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APPROVE A RESOLUTION OF CONSIDERATION TO MAKE CHANGES AFFECTING CERTAIN PARCELS WITHIN IMPROVEMENT AREA 2 OF COMMUNITY FACILITIES DISTRICT NO. 2018-2 (WESTLAKE VILLAGES II)
recommended action
RECOMMENDATION
It is recommended that the City Council approve the following resolution:
1) A Resolution of Consideration to make changes affecting parcels within Improvement Area 2 of Community Facilities District No. 2018-2 (Westlake Villages II).
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Summary
Approval of the recommended resolution will facilitate further development in CFD No. 2018-2 (Westlake Villages II) (the “District”). The formation of the District was initiated in 2018 to assist the funding of certain public improvements. The District was split off from CFD No. 2006-2 (Westlake Village) and included both Improvement Area 1 (“IA1”) and Improvement Area 2 (“IA2”) with plans to construct approximately 2,200 single family homes. In early 2020, there was an initial adjustment to IA1 as development plans changed. Development of IA1 is near completion. There have been two series of bonds issued for IA1 supported by the special taxes paid on developed property within that improvement area.
To facilitate development in areas likely to develop in the next couple of years, Eight Mile Development Inc. (the “Developer”) has requested the City pursue modifications to Improvement Area 2 (“IA2”), reducing its size and creating Improvement Area 3 (“IA3”) and Improvement Area 4 (“IA4”), as shown in Exhibit 1 to the resolution.
The District will continue to fund the acquisition of the necessary public improvements through the issuance of future bonds, and the property owners will continue to pay for the ongoing maintenance and the provision of services. The District was formed under the Mello-Roos Community Facilities Act of 1982, as amended (the "Act"), which authorized the special taxes and the collection of those taxes each year on the property tax bill of each developed parcel in the District. The special taxes provide ongoing revenue for the payment of debt service on bonds, to pay for City services, the maintenance of public facilities, and the administration of the District.
The resolution being considered this evening, if approved, will begin the process of creating IA3 and IA4, which will occur after a public hearing to be held at a future council meeting at least 30 days, and not more than 60 days, from tonight. If this change is approved, IA3 and IA4 will be subject to the levy of special taxes according to a newly established Rate and Method of Apportionment (“RMA”). The RMA is the primary document that describes the amount and collection of the special taxes each year from properties within each respective improvement area. The RMAs for both IA3 and IA4 are attached as Exhibits 2 and 3, respectively, to this resolution.
DISCUSSION
Background
On June 19, 2018, the City completed formation of the District to finance public infrastructure associated with the development of the remaining 580-plus acres in the Westlake Villages project. This project is planned for approximately 2,200 homes ranging in size from 1,400 to 3,500 square feet and will, when fully developed, include a master planned portion dedicated to 55+ living, multiple neighborhood parks, a school site, and a series of manufactured lakes to aid in flood control. As shown in Exhibit 1, the project consists entirely of parcels bounded on the west by Bishop Cut, on the north by Eight Mile Road, on the east by Regatta Lane (which separates the remaining development from the existing Spanos West CFD, and the initial homes built in the original Westlake Villages CFD) and on the south by Disappointment Slough.
In the little over three years since formation, the development has progressed well with 377 homes in Improvement Area 1 mostly completed and sold to homeowners. Model homes are currently being planned for IA2 and it is anticipated that home sales will commence during the spring of 2022. To facilitate the issuance of bonds in IA2, the developer requests an adjustment to the boundaries of IA2 by reducing the size of IA2 and creating IA3 and IA4 that will develop in the near future.
Present Situation
All legal matters concerning the formation of the District were completed in June 2018, and the City recorded a Boundary Map and Notice of special tax lien at the County, later updating it with a boundary change in early 2020. The law requires that improvement areas can only be modified by either a unanimous vote of the property owners affected, or if there are 12 or more registered voters residing within the boundaries of the proposed CFD, the eligible registered voters with one vote for each acre of land owned. In this instance, Stockton Westlake Investment LLC, Stockton Westlake Marina LLC, Richmond American Homes of Maryland, Inc, Meritage Homes of California, Inc, and Lennar Homes of California, Inc, own all the land within the current IA2 allowing for a unanimous consent. Should the resolution be approved tonight, there will be a date established for a public hearing that must be at least 30 days after tonight’s meeting.
