CDIAC TRANSCRIPT November 17, 2020
California Debt and Investment Advisory Commission
Webinar Transcript Mello-Roos Community Facilities Districts Fundamentals Mini-Series Session 2: Community Facilities District Bond Issuance and CFD Administration November 17, 2020
Community Facilities Districts (CFDs), or Mello-Roos Districts, have been used by public agencies since 1982 to finance public infrastructure and community facilities. CFDs may also fund public services, which has been a growing trend in recent years. Because this funding tool is used on the majority of new developments in California, it is imperative that public agency employees understand the fundamentals of CFDs and how they can be implemented to fund infrastructure and services.
This introductory two-part webinars series will provide an overview of CFD fundamentals. Topics include the Mello-Roos Act, CFD formation process, and ongoing administration requirements once a CFD has been formed.
Session One will kick off with an introduction to the Mello-Roos Community Facilities Act, a review of the history of CFDs, a discussion of pre-CFD formation considerations, and specific steps involved in the CFD formation process. Participants will gain a basic understanding of the role of public agency staff and financing team members in the CFD formation and ongoing CFD administration process.
[Editor’s Note: This transcript has been prepared by the California Debt and Investment Advisory Commission (CDIAC) and it believes it to be a fair and accurate reproduction of the comments of the speakers. Any errors are those of CDIAC and not the speakers.]
Title Slide – Mello-Roos Community Facilities Districts Fundamentals Mini-Series, Session 2: Community Facilities District Bond Issuance and CFD Administration
ROBERT BERRY: Good morning everyone, and welcome to Mello-Roos Fundamentals, CFD Bond Issuance and CFD Administration. This is the second webinar in a two-part Mello-Roos series, presented by the California Debt and Investment Advisory Commission. My name is Robert Berry, and I'm the Executive Director here at CDIAC. I'm happy to see that most of you have returned for our second, Mello-Roos webinar this morning. For those of you that were unable to join us last week and others that would like a review of last week's program on CFD formation, the replay and transcript have been posted to the CDIAC website and we sent out an e-mail, I believe, yesterday, to all the registrants with a link and access instructions.
As I mentioned last week, CDIAC one and one-half day in-person program on land-secured financing has been one of our most popular programs over the years. We feature an expanded faculty that goes into great depth on both Mello-Roos and assessment district formation, financing, and administration, and we plan to hold that full in-person program as soon as we can do that safely. So again, this two-part webinar is not intended to be a substitute for our full Land-Secured Fundamentals program. But our presenters have worked very hard to assemble a program that covers the topics at, we think, a sufficient depth and detail at least relative to Mello-Roos CFDs to give you a solid fundamental understanding.
So last week's session covered the basics of the Mello-Roos Act, district pre-formation steps, and the formation process. This morning, our faculty has returned to take up debt issuance by community facilities
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 1 CDIAC TRANSCRIPT November 17, 2020 districts and ongoing CFD administration. So again, before we get started, let me run through a few of the housekeeping items.
Slide 2 – Housekeeping 2:00
ROBERT BERRY: Okay, so, again, same as last week, the slides for today's presentation are available in PDF form, in the Handouts section of your control panel. We're planning a Q&A session during the last few minutes of the program. So again, please submit your questions using the Question Box at any time during the program. And then just as we did last week, we will host an extended Q&A session, where you will be able to directly speak with our panelists and ask more detailed questions. Again, like last week, we will post the login information for the Extended Q&A just before we close the main webinar. We had a very good group last week, but we weren't able to get to all the questions, get to everyone who had come into the extended Q&A. So, I hope [if] you all weren't able to raise your question, will be able to join us this week. If you're having any technical issues, the best way usually to resolve them is to close out and log back in. If that doesn't work, GoToWebinar can be reached at (877) 582-7011, or you can contact CDIAC staff at the number on the screen.
We do have live captioning today, available in the Control Panel link in the chat box. We'll send out certificates of participation to all the registrants within a couple of weeks, and then MCLE credits are available upon e-mail request and please include your bar number. And lastly, like last week, all registrants will receive a link to the replay in 10 to 14 days, and of course, all our webcasts are available on our website for anytime viewing.
