February 24, 2022
Department
DATE: February 24, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Anil Comelo, Interim Deputy City Manager
Belinda Brown, Director of Finance
Joe Leach, PE, Director of Public Works
Lina Velasco, Director of Community Development
Subject:
Risks to the City from Formation of a Community
Facilities District (CFD) for Point Molate, Role of Goals & Policies Statement in Addressing These Risks
FINANCIAL IMPACT: A Fiscal Impact Study was prepared on behalf of the developer, and the Study was peer reviewed by the City’s consultant. The Study projects a positive long-term
impact of the development. However, adverse fiscal
impacts in the short term are possible.
PREVIOUS COUNCIL
ACTION:
November 23, 2021
January 25, 2022
February 1, 2022
This item was agendized for January 25,2022, and
carried over to the February 1, 2022, Council Meeting
without formal action.
The technical consulting team for the Community Facilities District formation was approved at the meeting of
November 23, 2021.
STATEMENT OF THE
ISSUE:
The purpose of the study session is to review the risks to the City from formation of a CFD for Point Molate, and to present potential mitigation measures for these risks,
including a statutorily required Statement of Goals &
Policies.
AGENDA
REPORT
February 24, 2022
RECOMMENDED ACTION:
RECEIVE a report and DISCUSS the financial feasibility
of the proposed Winehaven Legacy/Point Molate Project
and the risks posed to the City by the formation of a
Community Facilities District (CFD).
DISCUSSION:
The Winehaven Legacy/Point Molate Project has been supported by significant financial analysis including studies demonstrating its financial feasibility. One of the actions required under the Development Agreement is to form a Mello Roos Community Facilities District (“CFD”). The Development Agreement provides that such a CFD cannot burden the City’s General Fund. In this regard, the City’s consultant team has been preparing information related to risks to the City arising from the formation and funding of a CFD. Additionally, at a City Council meeting on February 1, 2022, Councilmembers asked a number of questions about those risks and the consultant team encouraged submission of additional questions from the Council. After further analysis, the risks identified by the consultant team for the Council in the formation of the CFD are summarized as follows:
o Risk 1: The CFD allows the development of Point Molate to proceed, and the project has an adverse fiscal impact on the City's General Fund. o Risk 2: The CFD is formed, but bonds are never issued and the project is de facto abandoned.
o Risk 3: The CFD issues bonds and the bonds go into default. o Risk 4: The CFD issues bonds but the development of the project proceeds very slowly or is stalled for years.
Below is a more detailed discussion of each risk described above:
Risk 1: The CFD allows the development of Point Molate to proceed and the project has an adverse fiscal impact on the City's General Fund.
The primary fiscal challenge associated with the development of Point Molate is the need for both a fire station and a police substation to serve the area. While the DDA specifies that a combined police and fire station must be completed at the expense of the developer prior to sale or rental of housing units in Point Molate, there is no such special provision in the DDA regarding developer funding of the operational costs.
During the entitlement phase of land use planning, a Fiscal Impact Study was prepared by EPS on behalf of the developer, and the Study was peer reviewed by the City’s consultant. These studies were reviewed by the City Council prior to the granting of development entitlements in September 2020. The EPS study projects a positive long -term fiscal impact from the development, taking into consideration the full operational costs for the new fire and police stations in P oint Molate. City staff
February 24, 2022
has checked the assumptions on fire and police operating expenses and found them substantially accurate. The combined costs of staffing and operating the proposed combined police and fire station in Point Molate projected by the Fiscal Impact Study done in 2020 were estimated to be $5.2 million per year. City staff has done a detailed analysis of the costs to staff and operate the proposed combined police and fire station in Point Molate. The updated staff analysis indicated an annual cost of $5.355 million per year.
However, the staff analysis also indicated a cost of about $1.7 million to acquire police and fire rolling stock for the new station. In addition, this equipment will need to be replaced over time.
