STAFF REPORT TO THE CITY COUNCIL
DATE: Special Meeting of January 18, 2022
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Michael Roberts, Public Works Director/City Engineer SUBJECT: Continued Discussion Regarding Santa Clara Valley Housing Group’s (SCVHG) Request to form a Mello-Roos Community Facilities District for the Hilltown Development RECOMMENDED ACTION:
City Council take the next step towards forming a Mello-Roos Community Facilities District to provide the financing needed for the Hilltown Development by directing staff to begin preparing the necessary documents for Council’s future consideration; alternatively, City Council inform the Developer, Santa Clara Valley Housing Group, that the City is electing not to proceed with a Mello-Roos Community Facilities District.
FISCAL IMPACT OF RECOMMENDATION:
There is no cost to the City associated with the recommended action. Staff time and associated expenses are being reimbursed by the Developer through a deposit account.
BACKGROUND:
The Hill Town Project is an approved but not yet constructed mixed-use project on a 44.2-acre site to consist of up to 598 residential dwelling units and approximately 4,200 square feet of neighborhood commercial uses. The site is located at 4200 San Pablo Avenue, which is bounded by John Muir Parkway, San Pablo Avenue, and Interstate 80. On September 14, 2021, City Council approved a minor subdivision dividing the site into 4 separate parcels to allow the development to be constructed in phases. Santa Clara Valley Housing Group (SCVHG) has indicated they would like to begin grading on the first phase as soon as Spring 2022 if they are able to obtain financing through a Mello- Roos Community Facilities District (CFD).
SCVHG initially requested the City form a Mello-Roos Community Facilities District (CFD) for their Hill Town Project during their update and presentation at the May 11, 2021 Council meeting. This request was then subsequently discussed in detail at the Special “Shirtsleeves” Meeting of October 19, 2021 (Att #5). At that time, Council directed staff to bring the item back at a future meeting for further discussion.
A Mello-Roos CFD is a governmental entity that can be formed by a city to finance facilities and services with special taxes. A CFD can issue low-interest, tax-exempt bonds that are then repaid through special taxes levied on the properties in the district which are paid at the same time as ad valorem taxes. Examples of eligible facilities for Hilltown include grading; public infrastructure including parks, utilities, streets and associated improvements; and payment of impact fees. Eligible services could include police services, recreation program services, and maintenance and operation of storm protection services.
SCVHG has provided a preliminary engineer’s estimate indicating the Hilltown development could qualify for up to $51.6M in Mello-Roos infrastructure costs (Att #5). They also have provided scenarios for different special tax rates, which are estimated to amount from $3,450 to $4,950 per year for a $750,000 residential unit sale price, in addition to the current ad valorem amount (Att #3).
Whether or not to form a Mello Roos Community Facilities District, including the amount and facilities/services to be financed, is a negotiation between the City and SCVHG. If Council directs staff to begin preparing the documents to form a Mello-Roos CFD for Council’s future consideration, it would constitute one of a series of required actions and would not at this juncture constitute a binding commitment to proceed with a CFD.
DISCUSSION:
Previous discussion points as well as staff recommendations are summarized below for Council’s consideration.
Reasons Council may wish to consider for forming a Mello Roos CFD:
SCVHG believes a Mello-Roos CFD is needed for the approved Project to advance - Per SCVHG’s most recent correspondence of January 4, 2022 (Att #2), financing is required for the project to advance at this time. Like the handful of other remaining undeveloped lands in Hercules, this project has unique characteristics that makes it especially challenging and therefore costly to develop; specifically, the large amount of earthwork needed to make the site buildable as well as the steep topography which increases the infrastructure costs such as grading, streets, and retaining walls.
Alternative Projects were previously explored but did not advance due to site constraints – The Developer previously explored alternative developments, including a large commercial center, which did not advance given the site constraints. Based upon those efforts, the most feasible use for the site is the approved project because residential developments have smaller structures with more flexible uses, which is the most adaptable to the site constraints (i.e. on a large hill).
