To:   HONORABLE MAYOR AND                   From:   Scott P. Johnson

                        CITY COUNCIL                                                        Katy Allen

 

 

COUNCIL DISTRICT:  2

SNI:  NA

 

SUBJECT:     Approval of the Sale and Issuance of Bonds and Related Bond Documents for Community Facilities District No. 10 (Hassler – Silver Creek)

 

 

RECOMMENDATION

 

Adoption of a resolution of the City Council:

 

(a)    Authorizing the issuance and sale of special tax bonds for Community Facilities District #10 (Hassler – Silver Creek) in an aggregate principal amount not to exceed $15,000,000, to be sold on a competitive basis.

 

(b)   Approving the form of and authorizing the execution of the Fiscal Agent Agreement and certain other related financing documents, and directing and authorizing certain other related actions.

 

(c)    Approving the form and authorizing the use of the Official Statement in connection with the competitive sale of bonds, and directing and authorizing certain other related actions.

 

 

BACKGROUND

 

District Formation Process

 

On February 18, 2003, the City Council adopted a resolution stating its intention to establish a community facilities district to be known as Community Facilities District No. 10 (Hassler – Silver Creek) (the "CFD") pursuant to the San José City Charter and Chapter 14.27 of the San José Municipal Code which incorporates and modifies the Mello-Roos Community Facilities Act of 1982, as amended (collectively, the “Law”).  At the same meeting, City Council also approved a resolution declaring its intent to incur bonded indebtedness of the proposed CFD (the “Bonds”) pursuant to the City of San José Community Facilities District Financing Procedure in an amount not to exceed $15 million.

 

On April 1, 2003, the City Council held a public hearing regarding formation of the CFD and at the close of the hearing adopted the following:

 

·        A resolution of formation of the CFD which authorized the levy of special tax within the district, preliminarily established an appropriations limit for the district, and outlined the method by which the levy of special tax and the establishment of the appropriations limit would be submitted to the qualified electors of the district;

 

·        A resolution determining the necessity to incur bonded indebtedness within the City of San José CFD No. 10 and submitting such proposal to the qualified electors of the CFD;

 

·        A resolution calling for a special election within the CFD;

 

·        A resolution declaring the results of the special election and directing the recordation of the notice of the special tax lien;

 

·        An ordinance levying the special taxes within the CFD.

 

The CFD Improvements

 

William Lyon Homes, Inc. (the “Developer”), through various related entities including Cerro Plata Associates LLC, is developing a 580-acre single-family residential community in the Silver Creek community in the East Foothills area of the City.  “The Ranch on Silver Creek” (the “Development”) will contain up to 538 dwelling units, consisting of single-family detached, single-family attached and town home units.  In addition, the Development will provide an 18-hole golf course that will be open to the public, additional improvements to the Silver Creek Linear Park, open space and habitat preservation, and other recreational facilities.  The Developer will also be restoring the historic Hassler Barn and will retain use and possession of the barn as a historic landmark.

 

The CFD is located within the Development, and is being formed at the Developer’s request to finance a portion of the public infrastructure costs associated with the Development.  Because of the high level of public amenities associated with this project, City assistance with this financing of public improvements is consistent with established policy and practice.

 

The CFD will finance the acquisition of approximately $10,655,000 in public infrastructure improvements, including Hassler Parkway and a portion of other adjacent street and storm drain improvements.  The City will acquire these Developer-constructed improvements upon their completion and dedication to the City with the proceeds of special tax bonds issued by the City on behalf of the CFD.  The City Council previously approved the acquisition agreement with the Developer in December 2002.  The improvements to be acquired by the CFD represent almost half of the public street improvements to be constructed by the Developer, which are estimated to cost a total of $21.3 million.  To date, the Developer has completed construction of approximately 90 percent of those improvements.

 

Hassler Parkway is a two-lane road, generally 40 feet in width from curb to curb, within a 60 foot right-of-way.  There are additional lanes and widths at major intersections.  The road extends from Silver Creek Valley Road, at the eastern boundary of the Development, to Dove Road, at the western boundary, for a total length of approximately 9,000 feet.  The Hassler Parkway passes over Silver Creek via a vehicular bridge elevated above the creek corridor.  Public utilities within the right-of-way include storm drainage and sanitary sewer. 