Slide 3 –Mello-Roos Issuance Fiscal Years 2000-2019 3:50
ROBERT BERRY: So, we'll be talking about Mello-Roos debt issuance this morning. So, I thought it might be interesting to take a look at Mello-Roos issuance data before our panelists get into the details of the issuance process. Mello-Roos debt issuers are required to submit a variety of reports to CDIAC, including a report when debt is proposed, a report when debt is issued, then two annual reports - the Annual Debt Transparency Report and Yearly Fiscal Status Report. We'll discuss those a little bit later in the program. So needless to say, CDIAC collects and disseminates a great deal of data on Mello-Roos debt, all of which is available on our website, through our Debt Watch website. But just to frame our discussion this morning, this is Mello-Roos issuance data by fiscal year, from July 2000 through June 30, 2020. So, just up until last summer. Mello-Roos issuance was at historic peak in the five fiscal years, from 2002 to 2006, reflective of the surge in new home development in the post-dotcom bubble burst recovery. While there was significant refunding activity, especially in 2005, those five years were the highest new money years since CDIAC had been collecting issuance data. When considering that, we have not adjusted these numbers for inflation it really shows how important Mello-Roos was to the expansion of housing in California during that five-year period. And then issuance “fell off a cliff” during the Great Recession starting in fiscal year 2007. And hit its lowest point ever in 2008 at only $178 million dollars in new money and refunding combined. But then issuance began to slowly emerge from the Great Recession levels marked by year-over-year increases in new money issuance through 2014. And robust refunding activity in the five years preceding the elimination of advanced refunding in 2018. No doubt refunding a lot of the new money issuance surge prior to the Great Recession. In the last four years new money issuances hovering around the billion-dollar mark, appears to be a bit of a plateau. In the 2019 new money figure of just over a billion does include three months of the COVID-19 crisis. So perhaps we would have seen a
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 2 CDIAC TRANSCRIPT November 17, 2020 stronger increase without the pandemic. I think the question now is, how will Mello-Roos debt support California's emergence from the Covid-19 crisis and the development of housing so desperately needed across our state? So perhaps a topic for our discussion in one of our Q&A sessions. But now we're going to get into the practical aspects of Mello-Roos debt issuance and ongoing CFD administration.
Slide 4 – Speakers 6:39
ROBERT BERRY: So, I'm happy that our panelists are back with us this morning, and I'm equally happy to briefly reacquaint you with them. First, we'll welcome back Susan Goodwin. Susan is managing principal at Goodwin Consulting Group; she has managed the planning and implementation of hundreds of districts and programs that have generated billions of dollars in funding for public infrastructure and services. And Susan is recognized as an expert in the preparation of special tax formulas, methods of apportionment, and disclosure documents for Mello-Roos CFDs. Next, welcome and good morning to Bradley Neal. Brad is a shareholder of Stradling Yocca Carlson & Rauth. Brad has worked as bond counsel, disclosure counsel and underwriter’s counsel on numerous public financings, specializing in community facilities districts, assessment districts, and Marks-Roos pooled financings, among others. And then completing our expert trifecta this morning is Jim Fabian. Jim is a principal and the secretary of the Board of Directors of Fieldman, Rolapp & Associates. He is an expert in the formation of community facilities districts and the financing of various public improvements. He also has extensive experience with the administration of land-secured special districts, having served as a local government official for 15 years.
So, welcome back, Jim. I think you're going to kick us off.
Slide 5 – Topics to be Covered 7:59
JAMES FABIAN: Thanks, Robert. We're going to turn to the next slide.
And we're delighted to be with you this morning to talk about, now that you have formed CFDs and you're in the process of issuing bonds, items to consider. Today, the first item we're going to talk about is expanding the financing team, and again, remember, this is your team, the public agency’s team.
We're going to talk about the process to issue bonds, go through upfront considerations and timing issues, and then also talk about a very important subject, disclosure to the bond market, both initially and ongoing annual disclosure to the bond market. So, on the next slide, expanding the finance team.
