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APPROVE A RESOLUTION AUTHORIZING A SECOND ISSUANCE OF SPECIAL TAX BONDS ON BEHALF OF THE CITY OF STOCKTON COMMUNITY FACILITIES DISTRICT NO. 2019-1 (CANNERY PARK II)
recommended action
RECOMMENDATION
It is recommended that City Council approve a resolution authorizing a second issuance of special tax bonds to be issued for and on behalf of the City of Stockton Community Facilities District No. 2019-1 (Cannery Park II), approving and directing the execution of a supplement to fiscal agent agreement, approving the form of limited offering memorandum, approving sale of such bonds, and approving other related documents and actions.
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Summary
The City Council (the “Council”) of the City of Stockton (the “City”) has conducted proceedings under and pursuant to the Mello-Roos Community Facilities Act of 1982, as amended, to form the “City of Stockton Community Facilities District No. 2019-1 (Cannery Park II)” (the “CFD”), to authorize the levy of special taxes upon the land within the CFD and to issue bonds secured by said special taxes for the purpose of providing moneys for the construction and acquisition of authorized public improvements for the CFD.
The Council, as the legislative body of the CFD, authorized the issuance of special tax bonds for the CFD in the maximum principal amount of not-to-exceed $25,000,000. In 2022, the City issued the first series of bonds for the CFD in the amount of $9,915,000 (the “2022 Bonds”) for the purpose of financing various public improvements for the CFD.
Holman Investors, LLC (the “Developer”) has requested the City issue a second small series of bonds (the “2024 Bonds”) in the expected amount of $1,590,000 and a not-to-exceed amount of $2,000,000. Staff and the Financing Team (defined later) are proposing to sell the 2024 Bonds as a limited public offering (described later). The 2024 Bonds will be issued on parity with the 2022 Bonds, meaning they have an equal right to the special tax revenue and funds held under the Fiscal Agent Agreement with the 2022 Bonds.
Adopting the resolution is necessary to complete the issuance process for the 2024 Bonds. The City Attorney’s office has approved the resolutions as to form.
DISCUSSION
Background
In 2005, the City formed the City of Stockton, Community Facilities District No. 2005-1 (Cannery Park) (the “2005 CFD”). The 2005 CFD encompassed the entire the 450-acre Cannery Park Master Plan area that was annexed to the City and originally approved in 2004 and designated for a variety of land uses ranging from more than 1,000 single or multi-family residential units to parks, an elementary school, fire station, business park as well as commercial and offices uses, and developable in accordance with a Development Agreement entered into in October 2004 (with a 20-year term). The original Cannery Park plans submitted in 2003 by the Developer were for 1,400 residential units, 1,100 of them single-family homes and the remainder apartments or condominiums. The 2005 CFD did not immediately undergo development largely due to the slow-down in the real estate market, neighbor concerns about water usage and regulatory delays associated with the construction of a bridge and utility infrastructure over Bear Creek.
In 2019, due to changes in development plans since formation of the 2005 CFD, the Developer requested that a large portion of the 2005 CFD be removed from the 2005 CFD and encompassed within a newly formed district. In April 2019, the City complied with the request and accepted participation in a new community facilities district as a form of prepayment of obligations related to the existing 2005 CFD. The portion of the CFD removed from the 2005 CFD is now subject to special taxes of the newly created adjoining district, the “City of Stockton Community Facilities District No. 2019-1 (“Cannery Park II”), previously defined as the CFD, which is comprised of undeveloped land owned by the Developer and lots purchased by two merchant builders. The CFD has a total bond authorization of $25,000,000.
The CFD is comprises of the remaining 278± acres in the Cannery Park Master Plan. The CFD is currently being developed with 515 single-family homes. LGI Homes California LLC (“LGI Homes”) and AG EHC II LGIH CA 2 LP (“LGI Homes Landbank”) have acquired 387 single-family lots and KB Home North Bay LLC (“KB Home”) has acquired 128 single-family lots. The remaining developable land consisted of four non-residential parcels and one multi-family parcel. The Developer submitted applications to the City to rezone three out of the four non-residential parcels, resulting in plans for an additional 331 single-family residential units and an additional 250-300 multi-family residential units, The Developer retained 19.70 acres of the non-residential land for future business park / commercial uses. The changes in land use were approved by the Stockton Planning Commission on February 8, 2024 and the Stockton City Council on April 2, 2024.