The modification of an improvement area, much like the original formation proceedings, is subject to a formal public process; in this case, beginning with the adoption of the Resolution of Consideration (the 'ROC') which will begin the process to modify IA2, create IA3 and IA4, and levy a special tax according to new RMAs for IA3 and IA4. The resolution includes:
• Reference to a boundary map showing the territory that is proposed to be included in the revised IA2 and the new IA3 and IA4 (Exhibit 1); and
• A formula defining the RMA for the special tax proposed IA3 (Exhibit 2) and proposed IA4 (Exhibit 3); and
• A bonded indebtedness limit and appropriations set for IA3 and IA4 be established at $18,500,000 for IA3 and $90,000,000 for IA4.
To be clear, the overall boundaries of the District are not proposed to change but rather the size of IA2 is being reduced to accommodate the establishment of IA3 and IA4.
In addition to the items mentioned above, adoption of the ROC sets the date, time and place for a public hearing on the establishment of the modifications to IA2. At the hearing, testimony concerning the proposed changes will be heard. Protests will be considered from registered voters residing within IA2 or persons owning real property within IA2. The date of the public hearing for the proposed changes is proposed for January 11, 2022 at 5:30 p.m. in the Council Chambers.
Facilities and services to be funded
The types of public facilities proposed to be constructed include major roads, traffic signals, bridges, sanitary sewer, water, drainage systems, storm water basin, lakes and pump station, parks, public utilities, public access and bike path improvements. The proceeds generated through the issuance of future bonds will be used to acquire these public facilities from the developer, all of which will be dedicated to the City upon completion.
This resolution does not impact any of the services portion of the parcels within the District as those are identical between improvement areas. The special taxes will fund a portion of the costs related to providing city services. Additionally, the services tax will fund maintenance and operation of 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.
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 District, issuance of bonds, and determination of the amount of taxes and the collection and payment thereof.
The Rate and Method of Apportionment
Parcels within each improvement area will pay a maximum special tax each year based on the taxes described in detail within each respective RMA. Each year, the City will approve the annual costs for each improvement area. These costs will include:
• Debt Service (i.e., principal and interest on bonds)
• Annual services costs related to the Improvement Area
• Administrative expenses
• Replenishment of the reserve fund (when necessary)
• Any amounts 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 within the RMA to determine the special tax levy for each parcel.
The tax formula is made up of two parts, Special Tax A and Special Tax B, as described below.
Special Tax A: This tax will be collected to finance the construction of capital infrastructure and is set up to allocate the maximum annual special tax first to developed parcels based on home size. If the special tax levy from developed parcels is not adequate to cover annual costs, the tax is allocated proportionately to undeveloped property in an amount equal to $25,212 per acre for IA3 and $25,922 for IA4, as shown in attached Exhibits 2 and 3 of the resolution. The annual tax levy includes an allowance for annual administrative expenses and an allowance to cover all special tax delinquencies that may occur in the District in a fiscal year. Special Tax A has an inflation factor which increases the tax by 2% per year. In most years, interest earnings on the bond reserve fund balance will generate revenue to offset potential special tax delinquencies.
Special Tax A is being adjusted for both IA3 and IA4 and the maximum annual special tax (capital portion) for each single-family residential unit ranges from $2,552 to $3,531 for FY 2021/22, while the maximum annual special tax for IA2 ranges from $1,431 to $3,031 for FY 2021/22.
Special Tax B: This tax is levied to generate special taxes to offset a portion of the costs 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 is the same as the special tax charged in the City’s Community Facilities District No.2018-3 (Citywide Services and Maintenance) which currently stands at $562 a year (FY 2021/22) for single family homes and has an inflation factor which increases the tax by 4% per year. Should the development plans change to allow for multi-unit housing, the rate will be based on 66% of the established single family home amount.
Incurrence of bonded indebtedness
Based on the Developers' schedule, the initial bonds associated with IA2 are not being sold at this time. It is anticipated that Council will consider adopting the Bond Issuance resolution, a resolution approving a Bond Purchase Agreement, and a resolution approving an Acquisition Agreement sometime in calendar year 2022. The details of the transaction will be presented and reviewed with the Council at that time.
FINANCIAL SUMMARY
There is no financial impact related to the recommended action. When future bonds are sold, the City will collect an administrative fee to cover the cost of bringing this item before the Council.