Historically the housing market is cyclical and there is a current window of opportunity - As was discussed in the May 2021 Council meeting, historically the housing market has been cyclical. The market is strong at this time and conducive to development. This window of opportunity most likely will close in the future for a period of time and the project site has remained unimproved for many years.
Mello Roos CFDs are in widespread use – Examples of communities that have utilized Mello-Roos in the greater Bay Area include Antioch, Brentwood, Oakley, Fairfield, Dublin, San Ramon, Tracy, Vacaville, Vallejo, and American Canyon.
SCVHG is well-suited to build the project – SCVHG is an experienced developer, having been in business for over 50 years and built over 50,000 residential units.
Additional Housing - The project will provide up to 598 new residential dwelling units, of which 5% or 30 units are required to be affordable housing units sold at a moderate-income level. $3M in Sports Facilities Fees - Per the development agreement for the project, SCVHG is required to pay a $5,000 Sports Facility Fee per residential dwelling unit, up to approximately $3M in total for the Project, at issuance of building permits. The City shall use all Park and Recreation In-Lieu Fees collected from the Project for any park or recreation use consistent with the City’s General Plan.
There is very little financial risk to the City to form a Mello-Roos CFD - Recourse for the bonds is to the land and homes. There is some level of “headline” risk if a Mello Roos CFD defaults, but it does not impact the City’s financial position. A market absorption study will be required. There is no impact to the City’s credit rating and the bonds are expected to be unrated. The City’s ability to utilize its own General and Enterprise Funds is not impacted.
Alternatively, reasons Council may wish to consider for not proceeding with a Mello-Roos CFD:
Mello-Roos is new to the Project – When the Project was originally approved, the decision did not include consideration of a Mello Roos CFD. With the inclusion of the Mello Roos CFD, the Project may no longer be viewed favorably.
Potential Consequences of Additional Tax Burden – The Mello Roos special tax, along with the estimated $300-$350/month Homeowners Association fee (Att #2, Section #4), may cause tax fatigue and contribute to the property owners’ unwillingness to vote for future tax measures or assessments.
Perception of Inequality/Unfairness – Hilltown’s future residents may have the perception the Mello Roos CFD is unfairly burdening them with costs that should be borne by all the residents in the City, regardless that all the financing will be spent on-site. Unlike other Mello Roos CFDs, the financing is not being used to construct new facilities, like schools or waterparks, whose construction is fully funded by the District but available to all residents.
Divisive for the Community – There is potential for the Mello Roos CFD to divide the City between those who pay it and those who don’t, which was discussed in a prior meeting.
The statutory requirements for forming a Mello Roos CFD specify the Council complete a series of actions similar to the City’s Lighting and Landscaping Assessment Districts and is outlined in Att #4. Staff estimates the process would take a minimum of 6 months given statutory timelines and other work commitments unless the property owner waives certain time periods in which case it could take as little as three (3) months.
Lastly, it should be noted that in their January 4th correspondence (Att #2), SCVHG recommends proceeding with Scenario #3 which is at a 2.00% maximum tax rate, since it would generate the largest amount of funding. For this scenario, $28M of the total infrastructure cost would be covered by Mello Roos while the Developer would fund $58.5M.
However, if the CFD advances staff would recommend consideration be given to Scenario #1 for a 1.80% max tax rate since it results in the lowest tax amount to future property owners. In this case, the CFD would fund $20M while the Developer would fund $66.5M. Per the Tax Rate Alternatives that SCVHD provided (Att #3), the annual CFD tax for a $750K residence at this tax rate is estimated to be $3,450 or approximately $300/month.
Attachments:
Developer Presentation
SCVHG January 2, 2022 Correspondence
Mello-Roos Alternative Rate Analysis
CFD Formation Process
October 19, 2021 Staff Report
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