Report Prepared by: Venus Rodriguez-Interim 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 2017-58, 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, 2017 Special Tax Refunding Bonds (Improvement Area No. 1) in the aggregate principal amount not to exceed $6,500,000, 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, 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 Assistant City Manager or Interim City Attorney or Interim Finance Officer to execute necessary documents, certificates and related actions: and,
C. Authorizing the Interim 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 $5,865,000 are currently outstanding (the “2006 Bonds”).
In January 2016, the CFD approved the refunding of the 2006 Bonds to take advantage of lower interest rates. Due to ownership of significant undeveloped land by the Merced High School Quarterback Club, a nonprofit corporation, and the Quarterback Club’s efforts to sell such land, the refunding was unable to take place at that time. In fall of 2016, said land was sold to an affiliate of Granville Homes which allowed for the proposed refunding to be placed back on track if and when the CFD and staff desired.
Staff is currently proposing to refund the 2006 Bonds to lower interest cost and annual debt service through the sale of Refunding Bonds by the CFD (the “Refunding Bonds”). Current bond market interest rates will allow the CFD to pay lower debt service and to permanently lock in the lower interest rates.
Based on current bond market conditions, a refunding could result in estimated savings in present value dollars of approximately $680,000 and $930,000. Estimated annual savings would be approximately $52,000 annually during the 19-year remaining life of the bonds. Initially savings in Special Taxes will be allocated to undeveloped parcels only. As home sales occur savings will be reallocated and the saving shift to the developed property. The Refunding Bonds will refund the 2006 Bonds and the 2006 Bonds will be redeemed on the earliest call date, March 1, 2018. The Refunding Bonds will have the same final maturity date as the 2006 Bonds (September 1, 2036). Current Net Present Value savings exceed 11% of bonds refunded. Most debt policies have minimum net present values savings targets of 3-5%.
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, 215 have been completed, sold and closed to individual homeowners. Another 26 developed parcels are owned by Lennar Homes and are in various stages of construction and sale to individuals. The undeveloped property within Improvement Area No. 1 consists of 470 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 (51.15%) owning the 470 finished residential lots, and Merced QB Club LLC (Granville Homes) (10.4%) owning the commercial site.
The Refunding Bonds will be designated as “Qualified Tax Exempt Obligations” (or “Bank-Qualified Bonds”) in accordance with the provisions of section 265(b)(3) of the Internal Revenue Code. This designation makes the Refunding Bonds more attractive to certain financial institutions. The designation means that the District or the City has not incurred or issued, and does not reasonably expect to incur or issue, tax-exempt obligations (bonds, notes, lease agreements, etc., other than certain private activity bonds) during calendar year 2017 in an aggregate amount in excess of $10,000,000.
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 $6,500,000. 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 (as well as your CFD Policies) consider a 3.5:1 value to lien as an acceptable 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 the Lennar lots and the undeveloped properties within Improvement Area No. 1 of the CFD, the aggregate average value to lien for these bonds is over 9:1. The appraised values for the undeveloped residential properties have an estimated value to lien of approximately 2.88:1, and the undeveloped commercial lot has an estimated value to lien of approximately 2.55:1, for combined value to lien for undeveloped property of 2.83:1.
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 is 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 the FOS 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 QB Club, LLC, 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