their use of tax-exempt debt to finance infrastructure and other improvements.

Officials who drafted the legislation said it includes such safeguards as direct state supervision of the districts, restrictions on their establishment, and indirect limits on the amount of debt that can be issued.

The aim, they said, is to protect the state against the numerous defaults and bankruptcies of special districts that Colorado has seen over the last several years as land values have fallen.

The bill, which the state Legislature passed earlier this year, was sponsored by state Sen. Paul Wartner, R-Portage. His chief purpose was to benefit a proposed development in northwest Michigan, according to John Arundel, the senator's chief of staff.

Anthony Ilardi, the attorney for the developer of a proposed 1,500-acre resort in Petoskey, said other sites in the state would also qualify as special assessment districts under the new law. Still, his client, Lawrence H. LoPatin & Co., will likely be the first to take advantage of the statute. Mr. Ilardi said he is drafting a petition to form an authority that would oversee the development, the first step in the special assessment district process.

The law sets up an authority of five or seven members that would issue bonds, backed by special assessments in the district, to pay for improvements, such as roads and water and sewer systems.

Both Mr. Ilardi, who helped write the legislation, and state officials contend that Michigan will not become another Colorado.

Nick Khouri, Michigan's chief deputy treasurer, said the state treasury department will have a representative on each district authority's board.

"The state Treasury will ride herd over the number of authorities and the debt issuance of the authorities," he said.

Mr. Ilardi said the Treasury will also appoint two members to the board who live in the county where the development is taking place. The board will include property owners in the district and appointees from the local county and township governments.

"Having direct state supervision will go a long way in preventing some of the things that happened in Colorado," Mr. Ilardi said.

Mr. Khouri aided that the law contains "pretty narrow" criteria for establishing the districts and should result in "a very limited amount of districts" in the state.

Under the law, the districts must be at least 300 acres and contain a blighted area that is 20% of the land or 100 acres, whichever is less. The land cannot be currently used for residential, recreational, or commercial purposes or be considered a hazardous waste site.

While the law does not set a specific limit on the amount of debt that can be sold by a district, it indirectly limits debt issuance by restricting how much of a property's value can be assessed. Mr. Ilardi said the assessment will be limited to the increase in the property value of a parcel caused by the improvements paid for with the assessments.

"If a piece of property is assessed $10, then the value of that property must go up $10," he explained. "I think [the law] puts a real dollar limit on how many bonds can be issued."

Though the law does not prohibit sales to retail investors, Mr. Ilardi said the bonds for his client's project would be privately placed with institutional investors, at least initially.

"This is a new act and we don't think it's appropriate for a retail deal at this time." he said. "Ten years later if the project is going gangbusters that could change."

In Colorado, new laws were passed in the wake of special district bankruptcies that occurred when land values plummeted in the state. The laws require districts to provide annual financial disclosure reports to the state's department of local affairs and limit the amount of debt they can issue.

Mr. Ilardi said his client's development, which will include single-family homes, condos, a marina, and possibly a hotel, would probably take 10 years to complete. He estimated that the cleanup of the site, which once held a cement factory, would cost $10 million to $20 million.

"My guess is that the first bond issue would be at least that much to get the development going," he said, adding there was no estimate of how much bond financing would be needed to complete the project.

While the developer has been working with bond attorneys at Dickinson, Wright, Moon, Van Dusen & Freeman, no investment banking firm has been retained for the project, he added.

"Once we have the authority formed, we'll move forward in an attempt to put the financing together," Mr. Ilardi said.

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