Given all these considerations, the peer reviewed fiscal impact analysis would indicate, when adjusted for SunCal's current development plans for Pt. Molate, an annual fiscal surplus of approximately $7.5 million per year.
However, prior to build out, staff and the finance team have determined that the need to fund $5 million+ per year in fire and police operating expenses for Pt. Molate will result in a negative fiscal impact prior to completion of about 600 of the 1,400+ units planned for Pt. Molate.
At the study session, the City's finance team will present potential mitigation measures for this risk, including one offered by SunCal.
Staff and the financing team have been presented with a number of specific fiscal impact questions from Council members. Answers to these questions will be provided at the study session as well.
Risk 2: The CFD is formed, but bonds are never issued and the project is de facto abandoned.
The formation of a CFD for a particular real estate development, such as Point Molate, does not directly trigger or result in the issuance of bonds or the actual construction of the project. There are a number of examples in California where CFD's were formed, and years passed before bonds were issued and the project started development. In a few cases, the project was de facto abandoned by the developer.
In this case the City's fiscal risk would arise from the need to provide basic public safety services to the Pt. Molate area in a vacant land and/or open space state. Neither staff nor the financing team has any estimates of what these costs would be.
If bonds are not issued, the City would not have any of the risks associated with bond issuance, as described under Risk 3.
With respect to the risk of project failure, staff and the financing team have been presented with a number of questions regarding anticipated absorption rate a development of Pt. Molate. While an absorption study has not been prepared at this time, staff and the finance team are developing answers to these questions for
February 24, 2022
presentation at the study session. "Best practices" amongst California public agencies with respect to the absorption study and appraisal for a potential CFD project is to require these documents at the time of bond issuance, as opposed to the time of CFD formation. Since two to three years may transpire between the time of CFD formation and the time when home construction can start, these studies are typically considered speculative at the time of CFD formation.
Risk 3: The CFD issues bonds and the bonds go into default.
As noted in a presentation to Council on November 23rd, the worst case for bond issuance is that the first series of bonds for a Pt. Molate CFD are issued, but the developer stops paying CFD special taxes and de facto abandons the project. Such a failure would most likely be accompanied by a bankruptcy filing by the developer.
Given the need to fully fund and construct a $40 million+ utility stub across 580 and up Stenmark Drive before the first building permit can be issued, the project could conceivably remain non-developable until the utility stub is completed.
In this case, the City would be required to (1) pursue statutory foreclosure proceedings against taxable property within the CFD and (2) retain bankruptcy counsel in the event the developer files for bankruptcy as well. Again, as noted before, the City has absolutely no obligation to pay debt service on defaulted CFD bonds. The CFD bonds are solely secured by special taxes on taxable property within the CFD. The disclosure to potential bond investors will make this fact very clear.
Nevertheless, the legal costs of statutory foreclosure and bankruptcy proceedings can be significant. Bankruptcy counsel for the City would be very expensive and could easily run $100,000+ per year. Note however that all of these expenses are reimbursable in full from future special taxes from the CFD. Note also that a Federal bankruptcy court has no authority to amend or extinguish the tax lien for the CFD. This means that it is extremely likely that the City will be repaid in full, with interest, for its expenses in pursuing foreclosure and representing itself in bankruptcy court.
The worst case in the City's municipal advisor's experience with respect to this interim adverse impact on the General Fund is with the Ritter Ranch CFD for the City of Palmdale. Foreclosure and bankruptcy court expenses over a 6 year period totaled approximately $1 million.
Potential mitigation measures for this risk will be presented as part of the Goals & Policies Statement discussion described below.
Risk 4: The CFD issues bonds but the development of the project proceeds very slowly or is stalled for years.
As noted above, staff and the City's finance team believe that the "cross-over point" where General Fund revenues from the project exceed General Fund expenses occurs when about 600 units have been constructed and occupied in Pt. Molate. The question is how does the City deal with the adverse fiscal impact of the project prior to that point?