 

The internal public streets also within the CFD, a portion of which are proposed to be acquired with bond proceeds, generally have 40 to 52 foot wide right-of-ways and include storm drainage and sewer improvements.  The foregoing Hassler Parkway and public street improvements include, without limitation, the installation of related curbs, gutters, sidewalks and street lights.

 

 

ANALYSIS

 

Under the Law, the formation of a community facilities district authorizes the City to levy a special tax on parcels within the CFD.  A two-thirds vote of those qualified electors within the CFD casting ballots is required to form the CFD and approve the special tax.  On April 1, 2003, the Developer, including its related entities, as the property owner of land within the CFD, approved formation of the CFD and the special tax to repay the proposed bond issue.  The maximum tax rate was established for the CFD and may not be raised without subsequent approval from the property owners within the CFD.

 

The special tax formula is designed to fit the local circumstances and is not required to be based on any degree of benefit that each assessor’s parcel will receive from the proposed improvements.  The recommended actions for the June 10, 2003, Council meeting are the authorization for the issuance of Bonds in an amount not to exceed $15 million and the approval of the bond documents as summarized below. 

 

Overview of Financing

 

The City will acquire the improvements with the proceeds of the sale of the City of San José Community Facilities District No. 10 (Hassler – Silver Creek) Special Tax Bonds which will be secured by special taxes imposed upon residential property in the CFD in accordance with the Rate and Method of Apportionment.  The Bonds, which will require a debt service reserve fund, will be issued as fixed rate debt and will be sold by competitive bid in early July to the underwriter(s) offering the lowest true interest cost pursuant to the terms outlined in the Official Notice of Sale and Bid Form.

 

The Director of Finance is authorized to accept the bid for the purchase of the Bonds with the lowest true interest cost as determined in accordance with the Official Notice of Sale, so long as the true interest cost of the Bonds does not exceed seven percent (7%) per annum.  The CFD formation costs and costs associated with issuance of the Bonds will be funded by Bond proceeds.  The estimated sources and uses of funds are shown in the following table.

 

COMMUNITY FACILITIES DISTRICT NO. 10 (HASSLER – SILVER CREEK)

Sources and Uses of Funds *

 

 

Sources

 

Bond Proceeds

$12,500,000

Total Sources

$12,500,000

 

 

Uses

 

Project Fund

10,655,355

Debt Service Reserve Fund

1,029,645

Cost of Issuance

565,000

Underwriter’s Discount

250,000

Total Uses

$12,500,000

* Preliminary and subject to change.  Calculations as of May 14, 2003.

 

Appraisal

 

The appraisal is a critical component of a land-secured bond transaction as the value of the land is the basis on which the potential buyers of the Bonds will make their determination whether to purchase.  The substantially completed draft appraisal of the property within the CFD indicates that the valuation will be between seven to nine times the principal amount of the Bonds.  This is well in excess of the City’s preference that value exceed four times the principal amount of the Bonds.

 

Staff had originally anticipated submission of the final appraisal with this recommendation.  However, delays in obtaining information from the property owner and the appraiser’s need for additional time to complete the appraisal, requires that staff include the results of the appraisal in the Supplemental Report that will be transmitted along with the other bond documents.  These documents will be available for review in the City Clerk’s Office on or about June 9, 2003.  The appraisal will be in the form of an appendix to the Preliminary and Final Official Statements.

 

Bond Financing Documents

 

There are a number of bond financing documents that require City Council approval to proceed with the issuance of the Bonds.  These documents will be available for review in the City Clerk’s Office on or about June 9, 2003.  Each of these documents will be executed by the City’s Director of Finance or the Director’s authorized designee, with such changes as the Director may deem necessary, upon consultation with the City Attorney’s Office.

 

Official Statement.  This document is the public offering statement for the sale of the Bonds which thoroughly describes the financing program, the economic and financial characteristics of the Development, the collateral security and other terms for the Bonds.  The appraisal will be included as part of the document.  The Official Statement, or prospectus, is being prepared for the City by Quint & Thimmig LLP as Bond and Disclosure Counsel. 

