For City Council Meeting [June 9, 2020]
TO: Honorable City Council
APPROVAL: Rod Foster, City Manager
FROM: Matt Schneider, Community Development Director
Title
Request City Council Adopt (1) Resolution No. 7629 Stating Intention of the City Council of the City of Rialto to Establish City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde) and to Authorize the Levy of Special Taxes within said District, and (2) Resolution No. 7630 of the City Council of the City of Rialto to Incur Bonded Indebtedness in the Amount of Not to Exceed $20,000,000 within Proposed Improvement Area No. 1, and $20,000,000 within Proposed Improvement Area No. 2, of City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde), and (3) setting a Public Hearing for July 14, 2020.
(ACTION)
Body
BACKGROUND
Mello-Roos Districts
Community facilities district (CFD) financing is a commonly used method of financing public infrastructure costs associated with new development when requested by a developer. Commonly referred to as a “Mello-Roos District,” this type of land-secured financing permits the City to issue bonds to pay for public infrastructure associated with a development. Debt service on the public infrastructure bonds is paid from special taxes levied on real property within the CFD boundary. The bonds are typically issued on a tax-exempt basis at the federal and state level, providing low cost financing for a portion of the overall project costs, with some or all of this benefit and cost passed along to the future homebuyers or property owners.
CFDs can also be formed so a development can contribute to public service costs to help mitigate any public service impacts that might be created by a development. Typically, bonds are not sold to pay for public service costs, rather a special tax is placed on the property and collected on an annual basis to pay for enhanced public services.
City Council Policy
The Mello-Roos Act provides that prior to initiating the CFD proceedings, the City Council must adopt a statement of local goals and policies concerning the use of the Mello-Roos Act. On November 1, 2005, the City Council adopted a policy for new development and annexations, which requires all new residential development to mitigate for all capital and operating costs incurred by the City from the development. The policy also establishes general standards for the establishment of community facilities districts to finance infrastructure and services. Some of these standards are the requirement that the effective tax rate shall not exceed 2% of the expected value of each home; the aggregate special taxes net of administrative costs must equal or exceed 110% of annual bond debt service; and the Developer must provide disclosures to homebuyers acceptable to the City.
On August 8, 2017, the City Council supplemented its policies upon adoption of Resolution No. 7176 establishing a Debt Issuance and Management Policy in compliance with Government Code Section 8855(i). For CFDs, this policy requires a minimum value to lien ratio of 3:1 prior to the issuance of bonds among other standards.
The City’s combined statement of policies relating to the formation of CFDs and the issuance of debt are attached hereto as Exhibit A.
With regard to a CFD special tax that contributes towards the City’s public service costs, in accordance with the City policy, new residential developments must prepare a fiscal impact analysis to identify the revenues that will likely be generated by a development and expenses associated with the City’s public service obligations for the development. New residential development generally does not generate sufficient direct and indirect revenue to support the City’s public service costs at the current service level standard. In order to mitigate the negative fiscal impacts and help ensure the City maintains its current service standard the City conditions residential projects in one of two ways. For projects without an infrastructure CFD component, the City will annex them into the Citywide CFD 2016-1. For projects with an infrastructure component, the City will form a distinct CFD with levies for both infrastructure and services as is this case with this proposed CFD.
The City has formed several CFDs for residential development beginning in 1987 for the Las Colinas development in northwest Rialto, and most recently in 2019 for a residential development near Spruce Avenue and Foothill Boulevard. As part of the annual CFD administration, the City Council must adopt Resolutions to levy the special tax and make appropriate annual adjustments for inflation as authorized by the original formation documents.