February 24, 2022
This question goes to the core question of the anticipated absorption rate for the Pt.
Molate project. SunCal anticipates build out over a 7 year period, measuring from the time the first building permit can be pulled. City staff and its finance team have not seen any market feasibility or absorption study prepared for SunCal. As noted above, Council members have asked appropriate questions about the likely absorption schedule for the project. However, even if such a study were publicly available now, it would remain very speculative. The time for CFD formation, design, permitting and construction of the utility stub and CFD bond issuance in all likelihood puts the first building permit at least 2 years, if not 3 years in the future. Any absorption estimates done now may not be applicable for the real estate market 2 or 3 years from now.
The question then becomes, how can the City best protect itself against adverse fiscal impacts from Pt. Molate prior to the "crossover point", regardless of the actual absorption rate?
Staff and the finance team will present a proposal for delivering significant mitigation of this risk at the study session. The proposal is comprised of two key elements: (1) a conditional offer from SunCal to pay extra special taxes for up to 5 years to mitigate this risk and (2) a proposal to use the City's 50% share of the DDA mandated $45 million payment from SunCal, as well as real estate transfer taxes generated by the Pt. Molate project to fund a "Fiscal Security Fund". We believe that this proposal will significantly mitigate the adverse fiscal impact prior to build out, but will not absolutely eliminate it.
Goals and Policies Statement. State law requires that any public entity considering approval of formation of a CFD adopt a Goals and Policies Statement. This statement addresses the following major policies issues regarding CFDs:
Types of land development for which CFDs may be used. Types of facilities and services that CFDs may be used to fund. Minimum ratio of appraised or assessed value to bond amount ("value-to-lien" ratio) for any bond issuance.
Any requirements for developer cash contributions for funding facilities. Method of bond sale for CFD bonds, e.g., public offering and/or private placement.
Maximum term of any CFD bonds.
Minimum land use entitlements required for issuance of bonds. Security requirements from developers for the issuance of bonds Minimum requirements for CFD bond sale investor disclosure document. Requirements for an absorption study and an appraisal prior to bond issuance
The City Council will set all of these requirements through adoption of the Goals and Policies Statement. The Goals and Policies statement is typically adopted at the same meeting that the Resolution of Intent is adopted. Again, as noted above, the constraints in the Goals and Policies Statement are not covered by either the Resolution of Intent or Resolution of Formation in the CFD formation process.
February 24, 2022
Discussion of Proposed Draft Goals & Policies Statement
We want to direct the Council's attention to certain sections in particular o f the draft Goals & Policies Statement:
Section V - Security. This section mandates a 5 to 1 value to lien ratio (ratio between appraised value and bond amount. In addition, it also requires that the developer post a letter of credit payable to the City equ al to 2 years of debt service on their undeveloped property at the time of bond issuance.
Section VI - Disclosure Requirements. This section, amongst other things, requires the developer to disclose all of their past history with other CFD's, including tax delinquencies and bankruptcies.
Section VII - Other Requirements for Land Developers. This section, amongst other things, provides that the City can require funding by developer cash or from bond proceeds of a $100,000 reserve to fund the City costs i n the event of developer tax delinquencies or a bankruptcy.
Section XI - Privately Placed CFD Debt. This section provides that if debt for a CFD is privately placed with investors who absolve the City of any responsibility for disclosure, that the value to lien ratio may be as low as 2.5 to 1, and the letter of credit requirement can be waived.
DOCUMENTS ATTACHED:
Attachment 1 – Draft Statement of Goals and Policies
Attachment 2 – Thirty Year Fiscal Impact Projections for Point Molate Attachment 3 – CFD Debt Service Cash Flows
Attachment 4 – Answers to Council Member Questions for February 24, 2022 Study Session
Attachment 5 – Valuation Study dated February 7, 2022, for Potential Sales Prices of Residential Units in Point Molate by Integra Realty Resources