How a Municipal Utility District (MUD) Facilitates Real Estate Development in Texas
Many Texans who live in the areas surrounding big cities may pay their water bills to a municipal utility district, or “MUD,” without really understanding what they are and how they work. From a legal standpoint, a MUD is a little bit like a tiny government that manages the water and sewer services for an area – usually a new development right outside the city limits.
When a real estate developer – most commonly a residential housing developer – identifies a piece of land to build on, one of the first things she must do is figure out how to provide utilities for that development, especially water, sewer, and storm drainage. If the land is outside the city limits, there may be no existing infrastructure in place and no realistic way for the city to extend those services to the new development under its current budget. And most developers want to be in the business of subdividing lots and building and selling homes, not operating water utilities. So the creation of a MUD can help both the developer and the city extend services to the new area.
MUDs are governed by Chapter 54 of the Texas Water Code and the creation of a MUD is done either by the legislature or the Texas Commission on Environmental Quality (“TCEQ”). If the proposed MUD is in a city’s extraterritorial jurisdiction (“ETJ”), the petition for creating the MUD must be approved by the city and then submitted to TCEQ, with eventual plans for the area comprising the MUD to be annexed into the city.
A typical MUD might be set up like this: the developer would agree to front the cost for the installation of the infrastructure – usually water, sewer, and stormwater drainage, but certain other functions, such as roads and parks and recreational facilities, can be included. Once the MUD is in place, it can issue debt in the form of bonds to pay back the developer for the infrastructure costs, and then the bonds are repaid with property taxes levied on the new development, plus user fees generated by the water and sewer services. Once the bonds are repaid, the MUD’s tax revenues can be used for other services as well.
MUDs are similar to small cities in their ability to levy taxes and manage utilities, but they are governed by a board of directors, not a city council. The five-member Board is initially appointed by the TCEQ but then later elected by residents in the District. The developer is almost always involved with the Board initially and during the bond payback period, and will manage the infrastructure installation.
MUDs have been and likely will continue to be quite popular in the development of master planned communities, especially in areas surrounding big cities like Houston and Dallas. And their popularity is understandable – they allow new development without overly “taxing” the developer or the city – until the infrastructure can, essentially, pay for itself.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our real estate practice can be found here.
