Report Prepared by: Bradley Grant - Finance Officer
Title
SUBJECT: Authorization to Issue Refunding Bonds for Community Facilities District No. 2005-1 (Bellevue Ranch West) of the City of Merced (Improvement Area No. 1)
REPORT IN BRIEF
Consider Refunding Bonds for Bellevue Ranch West
RECOMMENDATION
City Council - acting as the Legislative Body of Community Facilities District No. 2005-1 (Bellevue Ranch West) of the City of Merced, adopt a motion:
A. Adopting Resolution 2016-04, a Resolution of the City Council of the City of Merced, California, acting as the legislative body of Community Facilities District No. 2005-1 (Bellevue Ranch West) of the City of Merced authorizing the Issuance of Community Facilities District No. 2005-1 (Bellevue Ranch West) of the City of Merced, 2016 Special Tax Refunding Bonds (Improvement Area No. 1) in the aggregate principal amount not to exceed $6,750,000, authorizing the sale of such bonds upon certain terms and conditions, approving an Official Statement, approving the execution and delivery of a Fiscal Agent Agreement, an Escrow Agreement, approving a Bond Purchase Agreement and a Continuing Disclosure Agreement, and authorizing the execution of necessary documents and certificates and related actions; and,
B. Authorizing the City Manager or City Attorney or Finance Officer to execute necessary documents, certificates and related actions; and,
C. Authorizing the Finance Officer to make necessary budget adjustments.
Body
ALTERNATIVES
1. Approve the action as recommended.
2. Request modification or amendment to the documents and provide direction to City staff regarding the same.
3. Decline to authorize action as recommended.
AUTHORITY
Chapter 2.5 (commencing with Section 53311) of Part 1 of Division 2 of Title 5 of the California Government Code (the “Act”), commonly known as the “Mello-Roos Community Facilities Act of 1982,” the City’s CFD Goals and Policies and Sections 405 and 1105 of the City of Merced Charter.
CITY COUNCIL PRIORITIES
Economic Development
DISCUSSION
Pursuant to the Act and the City’s CFD Goals and Policies, in November 2005 the City formed a community facilities district (CFD) under the Act in response to a petition by the original developer, Woodside Group LLC (the “Woodside”) for the first phase of Bellevue Ranch West. In November 2005, following a successful landowner election, the CFD authorized the levy of a special tax pursuant to a rate and method of apportionment and authorized the issuance of not to exceed $8,500,000 in special tax bonds for Improvement Area No. 1. In July 2006 $7,410,000 principal amount of special tax bonds were sold for Improvement Area No. 1, of which $6,215,000 are currently outstanding (the “2006 Bonds”).
The bond proceeds were used to finance the acquisition and/or construction of a portion of certain infrastructure improvement facilities of benefit to Bellevue Ranch West.
Current interest rates will allow the CFD to lower the interest cost. Staff is proposing to refund the 2006 Bonds to lower the interest cost and annual debt service through the sale of Refunding Bonds by the CFD (the “Refunding Bonds”).
At the September 21, 2015 Council meeting the City Council authorized the refinancing of Community Facility District No. 2005-1 (Bellevue Ranch West) Special Tax Refunding Bonds and approved agreements for a financing team that included Fieldman, Rolapp & Associates as financial advisor, Norton Rose Fulbright as bond and disclosure counsel, Goodwin Consulting Group as special tax consultant and Brandis Tallman as underwriter.
Based on current bond market conditions, a refunding could produce a savings in present value dollars of approximately $450,000 and $750,000 in total dollars for Improvement Area No. 1 of the CFD. Average annual savings would be $37,000 in the early years declining to $18,000 in the later years over the 21 year life of the bonds. The Refunding Bonds will refund the 2006 Bonds and the 2006 Bonds will be redeemed on the earliest call date, March 1, 2016. The Refunding Bonds will have the same final maturity date as the 2006 Bonds (September 1, 2036). Current Net Present Value savings are attractive at 7% of bonds refunded. The City of Merced has a minimum net present value savings target policy for refunding’s of 3%.
Bellevue Ranch West consisted of two phases of development and was planned to include 1,303 residential units on approximately 220 acres. Improvement Area No. 1 boundaries cover the first phase of Bellevue Ranch West. Of the 711 planned single-family homes within Improvement Area No. 1, 204 have been completed and sold to homeowners. Currently, the undeveloped property within Improvement Area No. 1 consists of 507 finished residential lots and a commercially zoned parcel. The two property owners owning the undeveloped property are responsible for approximately two-thirds of the special tax obligation: Forebay Farms LLC (57.2%) owning the 507 finished residential lots, and Merced High School Quarterback Club (10.5%) owning the commercial site.
