CITY OF MENIFEE
SUBJECT: Proposed Bond Issuance for Community Facilities District No. 2023-2 Improvement Area 1, Cimarron Ridge
MEETING DATE: January 30, 2025
TO: Finance Committee
PREPARED BY: Lauri Lockwood, Financial Analyst
REVIEWED BY: Travis Hickey, Chief Financial Officer
APPROVED BY: Armando G. Villa, City Manager
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RECOMMENDED ACTION
1. Review the proposed bond issuance request for Community Facilities District (CFD) No. 2023- 2 Improvement Area 1, Cimarron Ridge by Pulte Homes, to finance the costs of certain public improvements in connection with the development of 424 homes in a community located south of Rouse Road and west of Byers Road in the City of Menifee; and
2. Recommend the Finance Department to proceed with preparation of the Official Statement and other legal documents related to the transaction for presentation to the City Council at a future City Council meeting.
DISCUSSION
Pulte Homes (“Developer”) owns a residential tract approved for a total of 756 homes in the City of Menifee (“City”). The project is divided into two improvement areas, known as Improvement Area 1 (“IA1”), consisting of 424 homes, and Improvement Area 2 (“IA2”), consisting of 332 homes within the previously formed CFD No. 2023-2.
In October 2024, the City received a request from the Developer to move forward with the issuance of bonds for CFD No. 2023-2 IA1, which is situated south of Rouse Road and west of Byers Road, to fund eligible facilities. The size of this bond issuance (the “Series 1” bonds) would be based on the 288 lots within IA1 for which building permits have been issued. A future bond issuance would cover the cost of facilities for the remaining 136 lots in IA1. The bonds would not be general obligations of the City and would be secured solely by the special taxes levied in CFD No. 2023-2 IA1.
City of Menifee Staff Report
Proposed Bond Issuance for CFD 2023-2 IA1, Cimarron Ridge
2 5
4 0
In November 2024, the Finance Committee reviewed the bond issuance request and recommended that staff advance it to the City Council for review while coordinating with the City’s consultants to develop the required documentation for the bond issuance.
In the process of working with the Developer and the City’s consultants, staff was made aware that Invitation Homes, a Real Estate Investment Trust (“REIT”), had purchased 54 homes in the community and is under contract to purchase more homes that would be included in a subsequent parity bond issuance. The REIT intends to maintain ownership and rent out those homes.
Invitation Homes currently owns 19% of the 288 homes included in the initial bond issuance.
Although the Developer has the right to sell the homes to any party, the acquisition agreement between the City and the Developer requires an additional security be established if any entity is responsible for more than 20% of the special taxes. This is designed to offset the concentration risk and protect bondholders. Due to the REIT’s current ownership percentage being right under the threshold, staff requested that the special tax consultant conduct an analysis to determine the percentage of special taxes for which Invitation Homes would be responsible. That analysis determined the REIT would have responsibility for less than 15% of the special taxes associated with the bond issuance and therefore no additional security is required. The percentage of taxes the REIT is responsible for is lower than the percentage of homes it owns because the homes in IA1 range in size from 1,959 square feet to 3,961 square feet and the REIT purchased the smaller homes, which are assessed a lower tax.
The REIT is expected to ultimately own 127, or 30%, of the 424 homes within IA1. Before any subsequent bond issuance, another analysis would be completed to determine the entity’s share of the tax responsibility. If the REIT would be responsible for more than 20% of the special taxes the language of the acquisition agreement would need to be amended and an additional security could be imposed at that time.
There have been no changes to the terms associated with the proposed initial bond issuance since the Finance Committee recommended it be forwarded to City Council, however, the REIT’s ownership stake was not known at that time, therefore it was not mentioned in the staff report.
The status of the 288 homes included in the proposed bond issuance is shown in Table 1.
TABLE 1: CFD No. 2023-2 (Cimarron Ridge) Improvement Area No. 1 (Series 1 Bonds):
Development Status Pulte Homes
(For Sale)
Invitation
Homes
(For Rent)
Total Homes Pct of Total
Closed Homes 191 54 245 85%
Model Homes 5 0 5 2%
Under Construction* 36 0 36 13%
Finished Lots 2 0 2 1%
Total 234 54 288 100%
Percent of Total 81% 19% 100%
*20 Homes Under Construction are in Escrow
City of Menifee Staff Report
Proposed Bond Issuance for CFD 2023-2 IA1, Cimarron Ridge
2 5
4 0
Based on the development’s status, the City’s tax consultant, Spicer Consulting Group, estimates that $4.6 million in bonds could be issued.
A preliminary bond analysis prepared by Spicer Consulting Group evaluated the viability of the bond issuance, estimating the valuation, delinquency history, and effective tax rate. The development has a strong value-to-lien ratio of 14.15:1, greater than the City’s policy of 4:1 and an estimated average tax rate ranging from 1.84% to 1.93%, which is less than the City’s 2% limit.
The first year the CFD taxes were levied was Fiscal Year 2023/2024 and the district has a 0% delinquency rate, which is below the 5% limit established in bond covenants.
Based on current interest rates, the Series 1 bonds are expected to fund approximately $3.9 million for eligible City fees and facilities, including traffic signals, improvements to McLaughlin Road, and park enhancements.
FISCAL IMPACT
There is no fiscal impact associated with the recommended action.
ATTACHMENTS
1. CFD 2023-2 IA1 Proforma Summary
2. CFD 2023-2 IA1 Project Map
3. CFD 2023-2 IA1 Boundary Map
4. CFD 2023-2 Lot Map
5. CFD 2023-2 IA1 Preliminary Bond Sale Analysis
6. CFD 2023-2 CFD Report