City of Gonzales
PUBLIC WORKS / CITY ENGINEER DEPARTMENT
STAFF REPORT
TO: Honorable Mayor Rios and City Council
DATE: May 6, 2024
FROM: Patrick Dobbins, Public Works Director/City Engineer THROUGH: Carmen Gil, City Manager
SUBJECT: Resolution No. 2024-12 and Resolution No. FA-2024-01 Issuance of the Public Financing Authority Lease Revenue Bonds Series 2024A
RECOMMENDATION
It is recommended that the City Council of the City of Gonzales and the Authority Board of Directors receive this staff report, hold a public hearing, and consider adoption of the following Resolutions:
• Resolution 2024-12, A Resolution of the City Council of the City of Gonzales Authorizing the Execution and Delivery of a Ground Lease, Lease Agreement, Indenture, Bond Purchase Agreement and Continuing Disclosure Certificate in Connection with the Issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, Approving the Issuance of Such Bonds in an Aggregate Principal Amount of not to Exceed $9,825,000, Authorizing the Distribution of an Official Statement in Connection with the Offering and Sale of Such Bonds and Authorizing the Execution of Necessary Documents and Certificates and Related Actions.
• Resolution FA-2024-01, A Resolution of the Gonzales Public Financing Authority Authorizing the Execution and Delivery of a Ground Lease, Lease Agreement, Indenture, Bond Purchase Agreement and Assignment Agreement in Connection with the Issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, Approving the Issuance of Such Bonds in an Aggregate Principal, Amount of Not to Exceed $9,825,000, Authorizing the Distribution of an Official Statement in Connection with the Offering and Sale of Such Bonds and Authorizing the Execution of Necessary Documents and Certificates and Related Actions.
AGENDA
ITEM
11 These resolutions authorize the execution and delivery of a ground lease, lease agreement, indenture, Bond Purchase Agreement and Continuing Disclosure Certificate in connection with the issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, approve the issuance of such Bonds, authorize the distribution of an official statement in connection with the offering and sale of such bonds and authorize the execution of necessary documents, certificates and related actions. Such authorization will allow the city to proceed with interim funding for Phase 1 of the Community Center Complex Project.
BACKGROUND
The City’s Community Center Complex Project is underway, and is being funded from the following sources:
• $5.0M State grant for the Teen Innovation Center
• $705,000 in Community Development Block Grant funds
• $1.8M County contribution to relocate existing library • $1.067M State Building Forward Library Infrastructure Grant Program • $400k Electric Vehicle Charging Station Grant from the California Energy Commission • Capital Campaign with pledges and contributions
• City Measure X Funds
• $9.825M Loan secured from United States Department of Agriculture Rural Development (“USDA”)
The USDA Loan requires interim funding during construction, which will eventually be replaced with the City’s loan with USDA upon completion of the construction of the Community Center.
In front of the City Council tonight is the approval of the 2024 Lease Revenue Bonds, which will provide the required interim funding. The approving resolution also authorizes the execution of legal documents required to facilitate such documents, the distribution of an official statement in connection with the 2024 Bonds and certain fees and related actions in connection with the financing.
REVIEW AND ANALYSIS
To determine the most cost-effective interim financing option for the city, multiple funding options were evaluated. It has been determined that a public bond offering is the most cost-effective option when evaluating the all-in cost to the city (interest cost and related costs to facilitate the financing).
The 2024 Bonds will be structured as lease revenue bonds. The lease revenue bond structure utilizes a lease/leaseback financing structure between City and City’s Financing Authority, with the Community Center site serving as the leased asset. In order to make lease payments (debt service payment), the City must have beneficial use and possession of the leased asset. Therefore, due to the construction nature of the Community Center/leased asset, the financing structure will require the debt service (interest) payments to be pre-funded at closing. This means that the City will make a deposit for such interest payments through May 1, 2026, upon closing of the 2024 Bonds.
A lease structure also requires a fair rental test to be met, which means that the annual fair rental value of the leased asset should be no less than the annual debt service of the bonds. To meet such test, the 2024 Bonds are being structured as a 20-year financing; the longer amortization allows the annual lease payments to coincide with fair rental value. However, the 2024 Bonds are structured with an optional redemption beginning November 1, 2025 and have a mandatory redemption of May 1, 2026. This means that the City has the option to redeem the bonds as soon as November 1, 2025 when construction is anticipated to be complete. The redemption of the 2024 Bonds will occur with the USDA funding and at such time the 2024 Bonds will be replaced with the USDA permanent loan.
Based on an estimated interest cost of 3.875%, the total interest cost of the 2024 Bonds through the mandatory redemption date of May 1, 2026 is expected to be approximately $731,826. Any unspent funds from the City contribution will be returned to the City upon redemption of the 2024 Bonds.
