Turning Water Into Whine

When Gary Antonoff set up his own private government, the town of Lochbuie got soaked.

Drive a short distance northeast of downtown Denver, and it's not difficult to see why the area has become one of the most active real-estate markets in the metro region. The hard industrial landscape of Commerce City quickly gives way to vast, empty fields. The still-white concrete expanse of I-76, completed in 1993, propels drivers quickly away from Denver. The city's skyline shimmers against the jagged profile of the Front Range. Planes from nearby DIA lift lazily into the sky.

"It's the last corridor of undeveloped land that's still within easy commuting distance to Denver. And the land is ideally located for DIA," Dan Law points out. "There are big, big stakes out there."

Finding itself at ground zero of all the sudden big-money activity is the tiny town of Lochbuie. Developed in the early 1960s as the Spacious Living Mobile Home Park--and later known as Space City--the town was incorporated in 1974. A quarter-century later, with its small lots, manufactured homes and rough roads that disappear into fields, Lochbuie still retains the feel of a place left behind.

Originally, the town's water was supplied by a succession of various developers through a corporation called the Lochbuie Water Company. In the early 1980s, yet another development company bought up a large tract of land, gaining control of the water in the process. The developer was Grand Homes, Inc. In May 1985, Grand Homes' owners, Gary Antonoff and his partner, Hale Davenport, formed the Beebe Draw Water and Sanitation District.

Although Antonoff would end up running the district like a closely held family business, Evan Goulding, executive director of the Special District Association of Colorado, says there's no question about how special districts should operate. "A lot of people make the mistake of referring to special districts as 'quasi-governmental,'" he says. "But they're not 'quasi-' anything: They are government agencies."

The districts are set up to provide a particular service to a very specific area, a service usually reflected in their names. There are water and sanitation districts, parks and recreation districts, fire protection districts, hospital districts--even cemetery and mosquito-control districts. In all, Colorado has 870 of them.

By forming a special district, residents of a particular area agree to pay for a service. Thus, says Goulding, "special districts have the considerable power to impose property taxes and float bonds."

The latter power has a particular appeal for developers. Goulding describes a typical scenario: An investor buys a chunk of ground and begins developing it. Because he must provide water and a water system for his future homes, he forms a special district, the formation of which must be approved by a district court judge. Under state law, a special district is required to have a board of directors with at least five members, so initially the developer names friends or colleagues to the board. Now officially a legal government entity, the district can vote to sell bonds to finance the new water system--which, for the developer, is the whole point: It's cheaper and less trouble than borrowing the money from a bank.

The district's board doesn't stay private, though. Land ownership is a requirement for board membership. As residents begin to move into the development, they acquire voting rights and gain representation on the district board. In that way, homeowners soon control their own destiny, deciding, say, whether to upgrade their water system or what water rates should be. "They are allowed to collect money and develop resources, but it must be for a public purpose," concludes Goulding.

The Beebe Draw Water and Sanitation District took a sharp detour from that standard path.

Antonoff set up his district on 9.04 acres of vacant Grand Homes property that included Beebe Draw, from which water was pumped. In order to gather the district's five boardmembers, over the years he gave a small interest in the parcel to a handful of friends, relatives and business associates so they would be qualified to serve. Beebe Draw's current board includes Antonoff, his wife, his son and two employees.

Then Antonoff added another level of insurance to his control of the ostensibly public district. According to various court filings in Adams County, whenever he handed over a portion of the nine acres to a new boardmember, Antonoff had the director sign a quit-claim deed back to him. Antonoff kept the document on file--like a pre-signed letter of resignation--so that the boardmember could lose his property rights at any time the developer desired and thus be disqualified from board membership.

Even more unusual than the district's setup, though, was what the Beebe Draw Water and Sanitation District did with the money that flowed into it--starting with how the district got its water in the first place.

On February 12, 1986, Grand Homes and Weld County Associates, another Antonoff development company, sold various water rights to Beebe Draw for $3.43 million. As president of the development companies and as head of the new district, Antonoff signed the deal for both sides, selling the water to himself.

(Adding to the confusion was where the money for that deal came from and where it went. Antonoff borrowed $3.5 million from Colorado National Bank, on whose board of directors he was then serving. He used the money to pay off development debts and buy the water rights from himself. Seven years later, after leaving CNB's board, Antonoff defaulted on the loan; he settled with the bank for a mere $500,000. "There wasn't any clandestine activity going on," says Antonoff. "There was no insider trading on this transaction.")

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