It is appropriate at this meeting to consider for adoption the resolution of the City authorizing the issuance of the Refunding Bonds in an amount not to exceed $6,750,000. Through the adoption of the subject Resolution certain bond documents will be approved.
General Summary of Security: These special tax bonds are secured by annual special taxes on the properties in Improvement Area No. 1 of the CFD and, ultimately, by the properties themselves. In addition, a reserve fund for the CFD is established from bond proceeds. The reserve fund can be used to pay debt service in the event that a property owner does not pay its special tax on time. Once the reserve fund is depleted, the City has no obligation to advance funds to pay the bonds. Each year special taxes will be levied against the properties in Improvement Area No. 1 of the CFD as part of the County property tax bill. In the event a property owner becomes delinquent on its property tax payment, the City covenants to initiate foreclosure proceedings provided the delinquency for such parcel is $5,000 or more, or if the overall CFD has a delinquency rate of equal to or greater than 5%. This covenant is very important to bond owners, as the property itself is the ultimate security for the bonds. The five year delinquency history is very low and currently the CFD is under the County’s Teeter Plan and receives 100% of the taxes it levies.
Potential investors will look closely at the value of the property underlying the bonds relative to the special tax lien. Most industry professionals consider a 3.5:1 value to lien as a standard minimum for property securing a special tax bond issue. Based on a mix of the assessed value for developed property and the current appraised values of undeveloped properties within Improvement Area No. 1 of the CFD, the aggregate average value to lien for these bonds is approximately 8.7:1 however, undeveloped properties have a bulk value to lien of 2.88:1 and the undeveloped commercial site has a value to lien of 2.55:1 based on appraised values
Fiscal Agent Agreement: The key legal document that lays out the legal structure and terms of the financing. It specifies payment dates, maturity dates of the bonds; revenues and accounts specifically pledged to the repayment of the bonds; flow of funds, default and remedy provisions; defeasance provisions in the event the bonds are prepaid; and covenants of the City (including foreclosure covenants). It is drafted by Bond Counsel and executed by the CFD and Fiscal Agent.
Escrow Agreement. This Agreement provides that proceeds from the Refunding Bonds will be deposited with the 2006 Bonds Fiscal Agent and used to redeem and defease the 2006 Bonds. It is drafted by Bond Counsel and executed by the CFD and 2006 Bonds fiscal agent.
Official Statement: This document describes the security and discloses potential risks to prospective investors. It will generally describe the sources of payment for the bonds, the value of the land ultimately securing the bonds, economic and demographic characteristics of the CFD and City, and inherent known risk factors associated with the security. It’s important that this document not contain any material misstatements or omissions. The Preliminary Official Statement (often referred to as the “POS”) is distributed by the underwriter to prospective investors prior to the bond sale so that they can make informed purchase decisions. The POS should be as close to final as possible with the actual terms of the pricing (interest rates and principal amounts) left necessarily blank. The Final Official Statement (FOS) will be prepared shortly after the bond sale and must be available in time for bond closing. The POS and FOS are drafted by Disclosure Counsel and is executed by the CFD.
Continuing Disclosure Agreement: This agreement outlines the updated information related to the security that the CFD will agree to provide to the bond markets. Disclosure is required annually, and on an exceptional basis for any major “material” event. This document is drafted by Disclosure Counsel and executed by CFD and Goodwin Consulting Group, Inc., as dissemination agent. Forebay Farms LLC and Merced High School Quarterback Club, as owners of property subject to 10% or more of the special tax will be executing a continuing disclosure agreement.
Bond Purchase Agreement: This contract is executed on the day of the bond sale, and specifies the actual principal amounts, interest rates and prices of the Refunding Bonds. In it, Brandis Tallman LLC commits to purchase the bonds at closing at the agreed upon prices and amounts subject to certain closing conditions. Closing conditions generally relate to the execution and validity of all required documents and the absence of material changes in the nature of the security. It is drafted by Disclosure Counsel and reviewed by the City Attorney and executed by the CFD and the Underwriter.
IMPACT ON CITY RESOURCES
Other than staff time spent working with outside professional consultants there is no fiscal impact to the City of Merced.
ATTACHMENTS
1. Resolution Authorizing Issuance of Refunding Bonds
2. Fiscal Agent Agreement
3. Escrow Agreement
4. Preliminary Official Statement
5. Continuing Disclosure Agreement (Issuer)
6. Bond Purchase Agreement