 

The Preliminary Official Statement will be distributed to potential underwriters of the Bonds along with the Official Notice of Sale.  Following the purchase of the Bonds by an underwriter, the Preliminary Official Statement will be finalized and the underwriter will distribute the Official Statement for the Bonds to potential purchasers of the Bonds.

 

The Preliminary Official Statement and the Final Official Statement will be executed by the Directors of Finance and Public Works or their authorized designees.  Changes to the Preliminary Official Statement will be made subject to the review of the Directors of Finance and Public Works in consultation with the City Attorney’s Office.

 

A copy of the draft Preliminary Official Statement, in substantially final form, will be distributed under separate cover to the Council on or about June 9, 2003.  Staff has carefully reviewed the information contained in the draft Preliminary Official Statement and believes it to be accurate and complete in all material respects.  If any councilmember has any personal knowledge that any of the material information in the Preliminary Official Statement is false or misleading, the councilmember must raise these issues prior to approval of the distribution of the document.  City staff, bond counsel, and the financial advisor will be available at the Council meeting on June 10, 2003, to address any questions, issues and/or concerns.

 

Fiscal Agent Agreement.  This agreement is between the City, on behalf of the CFD, and the Fiscal Agent, US Bank.  The agreement outlines the terms and conditions of the Bonds, the responsibilities of the Fiscal Agent, and the responsibilities of the City, including payment of interest and principal on the Bonds and distribution of the Bond proceeds.  One of the City’s obligations is to commence foreclosure actions on properties within the CFD that are delinquent on their special tax payments.

 

Official Notice of Sale.  This document describes the competitive bidding process, the bidding parameters governing the submission of bids by potential underwriters for the Bonds, and the basis for awarding the Bonds to an underwriter.  The Official Notice of Sale is provided to potential bidders with the Official Statement.  The City’s Bond Counsel will publish a notice of intention to sell the Bonds, in the form on file with the City Clerk, in “The Bond Buyer,” a financial publication generally circulated throughout the State of California, at least 15 days prior to the date for submission of bids.

 

Continuing Disclosure Certificate.  This is the form of certificate the City must provide as part of the Bond issuance and satisfies the continuing disclosure rules and regulations for the issuance of Bonds (SEC rule 15c2-12(b) (5)).  The certificate obligates the City to continue to provide information regarding the City and the Bonds to the secondary (bond) market as long as the Bonds are outstanding.  The Developer will execute a similar certificate.

 

Financing Team Participants

 

The following are the key members of the financing team:

 

Bond and Disclosure Counsel

Quint and Thimmig LLP

Financial Advisor

Kelling, Northcross & Nobriga

Special Tax Consultant

Francisco & Associates

Fiscal Agent

US Bank, NA

Appraiser

Hulberg & Associates

 

Financing Schedule

 

The key dates in the balance of the financing schedule are as follows:

 

June 17, 2003

Council approval

July 10, 2003

Bond Sale

July 23, 2003

Bond Closing

On or about August 1, 2003

Transmit special tax levy to County

 

 

PUBLIC OUTREACH

 

The City Council held a public hearing on this matter on April 1, 2003.  Notice of the public hearing appeared in the San José Post-Record on March 21, 2003.

 

 

COORDINATION

 

This report has been prepared by the Finance Department in coordination with the Department of Public Works, the City Manager’s Office and the City Attorney's Office.

 

 

COST IMPLICATIONS

 

Costs associated with the formation of the CFD and the issuance of the Bonds will be paid from Bond proceeds.  The Financial Advisor and Bond and Disclosure Counsel work on a contingency basis and are only paid upon the successful sale and close of the Bonds.  The Special Tax Consultant and the Appraiser do not work on a contingency basis.  If the proposed Bond financing does not occur, the Special Tax Consultant and the Appraiser will be paid from a deposit given to the City by the Developer to cover staff costs and other expenses.

 

These actions are in compliance with the Mayor’s Budget strategy in stimulating economic recovery.  The sale of municipal bonds to fund the construction of some of the street improvements within the CFD allows the Developer to sell the homes at a lower initial price and allows the homeowner to amortize the improvement costs over the life of the Bonds.

 

 

CEQA

 

Resolution No. 64913, PP02-11-347.

 

 

 

 

SCOTT P. JOHNSON

KATY ALLEN

Director, Finance Department

Director, Public Works Department