Presentation to:
City of Hercules
Using Mello-Roos Community Facilities Districts
("CFDs") to Finance Public Facilities
JH
JONES HALL HilltopSecurities
May 2021
Introductions
Craig Bettencourt
HilltopSecurities. Hilltop Securities
JH-
David Fama and James Wawrzyniak
JONES HALL Jones Hall, A Professional Law Corporation
"About CFD Financing" Page 1
What is a CFD?
• A "community facilities district" is a distinct legal entity. • Formed under Mello-Roos Community Facilities Act of 1982 (the "Act"). • Provides an alternative method of financing public capital facilities and services eligible under the Act, if obtain 2/3 voter approval of the tax.
Permits the levy of a special tax (typically at the same time and manner as ad valorem tax) to pay for eligible facilities and services. • Special tax must be apportioned on a "reasonable basis" (e.g., benefit, cost); contrary to assessment districts, no requirement that the tax be apportioned on the basis of special benefit to the property.
• Can be formed by cities, counties, special districts, school districts, joint powers entity, or any other municipal corporation, district, or political subdivision of the State.
"About CFD Financing" Page 2
CFD Financing - Historical Perspective
• Constitutional restrictions on taxation imposed by Prop. 13 (1978) required California local governments to devise new strategies for financing public services & facilities, particularly for new development. • Local agencies began to rely more on their legal authority to require developers/new residents to pay for services & infrastructure as a condition of development approval.
• Special assessment financing limited to special benefit to each parcel from improvements; difficult after Prop. 218 and court cases. • State adopted the Act in 1982 as a response to these problems.
Considerable flexibility in formation, levy of special tax, annexation. "About CFD Financing" Page 3
What facilities are eligible to be financed?
General rule: Any real or tangible property improvements with St years' estimated useful life. Examples include:
Public buildings, including park, recreation, parkway, and open-space facilities Water transmission and distribution facilities, gas facilities, telephone lines, energy lines, cable lines
• Flood and storm protection facilities
Seismic retrofitting for private and public property and earthquake damage repair Grading, sitework, cleanup and related expenses for removal or remediation of hazardous substances
Abatement of damage to private buildings and structures caused by soil deterioration
• Payment of fixed special tax or assessment liens or indebtedness secured by any tax, fee, charge, or assessment levied within the area of the CFD "About CFD Financing" Page 4
What services are eligible to be financed?
General rule: Landowner vote may only authorize special tax to finance services in addition to services provided when CFD is formed. Authorized services are:
Police protection services • Flood & storm protection
services, including operation &
Fire protection & suppression
maintenance of storm drainage
services & ambulance &
& sandstorm protection systems
paramedic services
Removal and remedial action
Maintenance & lighting of services for the cleanup of any streets, roads, parks, parkways hazardous substance released or & open space
threatened to be released into the
Recreation program services, environment
school maintenance, library Maintenance & operation of any services, operation and other real or tangible property maintenance of museums and
with 5+ years' estimated useful
cultural facilities (but only with
life
registered voter approval)
"About CFD Financing" Page 5
Key Elements of CFD Financing
• Formation requires 2/3 voter approval by "Qualified Electors" If 12 or more registered voters residing in CFD, then registered voters If less than 12 registered voters, then landowner voters, based on amount of property not special tax (1 vote per acre/portion of an acre) Special taxes levied according to "Rate and Method of Apportionment" (also known as Special Tax Formula or "RMA")
• Recordation of CFD Boundary Map
• Notice of Special Tax Lien recorded against property subject to special tax • Legislative body may (and covenants in bond indenture to) foreclose on properties due to non-payment of special taxes
"About CFD Financing" Page 6
"Reasonable Basis" Methodology Levying
Special Taxes
• Special taxes are levied within CFD's
City-wide boundary, not throughout local agency's
Police/Fire jurisdiction; this permits new development to Services
"pay its own way"
Freeway • Services and facilities financed do not have to Interchange •
Improvements be physically located within CFD boundaries.
CFD • CFD boundaries may be non-contiguous.
Boundary
• Reasonable basis determination by the City
• provides great flexibility in the design of the
Sewer Facility
special tax. Taxes are voted on, so deference
given.
Annexation • • No need to obtain engineer's report or prove Area Library "special benefit" like with assessment
districts.
Annexation of other land in the future is
City Boundary possible.
• Example CFD Financed Facilities
"About CFD Financing" Page 7
Special Tax for Facilities - Key Characteristics
• Must have established maximum rate in the "Special Tax Formula" Term of Tax - Must be specified for residential property (no limit specified by statute, but typically 40-50 years)
• Annual Escalation Rate - No more than 2% per year for residential property Local agency typically imposes limits for residential property on the initial amount of the tax based on Effective Tax Rate calculation (2.0% cap) Typically used to pay debt service on bonds or other debt Timeframe to foreclose on delinquent property owners typically determined through covenant with bondholders (e.g., $5,000 or 3 missed installments) "About CFD Financing" Page 9
Typical CFD Formation & Financing
Process Summarized (Landowner Voter Election)
Adopt Local Goals & Policies in accordance with Gov. Code § 53312.7 Landowner petitions for CFD formation
Ist set of City Council actions:
- Approve Resolutions of Intention (ROI) to form CFD & Incur Bonded Indebtedness (if bonds will be issued to finance Facilities) ROI includes Rate and Method Apportionment, CFD Boundary Map, and description of Facilities and/or Services to be financed - Sets date for Public Hearings
City records CFD Boundary Map (within 15 days after ROI) "About CFD Financing" Page 10
CFD Formation & Financing
Process Summarized (Cont'd)
• 2nd set of City Council actions:
- File CFD Report with City Council, describing Facilities and/or Services to be financed and estimate of their cost
- Conduct Public Hearings
- Approve Resolution of Formation & Necessity to Incur Bonded Indebtedness - Conduct and certify results of Landowner Election (assuming 100% landowner waiver) - Introduction and 1st Reading of Ordinance Levying Special Tax (2nd reading at next regular meeting & effective 30 days thereafter)
Local agency records Notice of Special Tax Lien (up to 15 days after the election) • 3rd set of City Council actions (can combine with 2nd set of actions or not):
- Resolution authorizing issuance of bonds
- Also approves bond financing documents including Indenture/Fiscal Agent Agreement, Bond Purchase Agreement & form of Preliminary Official Statement "About CFD Financing" Page 11
CFD Formation & Financing
Process Summarized (Cont'd)
• CFD bonds may be issued after 3rd set of legislative actions & special tax ordinance is in effect
• City provides levy amount on annual basis to County in August - this is an administrative action only (no City Council action required) • Annual CFD administrative costs (including any foreclosure related costs) are built into the special tax
City can obtain services of special tax consultant to assist with calculation of the levy
Additional property can annex into the CFD at later date, either through short- form process not requiring City Council action if in future annexation area for the CFD, or through longer-form process involving City Council action "About CFD Financing" Page 12
CFD Bonds
CFD bonds are issued to generate money to pay for capital improvements- most typically via reimbursement to the developer for costs • The City general fund has no obligation to pay- paid only from CFD special tax collections
• CFD law requires minimum property value to bond amount of 3:1 • Foreclosure remedy assures bond buyers of a remedy for nonpayment • Typical bond term 30 years; investor demand usually strong • Special tax pays for all City administration and collection expenses "About CFD Financing" Page 12
Questions?
"About CFD Financing" Page 12