Slide 6 – Expanding the Financing Team 8:52
JAMES FABIAN: As we talked about in our first session, the consultants - you use the certain consultants to help you form a CFD or Community Facilities District, and now that you're moving into the bond issuance process, you need to bring on some additional players to help with the documentation required to issue bonds. The first of those additional team members is the appraiser. And the appraiser is a consultant that is used to determine the value of the property within the CFD. As we've talked about in our prior session, the land within the CFD is the security for the bond. There's a special tax lien that is levied on that land and recorded against that land and the appraiser's job is to determine a value of that land so that you know what the value-to-lien ratio is for the land within the CFD.
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And you might remember that we talked about the Mello-Roos statute has a minimum 3:1 value-to-lien ratio required per issuance of bonds. So, a property that is $10 million dollars in value, could support roughly $3,333,000 of bonds, a 3:1 ratio. And the appraiser’s job is to utilize the appraisal guidelines that have been developed by CDIAC and the CDIAC guidelines are on their website. If you wanted to take a look at that. But, they're pretty specific of, how the appraiser values property within a CFD. And all appraisers use the CDIAC guidelines and then their industry guidelines to determine the value of property within a CFD.
As we talked about last time, the underwriter is required to be engaged to actually buy the bonds for the public agency and then resell them to the public. We talked about the importance of having an underwriter that is very familiar with land-secured financing and understands the specific nuances of land- secured financing and what types of investors like to buy that type of a bond issue.
The disclosure or underwriter’s counsel is also brought in, and their job is to prepare the preliminary official statement. That is, the primary document to provide information to bond investors, to be able to inform them about all the required information to make a decision about whether to buy bonds or not. They also prepare a continuing disclosure agreement. That is the document that lays out what is required, on an annual basis, to be disclosed to the market for the term of the bond issue.
Additionally, a market absorption consultant is often hired. They provide their estimate of the build-out or absorption from start to final unit sale, so that we have a good understanding and can describe to the marketplace the length of time to build-out a project. It's usually a 3 to 5 year timeframe for a build-out of a project, dependent upon the type of and number of units that are involved. That market absorption consultant can also determine the effective tax rate, so that you know that the units that are sold within the CFD are done at a, at your policy-described, effective tax rate limit, typically 2%.
I'm going to turn to the next slide.
Slide 7 – Expanding the Financing Team, Continued 12:51
JAMES FABIAN: And again, to discuss a couple other key players that are required for CFD bond issuance. And on slide number seven, you have a trustee or a fiscal agent. And, you know, it's typically the same type of bank, a trustee is the term used when you have an indenture and a fiscal agent is used when you have a fiscal agent agreement. Their job is to hold, invest, and distribute bond proceeds. They also pay for the principal and interest to bond investors for the whole term of the bond issue. And they typically make those payments on March first and September first.
Also, we've talked about the need to have a special tax consultant for formation of a CFD, and Susan did a great job describing all the nuances and steps involved in creation of CFD. You also need a special tax consultant when you issue CFD bonds, because they produce tables that are required for the preliminary official statement to be able to describe the value of the property located within the CFD, the effective tax rate that I described previously. And then the percentage of the ownership by lien amount. And these are specific tables that they prepare for the preliminary official statement that provide the bond investor with detailed information about the special taxes that are levied.
Additionally, the CFD administrator typically is the special tax consultant. They provide the administration of the CFD for putting the lien onto the tax roll each year, to look at any monies that might be surplus that
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 4 CDIAC TRANSCRIPT November 17, 2020 could be used to call bonds. Sometimes this is done by external consultants, or sometimes it's done in- house. I would say, most of the time, it's done by an external consultant.
And then the last player that's brought in for CFD bond issuance is the developer’s counsel and consultants. They represent the developer, not you, the public agency. They provide the required legal opinions for the developer, the required certifications and representations describing the developer, their financial situation, and the specifics of the project that is being included within the CFD.
Let's go to the next slide to talk about bond issuance.
Slide 8 – Bond Issuance Process 15:28
JAMES FABIAN: We're going to walk through in more detail some of the documents that are described on this slide, but I just wanted to briefly talk about that the financing team produces legal and financing documents that are required for the bond issuance. And these are the preliminary official statement, the indenture or the fiscal agent agreement, the BPA or the bond purchase agreement, the CDA which is the continuing disclosure agreement, Brad will talk about those in more detail. The bond counsel also prepares the resolution that is adopted by the public agency to approve the CFD bond issuance. He’ll mention the bond parameters and the specifics of that resolution. One thing also that's included in that resolution now is the SB450 Good Faith Estimates that are a new requirement in the last two years that require estimating the cost of the financing and are typically attached to that resolution as an exhibit. Sometimes, they're actually included in the staff report or both.