The Project and the Pre-Annexation and Development Agreement
In August 2012, the City entered into a Pre-Annexation and Development Agreement (“Development Agreement”) with Lytle Development Company, El Rancho Verde Golf, LLC and Pharris Sycamore Flats LLC (“Lytle Creek”) that provides for a master planned development, known as the Lytle Creek Ranch. The development consists of approximately 2,447 acres with planned land uses including, but not limited to, 8,407 residential units, 849,420 square feet of industrial and commercial land uses, 21 acres of neighborhood parks, 23.5 acres of Paseo’s and greenbelts, a 35.7 acre Sports Park, 27.2 acres of linear open space/recreation land, trails and walkways, 900 acres of natural open space preserved in perpetuity, public schools, public streets and walkways and other amenities that are of benefit to the development and the City.
Lytle Creek plans to begin the first phase of the master planned development which consists of 776 single family residential units. The proposed CFD 2020-1 will provide a portion of the financing for the public improvements associated with the construction of the single family residential units. Due to the extraordinary costs for the public improvements for this initial phase of the Lytle Creek Ranch project, use of a CFD was anticipated and included in the Development Agreement beginning with Section 7.
Developer Petition to form CFD
The business entities consisting of Lytle Development Company and El Rancho Verde Golf, LLC (Owner) made a request to the City to explore formation of a Community Facilities District to finance public infrastructure project costs, development impact fees and a special tax for mitigating the project’s impact on City services. As a result of the Owner’s request, on July 25, 2017 the City Council approved a Deposit and Reimbursement Agreement to initiate formation of a Community Facilities District and selected a financing team to assist the City and the Owner in this process. The financing team consists of Fieldman, Rolapp & Associates, Inc. (Financial Advisor), Willdan (Special Tax Consulting), and Aleshire & Wynder (Bond Counsel). Any funds that remain in the deposit account after the CFD is formed will be returned to the Owner.
Subsequently, the City received a petition, dated May 19, 2020 (Exhibit B), from the Owner to establish a CFD for the purpose of financing public facilities and impacts on City services. The petition requests the City approve a levy of special taxes, authorize the issuance of bonds, and establish an appropriation limit for the CFD.
ANALYSIS/DISCUSSION
General Terms of CFD Financing Structure
Each CFD the City has formed is unique to the project and the public improvements which the CFD funds. For the proposed CFD 2020-1, the following is a general summary of the financing structure. It is important to recognize that Lytle Creek Ranch is a large development that will occur over many years and the financial structure included in this initial CFD 2020-1 may change in future CFDs as more of the Lytle Creek Ranch is built out.
1. Bond Term and Type of Bonds to be sold: The term of any bond issue will not exceed 35 years. While it is expected the bond issues will be tax-exempt, the Owner has also requested the option of selling taxable bonds. In no case will the Special Tax A tax rate (described below) that is used to pay for the debt service on any bonds sold increase beyond what is allowed by the CFD formation documents.
2. Improvement Areas 1 and 2: There are two Improvement Areas associated with CFD 2020-1 that cover approximately 204.5 acres of the Lytle Creek Ranch master planned community. The boundaries of each of the Improvement Areas will coincide with the Tract Maps that are planned for development. Improvement Area 1 will include the construction of 364 single family residential units and Improvement Area 2 will include 412 single family residential units. The physical locations of Improvement Areas 1 and 2 can be found on the Boundary and Zone Maps that are included in the Resolution of Intention to Establish CFD 2020-1 (El Rancho Verde) (“ROI”) and is attached as Exhibit C.
3. Special Tax A: This is the tax that will be assessed on properties to pay for the debt service on bonds issued and the revenues used for constructing public improvements and paying development impact fees. The Special Tax A varies in amount based on the size of the residential home. The annual tax rate for both Improvement Area 1 and 2 range from $1,557 to $2,325 depending on the size of the single family home. A more complete list of Special Tax A rates for both Improvement Area 1 and 2 can be found in the Rate and Method which is part of the ROI and attached as Exhibit C. Special Tax A will annually increase by 2%. Special Tax A is levied on developed property and will remain for so long as is needed to pay for all principal and interest on bonds, but not more than 50 years.