Below is a table of the status of current development in the CFD:
|
Completed Homes: Individual Homeowners |
213 |
|
Remaining Lots: LGI Homes and LGI Homes Landbank |
196 |
|
Remaining Lots: KB Home |
106 |
|
Total Homes |
515 |
Each single-family residential lot pays a capital special tax (Special Tax A) of $1,600 per unit per year upon the issuance of a building permit. The City, due to COVID-19 concerns and the potential impact on the housing market, reduced the size of the 2022 Bonds to assist in the reduction of the special tax burden to be paid by the merchant builders from approximately $1,600 per lot per year to approximately $1,200 per lot per year. This had the impact of reducing the amount of bonds to be issued and resulted in the final issuance of the 2022 Bonds in the amount of $9,915,000 which provided $8,000,000 for public capital improvements.
The Developer has requested the City issue a second small series of bonds (the “2024 Bonds”) currently estimated in the amount of $1,590,000. The 2024 Bonds are meant to fund the small remainder of bonds that were originally not issued in 2022. Staff and the Financing Team (defined later) are proposing to sell the 2024 Bonds as a limited public offering. The 2024 Bonds will be issued on parity with the 2022 Bonds, meaning they have an equal right to the special tax revenue and funds held under the Fiscal Agent Agreement with the 2022 Bonds.
Due to the small size and the limited amortization of 2024 Bonds, institutional buyers will be the most likely buyers to purchase the 2024 Bonds. A limited public offering is restricted to a limited number of institutional buyers and is less expensive primarily because no appraisal is required. In addition, the Financing Team has agreed to work on the transaction for fees that are generally less than those for a full public offering (“see the estimated costs of issuance later in this document”).
The Rate and Method of Apportionment
Parcels within the CFD pay a maximum special tax based on the rate and method of apportionment of special tax, commonly referred to as the “RMA”.
Each year, the City will approve the annual costs for the CFD. The annual
costs will include:
• Debt service (i.e., principal and interest on bonds) - Special Tax A (see below)
• Annual services special tax - Special Tax B (see below)
• Administrative expenses
• Replenishment of the reserve fund for bonds (when necessary)
• An amount equal to estimated special tax delinquencies
The annual costs funded by the levy of the special tax will be determined by subtracting other available revenues, such as reimbursement payments, fees, funds available from prepaid special taxes, interest earnings on the bond reserve fund, or receipts of delinquent special taxes from previous fiscal years. The City will then apply the Special Tax Formula first to developed properties to determine the special tax levy for each parcel. Developed properties are defined as any properties that have pulled a building permit by May 1 of each year. If the special taxes from developed properties are insufficient, the special tax formula will then look to final map and undeveloped properties to fill the gap (See “Special Tax A”). In addition, the City will then apply Special Tax B to any properties that have a Certificate of Occupancy issued by the City (See “Special Tax B”).
The special tax formula consists of two parts:
Special Tax A: This tax will be collected to finance the construction of capital infrastructure. The maximum annual facilities special tax for each single-family residential unit in each of the improvement areas in the proposed new CFD will be $1,600 per unit and a maximum annual special tax of $7,500 per acre multifamily, $4,500 per acre commercial, and a maximum annual special tax of $4,145 per acre for light industrial. These rates will not increase during the life of the CFD. Upon payoff of final bonds, or July 1, 2059, whichever comes first, Special Tax A reverts to a transition component that is added to Special Tax B and will be used to pay for area maintenance of specific infrastructure financed with Special Tax A.
Special Tax B: This tax is levied to finance services related to police and criminal justice, fire, ambulance and paramedic, parks, parkways, roads, streets, open space, and maintenance and operation of any city real property or other tangible property with an estimated useful life of five or more years, including incidental expenses related to any authorized service. The purpose of the tax is to offset the net negative financial impacts of residential development. Special Tax B started at $520 a year for single-family homes and $343.20 for multi-family homes (based on FY 2019/20) and will grow at a maximum rate not to exceed 4%, in perpetuity. The City’s service costs increased at or above the rate of inflation for many years, and inflationary increases are necessary to sustain the City’s service levels.
Facilities and Services to be Funded
The types of public facilities proposed to be funded by bond proceeds include the construction of public capital infrastructure facilities in the project area, including multiple neighborhood parks, major roads, sound walls, landscaping, traffic signals, bridges, sanitary sewer, water, drainage systems, storm water basin and pump station, public access and bike path improvements. The bonds sold for the CFD will reimburse the Developer for advance funding these public infrastructure needs, all of which will be dedicated to the City upon completion.