Also, the issuer, the public agency approves all the financing documents that I mentioned previously. The issuer or the public agency then sells the bonds to the underwriter, and then the underwriter sells the bonds to the investors. And this typically takes two different calls between the public agency and the underwriter. You typically have a pre-pricing call in the afternoon, and then you have the order period for the bonds to be sold, and then you have a pricing wrap-up call in the morning and that's at the point in time where you award the bonds to the underwriter. You signed the bond purchase agreement, and typically that needs to be signed the same day that the bonds are sold by five o'clock, usually, that day. And bonds typically are sold, usually on a Tuesday, Wednesday, or Thursday. Seems like you try to avoid Mondays and Fridays. And then the issuer receives the proceeds in exchange for the bonds, usually two weeks later, when the bonds are closed. And then the issuer disperses those proceeds for payment of infrastructure.
As we've talked about the last time, you typically have an acquisition agreement that is entered into that describes what will be paid for from the CFD bond proceeds and what documentation is required to support that payment of bond proceeds. You also have a bond reserve fund that's funded. This is for the benefit of the bondholders. It's there, in case you have shortfall in debt service payments. In the last year of the bond issue, if it's still there, it's used to pay that last year of debt service. The cost of issuance fund is to pay for all the consultants that I mentioned previously, and this fund is typically used to pay all invoices at closing and then is typically closed out after six months. You also might have a capitalized interest fund if you need to fund some interest until you can get onto the tax roll and levy the special tax payments.
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The last things are annual special tax payments need to be levied and collected. And as we talked about, that special tax administrator helps the public agency put that onto the tax roll each year and then the bondholders get their semi-annual payments, as I mentioned, on 3/1, and 9/1.
I'm going to turn it over to Brad on the next slide.
Slide 9 – Bond Issuance Process, Continued 19:20
BRAD NEAL: So once all of the legal documents necessary for the bond issuance are substantially final, those documents are taken to the governing board of the issuer to be approved. The governing board takes action on a resolution of issuance authorizing the issuance of the bonds under certain parameters. The parameters include, there'll be a not-to-exceed par amount for the bond, so, a certain amount above which the bonds cannot be issued. A not-to-exceed true interest cost of the bonds, a maximum interest rate under which the bonds may be issued. And usually, a maximum, not-to-exceed underwriter's discount, and what that is, is what Jim just described. The underwriter’s discount is what the underwriter gets paid, it's the difference between the price that the issuer sells the bonds to the underwriter, and the price that the underwriter expects to sell the bonds to the public.
The resolution of issuance approves all of the substantially final documents for the bond issue, and authorizes certain officers of the issuer to approve changes to those documents, and to execute and deliver those documents when it's time to close the bond issue and issue the bonds. The documents that are approved by the resolution of issuance include the official statement, and it's actually the preliminary official statement at this stage in the bond issue. The preliminary official statement is the offering document that contains all of the material information with respect to the bond issue that potential investors are going to review when they decide whether or not to invest in the bonds. It's preliminary until the date that the bonds are priced, and that is the date that the bond purchase agreement is executed by the issuer and the underwriter. And the underwriter agrees to buy the bonds under the terms that are provided in the bond purchase agreement and then sell them to the public on the date of bond issue or closing.
Once the bond purchase agreement is executed, then all of the information that's in the bond purchase agreement, the pricing information with respect to the bonds - the principal amount, the interest, the redemption features, and all that information concerning the pricing of the bonds - all that information is put into the preliminary official statement and [it] is amended to include all that information and it then becomes the official statement with respect to the bonds.
The official statement also includes the form of the continuing disclosure agreement which is the contract where the issuer is obligating itself to provide ongoing continuing information concerning the community facilities district to bond investors. It's done at least annually and there are certain types of notice events where the issuer is obligated to immediately tell the marketplace if certain events occur, such as draws on the reserve fund. And, so, that is an ongoing obligation of the issuer to speak to the marketplace at least annually.
