For City Council Meeting June 10, 2025
TO: Honorable Mayor and City Council
FROM: Tanya Williams, City Manager
AUTHOR: Scott Williams, Director of Finance
Title
Request the City Council to Adopt Resolution No. 8363 Authorizing the Issuance of the Proposed City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde) Special Tax Bonds, Series 2025, and Approving Certain Documents in Connection Therewith.
(ACTION)
Body
RECOMMENDATION
Staff recommends that the City Council adopt Resolution authorizing the issuance of the City of Rialto Community Facilities District No. 2020-1 (El Rancho Verde) special tax bonds, series 2025, in an aggregate amount of not to exceed $21,000,000, authorizing the execution and delivery of a first supplemental fiscal agent agreement, a continuing disclosure agreement, and a bond purchase agreement; approving a preliminary official statement and a final official statement; and authorizing certain other actions in connection therewith.
BACKGROUND
Mello-Roos Districts
Cities in California commonly use community facilities district financing as a method of financing infrastructure and services for new development. Commonly referred to as a “Mello-Roos District,” this land-secured financing permits the City to issue bonds to pay for public facilities and service costs associated with development. Debt service on the bonds is paid from special taxes levied on real property within the Community Facilities District (CFD) boundary. The bonds are issued on a tax-exempt basis at the federal and state levels, providing low-cost financing for a portion of the overall project costs, with some or all of this benefit passed along to the homebuyers.
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 imposed upon the City by that development. The policy also establishes general standards for the establishment of community facilities districts to finance infrastructure and services. Among these, 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 CFD’s, this policy requires a minimum value to lien ratio of 3:1 prior to the issuance of bonds among other standards.
The Project, CFD Formation and Modification
Background
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.
The business entities consisting of Lytle Development Company and El Rancho Verde Golf, LLC (Owner), previously made a request to the City to explore the 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.
Formation of the CFD.
On July 14, 2020, the City Council held a Public Hearing and took action to approve and establish Community Facilities District No. 2020-1 (El Rancho Verde). The CFD was established to provide a portion of the financing for the public improvements associated with the construction of the single-family residential units, including certain capital facilities of the City and the West Valley Water District (WVWD), including capital fees. 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.
Modification of CFD
On May 26, 2022, the City Council approved a request by Lennar Homes to initiate the process to modify the CFD to (i) eliminate the designation of Improvement Areas; (ii) modify the Original RMAs to consolidate into one rate and method of apportionment and increase certain special tax rates; (iii) increase the maximum bonded indebtedness for the CFD to $50,000,000; (iv) modify the boundaries of the CFD to eliminate certain non-taxable property; and (v) revise the appropriations limit for the CFD (the “Proposed Modifications”). On such date, the City Council also adopted a resolution approving the execution of a Deposit and Reimbursement Agreement with Lennar Homes of California, LLC., and approving the contracts of various consultants to facilitate the modification process.
On August 9, 2022, the City Council adopted a resolution of consideration relating to the Proposed Modifications to the CFD and set a public hearing for September 13, 2022. On September 13, 2022, the City Council held the public hearing and conducted the election on the modifications. The proposition passed unanimously, and a new Ordinance levying the modified special tax was adopted on September 27, 2022.
Rate and Method Apportionment (“RMA”) and Special Taxes.
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 the five zones ranges from $2,330 to $3,530, depending on the size of the single-family home. 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 commencing with FY 2023-2024.
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 and maintenance created by the development. Special Tax B, which is $341 per single-family unit for FY 2023/24. Special Tax B increases on an annual basis by the lesser of CPI or 3%. This tax will remain on the property in perpetuity.
Pay Go
Due to the extraordinary costs of public improvements that are required, it is expected that bond revenues will not be sufficient to pay for the costs of public improvements. For this reason, the developer has requested that any excess amounts of Special Tax A that are not used for debt service and administrative costs be paid to the developer 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. The 30-year time period begins in the first fiscal year in which Special Taxes have been levied.