The types of services to be funded are a portion of costs related to police and criminal justice, fire, ambulance and paramedic services, and services related to parks, parkways, and open space. Maintenance and operation of any city real property or other tangible property with an estimated useful life of five or more years, including incidental expenses related to any authorized service will also be addressed.
In addition, certain incidental expenses authorized by the Mello-Roos Community Facilities Act of 1982 can be financed, including but not limited to, the cost of planning, engineering, and designing the facilities; costs associated with the creation of the CFD, issuance of bonds for the CFD, and determination of the amount of taxes and the collection and payment thereof.
Documents to be Approved
There are several documents to be approved as part of the resolution to authorize the issuance and sale of the 2024 Bonds.
• Supplemental Agreement No. 1 To Fiscal Agent Agreement: This agreement governs the terms and conditions of the 2024 Bonds and identifies the net proceeds of the 2024 Bonds will be used for the following purposes:
o Make a deposit to the Project (Improvement) Fund
o Fund a Debt Service Reserve Fund
o Fund the Interest Due on September 1, 2024 (Capitalized Interest)
o Pay the costs of issuing the 2024 Bonds
• Limited Offering Memorandum: Disclosure Counsel prepared this document, that upon Council authorization, will be distributed by the Underwriter and is used as the primary marketing document to prospective bond purchasers. The agenda packet includes a preliminary version of the limited offering memorandum (“LOM”) deemed to be essentially final. A final version of this document is to be made available shortly after the 2024 Bonds are sold and will reflect all of the final bond sale information. A table of contents identifies critical topics such as the plan of finance, security for the 2024 Bonds, information on the CFD, continuing disclosure, the foreclosure covenant, and the form of opinion of Bond Counsel.
• The Continuing Disclosure Agreement (included as an exhibit to the Limited Offering Memorandum): This agreement governs the terms and conditions whereby the City will provide the holders of the 2024 Bonds an annual report updating the status of development in much the same form as some of the tables in the LOM. In addition, should a material event occur, as listed in the agreement, the City will provide immediate disclosure to the holders of the 2024 Bonds. In addition, LGI Homes and KB Home and any other merchant builder or developer will provide semi-annual disclosures to the holders of the 2024 Bonds on the status of current development until such time as they own property in the CFD responsible for less than 20% of the annual special tax levy.
• Bond Purchase Agreement: Oppenheimer & Co. Inc. as Underwriter will execute this document agreeing to purchase the 2024 Bonds contingent upon the City satisfying the obligations imposed within the agreement. The Underwriter agrees to make a public offering of the 2024 bonds when authorized by the Council.
Financing Schedule
Assuming approval, the financing calendar outlines the remaining steps and the timeline to complete the sale and closing of the 2024 Bonds. It is anticipated that the financing team will participate on a due diligence call the week of May 27th, post the LOM during the week of June 17th, conduct the sale on June 26th, finalize the documents and post the LOM during the weeks July 1st and July 8th and close on July 17th.
Financing Team
The financing team (the “Financing Team”) consists of representatives from the appropriate City vendor pools:
• Municipal Advisor: Del Rio Advisors, LLC
• Bond Counsel: Jones Hall
• Underwriter: Oppenheimer & Co. Inc.
• Special Tax Consultant: Willdan Financial Services
• Fiscal Agent: U.S. Bank National Association
FINANCIAL SUMMARY
The RMA includes a Special Tax A of $1,600 per Single-family home, $7,500 per acre for multi-family, and from $4,145 to $4,500 for light industrial and commercial that will support the remaining infrastructure associated with the development. At the payoff of bonds, a transition event was included in the RMA where a portion of Special Tax A will convert to pay for the City’s ongoing maintenance of the capital facilities that were financed.
The Rate and Method of Apportionment also includes a Special Tax B of $520 per Single family parcel and $343.20 for Multifamily parcel that addresses the City’s costs to service the new homes and to maintain the City’s infrastructure. This amount will annually increase by up to 4% to keep pace with inflation and the City’s service delivery costs.
