4040 Civic Center Drive, Suite 200
San Rafael, CA 94903
Office: 415.785.2025
www.NHAadvisors.com
September 24, 2024
Carmen Gil, City Manager
Patrick Dobbins, Public Works Director
City of Gonzales
147 Fourth Street
Gonzales, CA 93926
RE: City of Gonzales Wastewater Interim Loan Funding Project – Regulatory Disclosure Letter Dear Carmen and Patrick,
NHA Advisors, LLC (“NHA Advisors”) is required to send this Regulatory Disclosure Letter per Municipal Securities Rulemaking Board (“MSRB”) rules. This letter updates the terms sent on March 21, 2024 and July 10, 2024; and details and refines the work and compensation that NHA Advisors will perform and earn for the City of Gonzales (the “City”) relating to the above referenced project (the “Project”).
Additionally, this letter provides certain duties and disclosures that municipal advisors must present to all clients as near to the beginning of work on a project that may potentially result in a municipal securities transaction.
Scope of Municipal Advisory Activities to be Performed
A detailed Scope of Services can be found in Exhibit A.
Independent Registered Municipal Advisor (“IRMA”)
If acting in the capacity of an Independent Registered Municipal Advisor (“IRMA”), with regard to the IRMA exemption of the U. S. Securities and Exchange Commission (“SEC”) Rule, NHA Advisors will review all third-party recommendations submitted to NHA Advisors in writing by the City.
Term of the Project
The Project commenced on March 21, 2024, and will end on either June 30, 2025, or upon closing/funding of the subject transaction, whichever occurs first; unless the term of the Project is otherwise terminated or extended. Any extensions must be mutually agreed upon by all parties in writing.
Termination of NHA Advisors’ Role on Project
The City may terminate NHA Advisors’ role on the Project at any time and without cause upon written notification to NHA Advisors.
In the event of termination, NHA Advisors shall be entitled to compensation for services performed to the effective date of termination. The City, however, may condition payment of such compensation upon NHA Advisors delivering to the City any or all documents, photographs, computer software, video and audio CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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tapes, and other materials provided to NHA Advisors or prepared by or for NHA Advisors or the City in connection with NHA Advisors’ work on the Project.
NHA Advisors may terminate upon 45 days’ written notice to the City and shall include in such notice the reasons for termination.
Compensation and Out-of-Pocket Expenses
A detailed proposal for compensation and expenses can be found in Exhibit B.
Fiduciary Duty
NHA Advisors is registered as a Municipal Advisor with the SEC and MSRB. As such, NHA Advisors has a fiduciary duty to the City and must provide both a Duty of Care and a Duty of Loyalty that entail the following.
Duty of Care:
a) exercise due care in performing its municipal advisory activities; b) possess the degree of knowledge and expertise needed to provide the City with informed advice; c) make a reasonable inquiry as to the facts that are relevant to the City’s determination as to whether to proceed with a course of action or that form the basis for any advice provided to the City; and
d) undertake a reasonable investigation to determine that NHA Advisors is not forming any recommendation on materially inaccurate or incomplete information; NHA Advisors must have a reasonable basis for:
i. any advice provided to or on behalf of the City;
ii. any representations made in a certificate that it signs that will be reasonably foreseeably relied upon by the City, any other party involved in the municipal securities transaction or municipal financial product, or investors in the City securities; and iii. any information provided to the City or other parties involved in the municipal securities transaction in connection with the preparation of an official statement.
Duty of Loyalty:
NHA Advisors must deal honestly and with the utmost good faith with the City and act in the City’s best interests without regard to the financial or other interests of NHA Advisors. NHA Advisors will eliminate or provide full and fair disclosure (included herein) to the City about each material conflict of interest (as applicable). NHA Advisors will not engage in municipal advisory activities with the City as a municipal entity, if it cannot manage or mitigate its conflicts in a manner that will permit it to act in the City’s best interest.
Conflicts of Interest and Other Matters Requiring Disclosures As of the commencement date of the Project, there are no actual or potential material conflicts of interest, other than those potential conflicts noted below, that NHA Advisors is aware of that might impair its ability to render unbiased and competent advice or to fulfill its fiduciary duty. If NHA Advisors becomes aware of any material potential conflict of interest that arises after this disclosure, NHA Advisors will disclose the detailed information in writing to the City in a timely manner.
CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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Pursuant to MSRB Rule G-42, on Duties of Non-Solicitor Municipal Advisors, Municipal Advisors are required to make certain written disclosures to clients which include, amongst other things, Conflicts of Interest and any Legal or Disciplinary events of NHA Advisors and its associated persons.
The following are potential conflicts of interest to be considered. NHA Advisors represents that in connection with the issuance of municipal securities, NHA Advisors may receive compensation from the City for services rendered, which compensation is contingent upon the successful closing of a transaction and/or is based on the size of a transaction. Consistent with the requirements of MSRB Rule G-42, NHA Advisors hereby discloses that such contingent and/or transactional compensation may present a potential conflict of interest regarding NHA Advisors’ ability to provide unbiased advice to enter into such transaction.
The contingent fee arrangement creates an incentive for NHA Advisors to recommend unnecessary financings or financings that are disadvantageous to the City, or to advise the City to increase the size of the issue. This potential conflict of interest will not impair NHA Advisors’ ability to render unbiased and competent advice or to fulfill its fiduciary duty to the City. NHA Advisors’ fees under this potential agreement may be based on hourly fees of NHA Advisors’ personnel, with the aggregate amount equaling the number of hours worked by such personnel times an agreed-upon hourly billing rate. This form of compensation presents a potential conflict of interest because it could create an incentive for NHA Advisors to recommend alternatives that would result in more hours worked. This conflict of interest will not impair NHA Advisors’ ability to render unbiased and competent advice or to fulfill its fiduciary duty to the City. NHA Advisors’ fees under this potential agreement may be a fixed amount established at the outset of this potential agreement. The amount is usually based upon an analysis by the City and NHA Advisors of, among other things, the expected duration and complexity of the transaction and the scope of services to be performed by NHA Advisors. This form of compensation presents a potential conflict of interest because, if the transaction requires more work than originally contemplated, NHA Advisors may suffer a loss. Thus, NHA Advisors may recommend less timeconsuming alternatives, or fail to do a thorough analysis of alternatives. This conflict of interest will not impair NHA Advisors’ ability to render unbiased and competent advice or to fulfill its fiduciary duty to the City.
The fee paid to NHA Advisors increases the cost of investment to the City. The increased cost occurs from compensating NHA Advisors for municipal advisory services provided. NHA Advisors serves a wide variety of other clients that may, from time to time, have interests that could have a direct or indirect impact on the interests of another NHA Advisors client. For example, NHA Advisors serves as municipal advisor to other municipal advisory clients and, in such cases, owes a regulatory duty to such other clients just as it does to the City. These other clients may, from time to time and depending on the specific circumstances, have competing interests. In acting in the interests of its various clients, NHA Advisors could potentially face a conflict of interest arising from these competing client interests. NHA Advisors fulfills its regulatory duty and mitigates such conflicts through dealing honestly and with the utmost good faith with the City.
Gerald Craig Hill, the Managing Principal of NHA Advisors is currently serving as an outside director for the HdL Companies based in Diamond Bar, CA. HdL Companies is a software and professional services consulting company providing revenue data and collections information to local governments, potentially including NHA Advisors’ clients. HdL Companies have affiliates including, but not limited to, HdL Coren & Cone. From time to time, NHA Advisors utilizes the services of HdL Coren & Cone for its clients. NHA Advisors is mindful of this conflict of interest and fulfills its CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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regulatory duty and mitigates such conflicts through dealing honestly and with the utmost good faith when this situation arises.
• NHA Advisors does not have any affiliate that provides any advice, service, or product to or on behalf of the City that is directly or indirectly related to the municipal advisory activities to be performed by NHA Advisors.
• NHA Advisors has not made any payments directly or indirectly to obtain or retain NHA Advisors’ municipal advisory business.
• NHA Advisors has not received any payments from third parties to enlist NHA Advisors’ recommendation to the City of its services, any municipal securities transaction, or any municipal finance product.
• NHA Advisors has not engaged in any fee-splitting arrangements involving NHA Advisors and any provider of investments or services to the City.
• NHA Advisors does not have any legal or disciplinary event that is material to the City’s evaluation of the municipal advisory or the integrity of its management or advisory personnel. • NHA Advisors does not act as principal in any of the transaction(s) related to this potential agreement.