4. Special Tax B - This tax will be levied on each residential property once it is developed in order to mitigate the impacts on City services created by the Lytle Creek Ranch development. In the Development Agreement the tax was identified as being $104/unit, however Lytle Creek has agreed to increase the per unit tax to equal the amount that is being charged in the Citywide CFD 2016-1. The tax levy for the Citywide CFD 2016-1 is planned to be increased to $311.68 in July 2020 per the formation documents. Because of the timing of this proposed CFD 2020-1, Lytle Creek has agreed to have the Special Tax B set at the same rate of what is planned for Citywide CFD for July 2020. Beginning in FY 2021/22 the Special Tax B for the proposed CFD 2020-1 will increase on an annual basis by the lesser of CPI or 3%. This tax will remain on the property in perpetuity.
5. Effective Tax Rate: The Effective Tax Rate expresses the relationship between a home’s value and all forms of property taxes (ad valorem and fixed rate) that are levied on a property, excluding charges for services such as sewer and trash. Common examples of property based taxes (ad valorem) is the standard 1% property tax levy as well as taxes for school/college/water bonds. Common types of fixed rate levies include vector, lighting, landscape and City Services. To calculate the Effective Tax Rate you take the total amount of taxes and divide it by the value of the home. Currently, based on the estimated home sale prices identified by the Owner, and the current and proposed property tax/assessment obligations, the effective tax rate is approximately 1.9% which is below the 2% cap that has been set by the Council (Exhibit D). As part of requirements for the proposed CFD 2020-1, prior to bonds being sold the CFD Administrator will select a consultant to prepare a new Price Point analysis to confirm the Effective Tax Rate remains below 2% based on the home sale prices. If the Effective Tax Rate exceeds 2% at the time bonds are ready to be sold for an Improvement Area, Special Tax A will be reduced to the amount needed to achieve a 2% Effective Tax Rate. This calculation is done once at the time bonds are ready to be sold. It is also important to note that the Owner has indicated the majority of the public street landscaping and paseos that would traditionally be maintained through a public assessment district will instead be maintained by the Homeowner’s Association (HOA) for Lytle Creek Ranch. Because HOA fees are private assessments they will not be a part of the Effective Tax Rate calculation. If this changes, and the public improvements will be maintained instead by a landscape and lighting assessment district, this amount will be factored into the Effective Tax Rate calculation.
6. Pay Go - Due to the extraordinary costs of public improvements that are required for this initial phase of development in Lytle Creek Ranch it is expected that bond revenues will not be sufficient to pay for the costs of public improvements. In addition to bond issue proceeds, the Owner may receive revenues from any future reimbursement agreements from other developers. However, it is still anticipated that bond and reimbursement revenues will still not be sufficient to pay for the extraordinary public improvement costs for this initial phase of construction. For this reason, the Owner has requested that any excess amounts of Special Tax A that are not used for debt service and administrative costs be paid to Lytle Creek for a period of 30 years, or until all eligible public improvements have been paid for, whichever occurs first. This type of payment to a developer from special taxes is commonly known as Pay-Go. Although Pay-Go has been used in other communities (i.e. Irvine, Fullerton, Calimesa, Chino) this is the first CFD for the City of Rialto that would include this financial component. For this reason, staff scheduled a discussion of the CFD financing proposal with the Economic Development Committee (EDC) in March 2019 and more recently in January 2020. At the most recent meeting the EDC agreed that due to the extraordinary costs of public improvements, as well as the benefits of the Lytle Creek Ranch development to the City, and the existence of a Development Agreement that further demonstrated the uniqueness of the master planned development and community benefits, the Pay-Go financial component to the CFD 2020-1 was acceptable. Attached as Exhibit E is an estimate of how much revenue could be generated from the Pay-Go component in the proposed CFD 2020-1. The 30 year time period begins in the first fiscal year in which Special Taxes have been levied in an Improvement Area.
CFD Formation Process
State law requires the City take certain prescribed actions before establishing a CFD. One of the first steps is for a property owner, or a delegated representative, petition the local governing body to establish a CFD. As noted previously, a petition, dated May 19, 2020 has been received by the City. The governing body must then act within 90 days of receiving a CFD petition to adopt a Resolution of Intention (ROI) to form the CFD and levy a special tax.