The bond indenture or fiscal agent agreement, that is the contract really to the bond investors. It is entered into by the CFD and the fiscal agent or trustee acting on behalf of the bond investors. It includes all of the information with respect to the bonds, any redemption features with respect to the bonds, whether they can be redeemed optionally, or a mandatory redemption from things such as
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 6 CDIAC TRANSCRIPT November 17, 2020 property owners prepaying their taxes. And it also contains the covenants that the CFD obligates itself to do certain things and to not do certain things. Such as, it obligates itself to commence judicial foreclosure if property owners above a certain threshold are delinquent in the payment of special taxes by a certain date. Then the CFD tells bond investors that they will initiate foreclosure proceedings by that date, oftentimes it's October 1 following a fiscal year if a property owner is delinquent in more than $5,000 of special taxes, and there's less than 95% of the special tax levy collected, then the CFD will obligate itself to begin foreclosure proceedings.
Slide 10 – Upfront Considerations, Bond Sizing 24:45
SUSAN GOODWIN: So I'm going to talk about some of the upfront considerations when you're getting ready to talk about a bond issue. One of the first things is to figure out the size of the initial bond issue, and there's a number of things that enter into that determination.
First question, “How much is needed now?” If you ask the developer this question, the answer is usually, “As much as I can possibly get.” But this is one of the areas, we talked a little bit on the last webinar about things that have changed pre the Great Recession and then post the Great Recession, and this is one of the things that has changed considerably. Before the recession, we used to have master plan communities that would have 2000 acres and need infrastructure that would be built in the future or have development that would be built in the future. Most of the infrastructure, a lot of it is needed upfront, but the payment for that infrastructure would be ultimately coming from development that may not occur for 5, 10, years or longer. What has changed since the recession is that investors don't like to buy bonds anymore that are secured and sized based on development that is any more than 3 to 5 years out.
So, we're seeing a lot more of these infrastructure financing programs broken up into more bite sized pieces. Sometimes, it's just sizing it based on the first phase. Sometimes, it's actually creating separate improvement areas, which we talked a little bit about last time, and it's getting into the weeds a little bit, but improvement areas separate geographic areas within a CFD that secure bonds only by that geographic area. So, we'll have a CFD, let's say, with three improvement areas and it's only the land within that improvement area that sells the bonds sold for that improvement area. We're seeing a lot more use of improvement areas since the recession.
The second sub bullet there, the 3-year expectation, so this has always been in place and this is federal tax law. What this means, is that you have to have the expectation, when bonds are sold, to spend those proceeds within three years of the bond sale. And, again, it's an expectation, when the recession hit, I can assure you, there are some bond proceeds that we have that were not used within three years, because the development stopped. But you do need to have that expectation, and this is especially important. Again, we discussed a little bit last time about the funding of impact fees or really, as Brad pointed out, it's the funding of infrastructure that would have otherwise been funded by impact fees. And you want to make sure that if you're, and we've touched on this, but, I want to stress again, you want to make sure that if you're funding items, or if you're instead of paying road fees and sewer fees, the developer is going to use Mello-Roos proceeds to fund the road and sewer improvements. You want to make sure that those improvements are programmed within three years of that bond sale, in the, in the capital improvement program for the fee program.
Another thing that kind-of goes into sizing that upfront debt is, the tax burden on undeveloped property. This is something that someone should be modeling, either the special tax consultant that works
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 7 CDIAC TRANSCRIPT November 17, 2020 for you, the public agency, or the developer’s consultant should be looking to see, okay, if we sell 20 million upfront, and development is expected to occur let's say 50 units per year, what will the burden be on the undeveloped property during that that build-out period? Because we're going to talk at the bottom of this slide about, there is a way to limit the upfront for a period of time, but once it kicks in, those bondholders have to be paid every six months. Their interest and principal payments, and so somebody is going to be making that payment. And we'll talk more about that.