Legal Events and Disciplinary History
NHA Advisors does not have any legal events and disciplinary history on its Form MA and Form MA-I, which includes information about any criminal actions, regulatory actions, investigations, terminations, judgments, liens, civil judicial actions, customer complaints, arbitrations and civil litigation. The City may electronically access NHA Advisors’ most recent Form MA and each most recent Form MA-I filed with the Commission at the following website:
www.sec.gov/edgar/searchedgar/companysearch.html
There have been no material changes to a legal or disciplinary event disclosure on any Form MA or Form MA-I filed with the SEC.
Recommendations
If NHA Advisors makes a recommendation of a municipal securities transaction or municipal financial product or if the review of a recommendation of another party is requested in writing by the City and is within the scope of the engagement, NHA Advisors will determine, based on the information obtained through reasonable diligence of NHA Advisors whether a municipal securities transaction or municipal financial product is suitable for the City. In addition, NHA Advisors will inform the City of:
the evaluation of the material risks, potential benefits, structure, and other characteristics of the recommendation;
the basis upon which NHA Advisors reasonably believes that the recommended municipal securities transaction or municipal financial product is, or is not, suitable for the City; and whether NHA Advisors has investigated or considered other reasonably feasible alternatives to the recommendation that might also or alternatively serve the City objectives.
If the City elects a course of action that is independent of or contrary to the advice provided by NHA Advisors, NHA Advisors is not required on that basis to disengage from the City.
CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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Municipal Securities Rulemaking Board Rule G-10 Disclosure Pursuant to MSRB Rule G-10, on Investor and Municipal Advisory Client Education and Protection, Municipal Advisors are required to provide certain written information to their municipal entity and obligated person clients which include the following:
NHA Advisors is currently registered as a Municipal Advisor with the SEC and MSRB. Within the MSRB website at www.msrb.org, the City may obtain the Municipal Advisory client brochure that is posted on the MSRB website. The brochure describes the protections that may be provided by the MSRB Rules along with how to file a complaint with financial regulatory authorities.
Record Retention
Pursuant to the SEC record retention regulations, NHA Advisors is required to maintain, in writing, all communication and created documents between NHA Advisors and the City for five (5) years.
If there are any questions regarding the above, please do not hesitate to contact NHA Advisors.
Sincerely,
Eric Scriven, Principal
NHA Advisors, LLC
CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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EXHIBIT A
SCOPE OF SERVICES
MUNICIPAL ADVISORY SERVICES
The City requires a short-term infusion of capital to pay contractors in a timely manner to keep the project on schedule irrespective of whether the State Revolving Fund (“SRF”) reimburses City for its submitted requisitions promptly. NHA Advisors will work with the City and other parties to develop funding strategies and options for financing potential working capital / cash flow needs (the “Project”) for City’s SRF-funded recycled water capital program. NHA Advisors will serve as the municipal advisor of record for the City. The initial, Task 1, scope of services will generally include development of a financing plan.
Once a financing plan has been identified, Task 2 scope of services will include the implementation of such financing plan.
TASK 1, HOURLY CONSULTING – DEVELOPMENT OF FINANCING PLAN:
Scope the Project / Due Diligence
Understand purpose and function of the City’s wastewater project Understand potential cost range for project, broken down by planning/design/permitting and construction cost
Understand schedule for project implementation, from planning through construction Understand operational costs for the project
Identify existing City cash or grant funding already committed for the project Review and assess core policy objectives and constraints related to the potential projects Review reports or studies of other City consultants related to the potential projects Uncover/research other unique opportunities for funding available to the City Determine Debt Financing Capacity
Review historical operating revenues and expenses
Review all existing fixed expense obligations
Analyze existing financial projections including operational and capital expenditures Discuss one-time expenditures or revenues that could impact projected results Develop model to calculate financial projections and coverage based on identified financing options and research including:
Financed capital expenditures
Pay-as-you-go capital expenditures
Potential future rate increases
Quantitative Analysis and Financial Structuring
Research subsidized or State-funded Loan program requirements, structure and rates CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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Research and analysis of market data and rates for a public offering and private placement Evaluate and advise the City on the various financing options, structure, method of sale, including the financing terms, call provisions, and covenants. Prepare and Deliver Presentations to Staff and Elected Officials Develop presentation materials identifying financing options and process for executing different financing plans
TASK 2, CONTINGENT TASKS – IMPLEMENTATION OF FINANCING PLAN:
Project Management
Manage financing process, including assembly of the financing team and assignment of tasks for all parties involved in the financing.
