In-city MUD Myths - Efficiency/Affordability

Submitted by Thomas Parent on Sun, 06/04/2017 - 11:40

These are the two most popular claims by developers on why a neighborhood should be in a MUD: 
1. It is an efficient way of paying for the infrastructure costs
2. They're just as or more affordable than the same house outside of a MUD because infrastructure is not included in price

Myth #1: Efficiency
My economics teacher loved the acronym TINSTAAFL... There Is No Such Thing As A Free Lunch. With or without a MUD, homebuyers pay for the cost of infrastructure. You'll either pay upfront as part of the buying price or you'll pay it over 40+ years in a MUD tax. So are MUDs really a more efficient way of paying for the infrastructure?

Over the life of a typical in-city MUD, residents of a MUD will pay over $3,000,000 in taxes just for the operational overhead of running a MUD. Add in the cost of issuing bonds and even with an interest rate lower than your typical mortgage, there is simply no way a MUD can be considered efficient. 

Myth #2: Affordability
The second claim of affordability is based on the premise that the infrastructure costs are not included in the price of the home. In a sample cited by a developer they suggested the amount would be roughly $20,000 off the price of the home and based on taxes versus mortgage payment you would actually save $200+ / year in a MUD. 

Assuming the $20,000 off the price is true and running payment calculations (principal, interest, inflation, home appreciation, taxes, decrease in MUD tax rate out 40 years, federal income tax deductions) out over the course of 40 years, we've found that the MUD will cost homeowners $30-40,000 more than the same house outside of a MUD. Yes, in the first year you'll save $200-400 but every subsequent year costs you more than being out of MUD.

The real kicker is that in this scenario you pay $30-40k more and end up with something worth $20k less. How's that for affordability?

In reality, these in-city MUD homes go for $5,000-$8,000 less than a comparable out of MUD home, boosting the developer's margin $12-15,000 and resulting in the same $30-40,000 increase in cost due to taxes.