Effective Tax Rate
The CFD was established with an overall Effective Tax Rate at approximately 1.9%, below the City’s policy establishing a 2% maximum 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.
The Effective Tax Rate is calculated by taking the total amount of taxes and dividing it by the value of the home. The Effective Tax Rate with the modifications remains at less than the maximum 2% allowed by the City.
Issuance of 2023 Bonds
On October 11, 2023, under the Fiscal Agent Agreement, the CFD issued the first series of Bonds in the principal amount of $16,840,000, the CFD’s Special Tax Bonds, Series 2023 (the “2023 Bonds”). All proceeds of the 2023 Bonds have been exhausted. The staff has determined that it is appropriate to consider the issuance of the final series of new-money CFD Bonds (the “2025 Bonds”).
ANALYSIS/DISCUSSION
The Project consists of the recently developed master-planned community known as “River Ranch” which is planned to consist of 776 detached single-family homes in six neighborhoods on an approximately 183-acre site located along River Ranch Parkway, at the northeast edge of the City.
The first builder sales of completed homes closed in November 2022. As of end of March 2025 there were a total of 661 closed builder sales to individual homeowners, and there were 32 pending builder sales that were scheduled to close from April through July 2025. All 776 lots have been issued building permits and are considered developed under the RMA.
The Special Tax A will be levied annually by the City pursuant to the RMA and used to pay bond debt service on the 2023 Bonds and the proposed 2025 Bonds. Special Tax A in the amount of $1,717,282.20 was levied on 630 residential units for the 2024-25 tax year and will be used to pay debt service on the 2023 Bonds and the proposed 2025 Bonds due September 2025. The proposed maximum bond authorization is $50 million. No other bonds will be authorized to be issued for the CFD (except refunding bonds in the future). The proceeds from the 2025 Bonds will be used to (i) finance certain capital facilities of the City and the WVWD, including capital fees, (ii) fund a deposit to the reserve fund, and (iii) pay the costs of issuing the 2025 Bonds.
The costs of undertaking this financing will be funded entirely by the proposed 2025 Bond issue. The proposed 2025 Bonds are secured solely by the CFD special taxes levied annually on privately owned property in the CFD on a parity with the 2023 Bonds. The lien of the special taxes is senior to all private financing providing security to the bondholders. There is an overlapping community facilities district formed by the Rialto Unified School District which has not issued any debt. No bond rating will be applied for. The Developer plans to complete the transfer to individual ownership by February 2026.
Potential investors will look closely at the value of the property within the CFD securing the 2023 Bonds and the 2025 Bonds relative to the special tax lien. Based on a combination of appraised and assessed values as of April 4, 2025, date of value of the property within the CFD, the aggregate average value to lien for the 2023 Bonds and the 2025 Bonds is over 12:1.
The City, on behalf of the CFD and as part of the bond issuance, will covenant to undertake judicial foreclosure proceedings in the event of delinquency in the payment of the special taxes. There is no City General Fund obligation to pay bond debt service for the 2025 Bonds. The 2023 Bonds and the 2025 Bonds will share a bond reserve fund estimated to be approximately $2,530,000. The expected bond debt service in 2026 for the 2023 Bonds and the 2025 Bonds is estimated to be approximately $970,000, escalating at a rate of 2% per year thereafter.
The 2025 Bonds are proposed to be sold through a negotiated sale by Underwriter in late June with closing scheduled for early July 2025. The final bond maturity is September 1, 2060. The final interest cost will depend on market interest rates at time of sale. The currently estimated all in true interest cost is 5.39%. The bond markets have recently been volatile, and final bond interest rates may be higher or lower depending on interest rates at time of sale.
The public disclosures required under SB 450, effective January 1, 2018, are attached hereto as Exhibit A. The estimates have been determined as of May 6, 2025.
Final sizing of the 2025 Bonds is expected to be $18,760,000 and will be determined at the pricing scheduled for late June of 2025.