The current assessed value of all properties within the CFD is valued at $70.5 million. In addition, the Financing Team obtained the sales prices for the homes sold since the assessed value for the most recent tax roll was established. This established an additional $62.3 million in value for a total of $132.8 million. Assuming the 2024 Bonds are sold in the amount of $1,590,000 and, when combined with the outstanding $9,915,000 of 2022 Bonds, equals an outstanding amount of $11,505,000 plus other overlapping land-secured debt in the amount of $1,214,234. The estimated value-to-lien of the CFD (Total Assessed Value + Sales Prices) / (Total Aggregate Land-Secured Debt) or ($132.8 million) / ($12.7 million) is approximately 10:1.
There is no financial obligation of the City to repay the 2024 Bonds. Repayment of the debt is secured solely from special taxes on property owners within the CFD and certain funds held under the Supplemental Fiscal Agent Agreement.
Based on current market interest rates as of March 12, 2024, the expected principal amount to be issued on the 2024 Bonds is $1,590,000. Interest on the bonds will be payable March 1 and September 1 of each year, commencing September 1, 2024. Principal will be payable on September 1 of each year commencing September 1, 2025 with the final maturity on September 1, 2054.
Below is a table of the estimated costs of issuance for the 2024 Bonds:
|
Role |
|
Company |
Amount |
|
Bond Counsel Fee and Expenses |
|
Jones Hall |
$30,000.00 |
|
Disclosure Counsel |
|
Jones Hall |
$20,000.00 |
|
Municipal Advisor |
|
Del Rio Advisors LLC |
$32,500.00 |
|
Special Tax Consultant |
|
Willdan Financial Services |
$10,000.00 |
|
City Administration Fee |
|
City of Stockton |
$11,925.00 |
|
Fiscal Agent / Counsel |
|
U.S. Bank |
$7,500.00 |
|
Printing of LOM |
|
TBD |
$2,500.00 |
|
Contingency / Rounding |
|
Miscellaneous |
$5,575.00 |
|
Total Estimated Costs |
|
|
$120,000.00 |
In addition, Oppenheimer & Co. Inc., as underwriter, has agreed to work for a fixed fee not-to-exceed of $35,000 and is currently showing their fee at $30,000. The fee is not dependent on the size of the 2024 Bonds.
Below is a table of the estimated sources and uses of funds for the 2024 Bonds:
|
Sources of Funds |
|
|
Par Amount |
$1,590,000.00 |
|
Net Premium / Discount |
($21.496.80) |
|
Total Sources of Funds |
$1,568,503.20 |
|
|
|
|
Uses of Funds |
|
|
Project (Improvement) Fund |
$1,308,949.45 |
|
Reserve Fund (Parity) |
$89,612.50 |
|
Capitalized Interest |
$19,941.25 |
|
Costs of Issuance |
$120,000.00 |
|
Underwriter’s Discount |
$30,000.00 |
|
Total Uses of Funds |
$1,568,503.20 |
SB 450 COMPLIANCE:
In compliance with SB 450, the good faith estimates set forth herein are provided with respect to the 2024 Bonds. Such good faith estimates have been provided to the City by Oppenheimer & Co. Inc. as the Underwriter. Each estimate is based on the City’s financing plan and current market conditions, including market interest rates prevailing at the time of preparation of the estimate.
Principal Amount: The estimated aggregate principal amount of the 2024 Bonds to be sold is $1,590,000.00.
True Interest Cost: The estimated true interest cost of the 2024 Bonds, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the 2024 Bonds, is 5.484684%.
Finance Charge: The estimated finance charge for the 2024 Bonds, which means the sum of all fees and charges paid to third parties (or costs associated with the 2024 Bonds), is $150,000.00 consisting of $120,000.00 in fixed costs of issuance and $30,000.00 for the underwriter’s discount.
Amount of Proceeds to be Received: The estimate of the amount of proceeds to be received by the City from the sale of the 2024 Bonds, less the finance charge of the 2024 Bonds, as estimated above, and less estimated reserves and capitalized interest, is $1,308,949.45.
Total Payment Amount. The estimated total payment amount, which means the sum total of all payments to pay debt service on the 2024 Bonds, plus the finance charge for the 2024 Bonds, as described above, not paid with the proceeds of the 2024 Bonds, calculated to the final maturity of the 2022 Bonds, is $3,893,953.75.
The foregoing estimates are good faith estimates only. The actual figures may differ from the estimates owing to (a) differences between assumptions regarding the date of the sale of the 2024 Bonds, the principal amount of 2024 Bonds sold, the amortization of the 2024 Bonds, and market interest rates at the time of sale of the 2024 Bonds and, (b) other market conditions, (c) changes in the City’s financing plan, and/or (d) a combination of such factors.