The ROI serves the following purpose:
1. Accepts the landowner’s petition to form the CFD;
2. Designates a name for the CFD;
3. Establishes the CFDs boundaries and zones;
4. Identifies what public assets and services are to be funded by the CFD;
5. Declares the intention to conduct proceedings, form the CFD, levy taxes and issue debt;
6. Sets the date of the public hearing; and
7. Describes the voting procedure.
The City Council must hold a public hearing not less than 30 days and not more than 60 days after adopting the ROI pursuant to Section 53321(e). Adoption of the ROI is not an action that binds the governing body to establish and form a CFD nor does it bind the City to levy special taxes. The City must complete the public hearing within 60 days; however, the City may continue the public hearing for a period of 30 days or up to 6 months pursuant to Section 53325.
At the public hearing, the City accepts testimony from the public regarding the formation of the CFD; declares if the CFD serves the public interest, convenience and necessity; considers the levy of taxes; approves the Rate & Method of Apportionment (RMA) that identifies the specific tax rate(s) on affected parcels; and, establishes the specific tax formula to be applied to each parcel in the CFD. At the conclusion of the public hearing, the City Council may either approve or disapprove the formation of the CFD. The legislative body has complete discretion to form the CFD or abandon the proceedings after the public hearing.
Resolution of Necessity to Incur Debt
The Resolution of Necessity to Incur Bonded Indebtedness (Exhibit F) states the not-to-exceed amount for bonds to be issued by the CFD and declares the special taxes to be levied within the CFD are to be used for direct payment of public facilities and services, as well as the payment of the debt service on the bonds of the CFD. The maximum total amount of bonds to be issued for CFD 2020-1 is $40 million, $20 million for each Improvement Area. The City will only issue debt that is supported by the Special Tax A tax rate and which satisfies all other elements of the City’s policies regarding land secured financings. The attached Resolution also sets the public hearing for July 14, 2020.
Noticing Requirements
The Resolutions direct the City Clerk to provide notice in accordance with state law. The ROI requires the City publish a notice in accordance with Government Code Section 6061, providing the text or a summary of the Resolution, a statement that the testimony of all interested persons or taxpayers will be heard, a description of the protest rights of the registered voters and landowners in the proposed district, and a description of the proposed voting procedure for the election. Additionally, the City must send a copy of the Notice of Public Hearing by first class mail to each landowner within the proposed CFD as shown on the last equalized assessment roll at least 15 days before the hearing.
The City must also publish notice regarding the public hearing to consider the proposed issuance of bonds. The City must publish this notice in accordance with Section 6061 of the Government Code, not less than 7 days prior to the hearing.
The Public Hearing Notice that satisfies the publishing requirements is attached hereto as Exhibit G.
Public Hearing Scheduled for July 14, 2020
City Council adoption of both resolutions commences the process to establish the CFD, authorize the levy of special taxes, and incur a bonded indebtedness. As noted previously, the formation of the CFD will occur after the public hearing which is scheduled for July 14, 2020. At that hearing, the Council will be presented with information regarding the CFD, the special taxes, and public facilities and services. The public will also have the opportunity to comment on the CFD. After the conclusion of the public hearing, and if the Council agrees to the formation of the CFD, the Council may take the following actions with respect to the proposed CFD 2020-1:
1. Adopt a resolution establishing the CFD.
2. Call a special election.
3. Conduct the election.
4. Adopt a resolution declaring the results of the election.
5. Introduce for first reading an ordinance authorizing the levy of special taxes.
The adoption of the two resolutions under consideration this evening does not commit the City Council to establish the CFD nor authorize the levy of special taxes or the issuance of bonds.