Although the City formed the CFD, the bond issuances are not obligations of the City or its entities and are solely obligations of the CFD. The finances and bonds of the CFD are unrelated to, do not rely upon, and do not impact the credit rating of the City. It is however the City’s obligation to administer the CFD bonds.
The action today by the City Council, acting as the legislative body of the CFD, is to approve the issuance of the Bonds in an amount not to exceed $21,000,000, along with the approval of related bond documents. These documents briefly described below and are as follows:
General Summary of Security
The 2025 Bonds (as well as the 2023 Bonds) are secured by the special taxes levied on the properties in the CFD and, ultimately, by the properties themselves. In addition, a reserve fund for the 2023 Bonds and the 2025 Bonds has been established by the 2023 Bonds, with an additional deposit from 2025 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 the CFD as part of the County property tax bill. In the event a property owner becomes delinquent on its property tax payment, the CFD covenants to initiate foreclosure proceedings provided the delinquency for such parcel is $3,000 or more, or against all delinquent parcels if the CFD receives special taxes in an amount which is less than 95% of the total special taxes levied. This covenant is very important to bond owners, as the property itself is the ultimate security for the bonds.
Fiscal Agent Agreement, as amended by the First Supplemental Fiscal Agent Agreement
Key legal document that lays out the legal structure and terms of the 2023 Bonds and the 2025 Bonds. The First Supplemental Fiscal Agent Agreement specifies payment dates, maturity dates, and interest rates for the 2025 Bonds, as well as the covenant that the only additional bonds to be issued in the future by the CFD shall be refunding bonds. The Fiscal Agent Agreement, as amended specifies transfer restrictions of the Bonds; revenues and accounts specifically pledged to the repayment of the Bonds; flow of funds; default and remedy provisions; redemption and defeasance provisions in the event the Bonds are prepaid; and covenants of the CFD (including foreclosure covenants). The First Supplemental Fiscal Agent Agreement is drafted by Norton Rose Fulbright US LLP, (the “Bond Counsel”) and executed by the CFD and U.S. Bank Trust Company, National Association (the “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 2025 Bonds, the nature of the improvement project, the value of the land ultimately securing the 2025 Bonds, economic and demographic characteristics of the CFD, and inherent known risk factors associated with the security. 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 (the “FOS”) will be prepared shortly after the bond sale and must be available in time for bond closing. While the City’s legal counsel, consultants, and staff have participated in preparing the POS, the CFD and City staff are ultimately responsible for ensuring that the POS is accurate, contains no misleading information and does not omit any information necessary to make the POS not misleading to investors. The POS and FOS are drafted by Bond Counsel, acting as 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 Bond Counsel and executed by the CFD. No landowner continuing disclosure certificate will be entered into since the Developer owns less than 20% of the property.
Bond Purchase Agreement
This contract is executed on the day of the bond sale, specifies the actual principal amounts, interest rates and prices at which the 2025 Bonds will be sold. In it, Piper Sandler & Company, Inc. commits to purchase the 2025 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 Underwriter’s Counsel, reviewed by Bond Counsel, and executed by the CFD and the underwriter.
More specific details of the financing can be found in the drafts of the documents referenced above. The documents being recommended for approval are available in the office of the City Clerk.
ENVIRONMENTAL IMPACT
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 participated in the preparation of related documents by the City’s financing team, including financial advisor, special tax consultant, and bond counsel. Legal Counsel and Bond Counsel are also requesting authority to make any revisions needed to the attached Resolution that are deemed necessary and which are non-substantive in nature.
FINANCIAL IMPACT
Operating Budget Impact
The action will have no impact on the operating budget.
Capital Improvement Budget Impact
All proceeds of the 2023 Bonds have been spent. The 2025 Bonds are estimated to reimburse the developer for $18.5 million in fees paid to the City and West Valley Water District and for the acquisition of public improvements related to the Project.
Licensing
There is no business license required for this action.