Provide information and advice on the timing of the financing process and develop timeline (schedule) of tasks.
Upon request, work with City staff to select a registered broker-dealer (underwriter or placement agent), bond/disclosure counsel, trustee, or other consultants that are required as part of financing process. Provide recommendation(s) and negotiate preferred terms and fees for said consultant(s).
Quantitative Analysis
Update financing cashflows to reflect timing and market changes. Analyze credit enhancement options (bond insurance and reserve surety bond policies). Meetings or conference calls with credit enhancement or insurance companies to discuss the transaction, as necessary.
Project Implementation
Coordinate the efforts of bond counsel, disclosure counsel, and/or any other legal counsel to prepare the financing documents for approval by the City. Review and provide comments on financing documents to ensure consistency with the financing plan.
Upon request, make presentations or attend meetings with the City Council or stakeholders to answer questions about the financing and process. Work with selected financing partner or funding source to determine optimal bond structure, including serial/term bonds, premium/discount bonds, and redemption provisions.
If a public offering method of sale is utilized:
o Coordinate preparation of a comprehensive credit presentation to the rating services and bond insurance companies, if applicable.
o Work with disclosure counsel to prepare, review, provide comments, and print the preliminary and final official statements.
CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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o If completed as a negotiated sale, monitor the underwriter's sales effort and assist the City with the negotiation of underwriting spreads and interest rates for the proposed financing.
o If completed as a negotiated sale, monitor the underwriter’s sales effort and assist the City with pricing negotiations.
o If completed as a competitive sale, engage a nationally recognized firm to widely distribute the offering documents to potential investors and establish a bidding platform.
o Assist with the solicitation of an investment advisor to coordinate investment of bond proceeds and/or accounts, as necessary.
If a private placement method of sale is utilized:
o Assist with the preparation of a credit package for potential investors. o If a placement agent has been engaged, oversee placement agent’s solicitation process, assist with the selection of the financing provider, and assist with the negotiation of terms, as necessary.
o If no placement agent has been engaged for a privately placed loan (nonmunicipal security), upon request, NHA Advisors will solicit bids from potential investors and assist with the selection of the financing provider and negotiation of terms.
o Manage bond or loan pricing and final financing structure (debt service and bond terms).
If a subsidized or State-funded Loan program is utilized:
o Serve as City’s fiduciary and agent throughout the specific Loan application, underwriting and documentation process.
Prepare or coordinate preparation of a closing memorandum outlining a detailed flow of funds at the time of closing.
CITY OF GONZALES Wastewater Interim Loan Funding Project REGULATORY DISCLOSURE LETTER SEPTEMBER 24, 2024
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EXHIBIT B
COMPENSATION SCHEDULE
TASK 1 hourly, non-contingent funding evaluation services were concluded September 24, 2024. A private placement of approximately $10 million is recommended as the most suitable size and approach to securing the needs for the project.
TASK 2: CONTINGENT TASKS
For work described in the Scope of Services, compensation will be contingent on completion of the financing and is expected to be paid from proceeds of the transaction or City wastewater enterprise funds at the time of closing. The fee for NHA Advisors’ services is based on a number of factors, including the method of sale, financing structure, complexity, funding source, and the time expected to be required to manage the financing process.
This Bridge Loan is expected to utilize the following method of sale:
(1) private placement with a private party or bank (requiring no credit rating or public offering disclosure document),
For this Bridge Loan, NHA will be paid a contingent, fixed fee ranging from $37,500 to $47,500 depending on the financing structure, complexity, the extent of NHA’s tasking and, generally, how much time and resources it will take to complete the financing. Expenses such as California travel will not be expensed.
All project-related expenses, if paid by NHA upon written direction of City, will be invoiced at cost (and typically paid from proceeds of the financing).
Expenses (Out-of-Pocket)
As noted above, all expenses will be billed directly at cost to the City. Expenses will be limited to those necessary to complete the Project.