Rate and Method of Apportionment
The Rate and Method of Apportionment (RMA) for both Improvement Area 1 and 2, which is included in the attached ROI as Exhibit C, identifies the City’s methodology for annually apportioning the special tax to the individual units. The RMA sets the annual base year Special Tax A that pays for the facilities component of the CFD between $1,557 and $2,325 depending on the size of the single family home. The Special Tax B portion that will annually pay for police/fire/public works services is $311.68 per single family unit. The Special Tax B component will run in perpetuity and increase annually by the lesser of the percent change in the Consumer Price Index (CPI) or three percent (3.00%).
ENVIRONMENTAL IMPACT
Formation of a CFD is not a “Project” as defined by the California Environmental Quality Act (CEQA). Pursuant to Section 15378(a), a “Project” means the whole of an action, which has a potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment. According to Section 15378(b), a Project does not include: (5) Organizational or administrative activities of governments that will not result in direct or indirect physical changes in the environment.
GENERAL PLAN CONSISTENCY
The City of Rialto has identified several goals and objectives within the City’s recently adopted General Plan through which the City looks to improve the community. The proposed action is consistent with the following goals and objectives contained in the General Plan:
Goal 3-1: Strengthen and diversify the economic base and employment opportunities and maintain a positive business climate.
Policy 3-1.2: Encourage a variety of businesses to locate in Rialto, including retail, high technology, professional services, clean industries, logistics-based businesses, and restaurants/entertainment uses to promote the development of a diversified local economy.
Goal 3-3: Attract, expand, and retain commercial and industrial businesses to reduce blighted conditions and encourage job growth.
Goal 3-6: Require that all developed areas within Rialto are adequately served with essential public services and infrastructure.
Policy 3-6.1: Coordinate all development proposals with other affected public entities to ensure the provision of adequate public facilities and infrastructure services.
Goal 3-7: Upgrade public infrastructure as an inducement to promote private investment.
LEGAL REVIEW
The City Attorney's office prepared the Resolutions and participated in the preparation of related documents by the City’s financing team, including the financial advisor, special tax consultant, and bond counsel.
FINANCIAL IMPACT
Operating Budget Impact
The proposed Special Tax B levy at build out of the first phase of development for Lytle Creek Ranch will provide General Fund revenue to supplement costs for public services in order to maintain, and increase, current service standards. When the CFD levy is combined with normal and customary expected revenues from the build out of this first phase of Lytle Creek Ranch, the City should be able to pay for increased costs of service generated from the development. The Police Department and Fire Department will receive their pro-rata share budgetarily of 39.6% and 26.4%, respectively as funds are received. If General Fund revenues decline (due to recession or other factors) or General Fund costs exceed revenue growth, then the City may not have the ability to maintain the current service standard. Conversely, if revenue growth exceeds expenditure growth then the City may maintain or expand current service standards.
Capital Improvement Budget Impact
Through the Development Agreement Lytle Creek is responsible for paying development impact fees which the City can then program for capital projects in the City. Lytle Creek is also responsible for the initial construction of all required public improvements associated with Lytle Creek Ranch including, but not limited to, streets, water and storm drain facilities, pedestrian walkways, public parks and paseos. Also, as part of the CFD financing structure, after the 30 year time period for the Owner to receive Pay-Go payments from an Improvement Area has expired, the City has the option of continuing to levy the maximum Special Tax A and use any remaining funds, after paying for debt service and administration, for qualifying public capital repairs and capital maintenance in the Lytle Creek Ranch development.
Business Licensing
There is no business license required because of this action.
RECOMMENDATION
Staff recommends that the City Council:
1. Adopt a Resolution Stating Intention of the City Council of the City of Rialto to Establish City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde) and to Authorize the Levy of Special Taxes Within Said District.
2. Adopt a Resolution Stating Intention of the City Council of the City of Rialto to Incur Bonded Indebtedness in the Amount of Not to Exceed $20,000,000 Within Proposed Improvement Area 1, and $20,000,000 Within Proposed Improvement Area 2, of City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde).
3. Set Public Hearing for July 14, 2020 and direct the City Clerk to publish public notice in accordance with the provisions of the two Resolutions and provide mailed notice as required by law.