USDA requires that their funding (committed in the amount of $9,825,000) will only be applied to construction related costs and cannot be applied to soft costs, such as interest or financing related costs.
Therefore, at the closing of the 2024 Bonds, deposits will be made by the City to fund 1) the 2024 Bonds interest cost through May 1, 2026, the date of the mandatory redemption; 2) financing costs of issuance and 3) underwriter’s discount. It is estimated that the deposit at closing will total approximately $950,951 based on current market rates, as shown in the table below. This amount is subject to change based on interest rates at pricing. Due to the prefunded interest deposit, it is not anticipated that the City will need to make any payments on the 2024 Bonds. Upon USDA providing its permanent loan funding of $9,825,000, it will be applied to redeem the principal amount of the 2024 Bonds. At such time, the USDA Loan replaces the 2024 Bonds and payments will commence on the USDA Loan according to a repayment schedule established at such time. It is currently estimated that the future annual payments of the USDA Loan will be approximately $480,275 based on a rate of 3.625% over a 38-year maturity.
The following shows the estimated sources and uses of the 2024 Bonds.
Sources:
Par Amount of Bonds $9,825,000.00
City Contribution $950,951.06
Total Sources $10,775,951.06
Uses:
Total Underwriter's Discount $49,125.00
Costs of Issuance $170,000.00
Deposit to Capitalized (Prefunded) Interest Fund $731,826.06 Deposit to Project Construction Fund $9,825,000.00
Total Uses $10,775,951.06
In addition, the following shows annual debt service on the 2024 Bonds through the 20-year stated maturity. However, as just described, the bonds will be redeemed on or before May 1, 2026 and replaced with the permanent USDA Loan. The debt service payments made prior to the mandatory redemption date will be paid from prefunded interest that the City will deposit upon closing of the 2024 Bonds in June 2024.
The deposit at closing includes financing and underwriting costs. All costs are contingent upon the successful completion of the financing, except the costs related to securing a rating for the bonds. Such costs are committed upon commencement of the rating process. Upon authorization by the City Council of the financing and related costs, the financing team will proceed with the rating process. The authorizing resolution provides for authorization or reauthorization of related financing costs.
Service Payee
Public
Offering
Bond Counsel Kutak Rock 40,000
Disclosure Counsel Kutak Rock 30,000
Municipal Advisor NHA Advisors 57,500
Rating S&P Global Ratings 19,750
Trustee US Bank 4,250
Official Statement Printer AVIA - estimate 2,500
Title Insurance Title company 8,000
Contingency 8,000
Total 170,000
Underwriting (Hilltop Securities) 49,125
Total (Inclusive of Underwriting) 219,125
Interim Financing Costs of Issuance
The resolutions before the Council set forth certain parameters upon the sale of the 2024 Bonds. The parameters are (i) the principal amount not-to-exceed $9,825,000, (2) a true interest cost attributable to the Lease Payments not exceeding 4.75% (3) the underwriter’s discount not exceeding 0.50% of the par amount of the Bonds.
While we expect the actual terms and rates to be lower as previously described, Council approval should provide some flexibility to adjust the structure if needed due to unexpected market changes.
Financing Documents:
Being presented for approval by the City Council and the Authority, as applicable, are the following documents:
Authorizing Resolutions:
Authorize the Authority to issue bonds in a principal amount not to exceed $9,825,000 to finance the Project, and authorize City and Authority staff to execute the legal documents for the 2024 Bonds.
Site Lease:
Agreement between the City as lessor and the Authority as lessee, under which the City leases the Leased Property to the Authority in consideration of the payment of an upfront amount which will be used by the City to construct the Community Center Project.
Lease Agreement:
Agreement between the Authority as lessor and the City as lessee, under which the Authority leases the Leased Property back to the City and the City agrees to pay semiannual lease payments to provide revenues with which to pay principal and interest on the 2024 Bonds when due.
Indenture of Trust:
Provides for execution and delivery of the 2024 Bonds and lays out the covenants and specifics of the 2024 Bonds, as well as the prepayment options. Trustee’s duties, repayment mechanisms, default and remedies provisions, and Bondholder’s associated rights and remedies.
Assignment Agreement:
Provides the terms and conditions under which the Authority assigns the City’s lease payments to the Trustee, for ultimate payment to Bondholders.
Bond Purchase Agreement:
Agreement with Hilltop Securities under which Hilltop Securities agrees to purchase the 2024 Bonds; establishes closing requirements and closing document and opinion deliverables Preliminary Official Statement:
Disclosure Counsel prepares a preliminary Official Statement with input from the financing team including tables relating to the City’s finances. Following City Council authorization, the preliminary Official Statement will be distributed by the Underwriter and used as the primary marketing document to prospective bond purchasers. The agenda packet includes a draft of the preliminary Official Statement.
A final Official Statement will be made available shortly after the Bonds are sold; it will be identical to the preliminary Official Statement except that it will reflect the final bond sale pricing information. The preliminary Official Statement and the Official Statement constitute securities disclosures for the benefit of the buyers of the bonds and are governed by federal securities laws.
Continuing Disclosure Certificate:
Certificate of the City to provide annual reporting and ongoing significant events reporting.
Financing Schedule:
If the City Council and Authority Board approve the two resolutions, City staff will work with the financing team to immediately ready the 2024 Bond transaction. Below is a summary of the anticipated financing schedule:
Date Activity
5/06/24 City Council and Authority Board Approve Financing Resolutions 5/07/24 City has rating discussion with S&P
Mid-May 2024 Bonds Official Statement is released to the market; Hilltop Securities begins marketing the 2024 Bonds
Late May 2024 Bonds are priced
Early to Mid-June 2024 Bonds close and funding delivered to the City The city has sufficient funds in the project account to begin construction prior to the receiving the interim financing.
How Recommendation Supports the Vision
Gonzales will continue to be a safe, clean, family-friendly community, diverse in its heritage, and committed to working collaboratively to preserve and retain its small-town charm.
Explain: Constructing a Community Center will provide residents with a facility for a wide variety of public and private functions, recreation programs and other activities which will enhance the quality of life of Gonzales residents.
Explain how the Recommendation Directly Implements the Mission The City Council and Staff of the City of Gonzales will realize our Vision by providing the leadership, commitment and resources necessary to provide excellent services that enhance the quality of life of our diverse community. X Yes ____ No____ N/A
Explain: Please see explanation above for the Mission.
City services will be delivered in a cost-effective, respectful and friendly manner to insure the safety and well-being of the residents and the promotion of business, recreational, housing and employment opportunities in an environmentally sustainable manner. X Yes ____No ____ N/A Explain: See Vision explanation above.
Strong fiscal policies allow us to provide appropriate infrastructure for:
• Public Safety Yes X No N/A
• Housing Yes X No N/A
• Recreation X Yes No N/A
• Environment X Yes No N/A
• Education X Yes No N/A
ALTERNATIVES
The city can choose to pursue other sources of funding, such as a direct placement with a lender; however, such alternative has been considered and was determined to be more costly to the city.
BUDGET IMPACT
Upon closing of the 2024 Bonds in early to mid-June, the city will make a deposit with the Trustee of the 2024 Bonds to pre-fund interest on the 2024 Bonds through May 1, 2026 and to pay costs related to the financing. All such financing costs are contingent upon the successful closing, with the exception of the rating fee as mentioned previously. It is anticipated that the deposit at closing will be approximately $950,951. It is also anticipated that a portion of the deposit will accrue earnings over time, which will be credited back to the city.
CONCLUSION
It is recommended that the City Council of the City of Gonzales and the Authority Board of Directors receive this staff report, hold a public hearing, and consider adoption of the following Resolutions:
• Resolution 2024-12, A Resolution of the City Council of the City of Gonzales Authorizing the Execution and Delivery of a Ground Lease, Lease Agreement, Indenture, Bond Purchase Agreement and Continuing Disclosure Certificate in Connection with the Issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, Approving the Issuance of Such Bonds in an Aggregate Principal Amount of not to Exceed $9,825,000, Authorizing the Distribution of an Official Statement in Connection with the Offering and Sale of Such Bonds and Authorizing the Execution of Necessary Documents and Certificates and Related Actions.
• Resolution FA-2024-01, A Resolution of the Gonzales Public Financing Authority Authorizing the Execution and Delivery of a Ground Lease, Lease Agreement, Indenture, Bond Purchase Agreement and Assignment Agreement in Connection with the Issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, Approving the Issuance of Such Bonds in an Aggregate Principal, Amount of Not to Exceed $9,825,000, Authorizing the Distribution of an Official Statement in Connection with the Offering and Sale of Such Bonds and Authorizing the Execution of Necessary Documents and Certificates and Related Actions.
These resolutions authorize the execution and delivery of a ground lease, lease agreement, indenture, Bond Purchase Agreement and Continuing Disclosure Certificate in connection with the issuance of the Gonzales Public Financing Authority Lease Revenue Bonds, Series 2024A, approve the issuance of such Bonds, authorize the distribution of an official statement in connection with the offering and sale of such bonds and authorize the execution of necessary documents, certificates and related actions. Such authorization will allow the city to proceed with interim funding for Phase 1 of the Community Center Complex Project.
Attachments:
1. Resolution No. 2024-12
2. Resolution No. FA-2024-01
3. Community Center Interim Funding Presentation
4. Site Lease
5. Lease Agreement
6. Indenture of Trust
7. Assignment Agreement
8. Bond Purchase Agreement
9. Preliminary Official Statement
10. Continuing Disclosure Certificate
11. Legal Notice of Public Hearing