So, there's how much is needed and then how much can actually be supported. The value-to-lien ratio we've talked about, that will limit the size of the bonds. But a couple of other things that come into it is what are the special tax revenues available to fund the debt? The value-to-lien ratio is generally only a constraint, most of the time with just the first bond issue sometimes with the first couple of bond issues, but as development occurs within the CFD that value is shooting up and so the value-to-lien isn't usually the constraint. The ultimate constraint is how much can be collected in special taxes. And so, when we're involved in sizing a bond issue, we will calculate the total special tax revenues that can be generated from the land uses within either the CFD or the improvement area. And we'll provide that projection to the bond underwriter and they will use that to run the bond sizing figures. So that's looked at right from the start. And then you take those revenues that are available, and you have to make sure that they support not only the debt service, but also provide the required debt service coverage. Again, we talked about this a little bit on the last webinar. That is generally 110% coverage, and that means that the 100% is what you actually need for debt service and then there's an additional 10% available on top of that. And that, again, is to cover any delinquencies that occur. If 5% of the special tax payments for whatever reason, were not made, it would allow for an increase on other people in the district up to the maximum tax, and so, that buffer is the debt service coverage.
Then the question of the timing of the bond issue, relative to the timing, really not to the first tax levy per se, but to the receipts of that tax levy. We mentioned these are semi-annual payments, March and September is the most typical payment dates, but they're six months apart whenever those payment dates are. Tax revenues, as most of probably most people tuned in know, the first installments due December 10th the second installment – well is delinquent December 10th, it's delinquent April 10th for the second installment. So, the team needs to look and make sure that based on when the taxes are going to be put on the tax roll, and those tax revenues are received, that there will be money in the account to pay the debt service payments. And obviously upfront, when bonds are sold, there have been no taxes levied. So, for most bond issues there needs to be prepaid interest included that come out of the bond proceeds, that's capitalized interest. And that can be by law, you can have up to 24 months of capitalized interest included in the bond issue. And so that needs to be considered as well because whatever goes to pay capitalized interest is less money available to pay for proceeds, because that comes right out of the bond issue. With that, I’m going to turn it back to Jim to talk about some other upfront considerations.
Slide 11 – Upfront Considerations, Credit Quality/Market Acceptance 32:30
JAMES FABIAN: Thanks, Susan. So, as the public agency you're in the process of issuing CFD bonds, you have your team to help you put together all the required documentation. And so, the things to think about, like with the underpinnings of the CFD and the credit worthiness, so to speak, of the CFD are the following:
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The first is the developer’s financial strength and ability to perform. It does really help to have a seasoned developer that has a proven track record, both in California or nationally of delivering projects that are successful. You can think of, like, the Lennars of the world and others that have a proven track record. The Irvine Company, a lot of others out there, but those just come to mind in terms of having that good name recognition that bond investors know and feel comfortable when they're involved in a project, that it's going to happen. The other thing is the diversification of the ownership. And from the standpoint of bond investors, the more diversification you have, the better. You know, typically, like if you have all the eggs in one basket, it's not such a great thing. And if you have diversification where you have, like, especially early on, like two or three master developers or merchant builders in there, it helps provide certainty that, you know, not all will go bankrupt or have problems. Diversification helps you deal with any fiscal stress that might happen. So, diversification is viewed as a favorable credit metrics from the standpoint of a CFD. The status of development within the project, as Susan mentioned, 15 years ago, 10 years ago, it wasn't uncommon to do a CFD that was raw land, that had a 10 year build-out and you issued bonds upfront. That has changed a lot. There's much more prevalence to have a CFD that have a significant development underway. You know what that threshold is to get the best interest rate I think varies but you know it's in that 30% to 50% range I think is common for a CFD in terms of the status of the development within the project to see a lot there and their momentum for a project before CFD bonds are sold. Land use types also is a key factor. Whether you have residential, commercial, industrial, or a mix of the three, is an important factor. We've talked a lot about the value-to-lien, that the minimum is 3:1, but, you know, the higher the value-to-lien, a 10:1, all things being equal will price better and have a lower interest rate than a 3:1 CFD. Prevailing market conditions and interest rate. It has been a great time to sell CFD bonds in 2020. Interest rates have been at historic lows. Other than the market disruption we had in March because of COVID- 19, it's been a very good overall interest rate environment, which then translates into a good overall interest rate environment for nonrated CFD bond issues. Also, another factor is the demand for land-secured debt. Again, these are nonrated bonds secured by land and typically investors who buy this type of security, they want a little bit more yield. It's not a general obligation bond, it's not a AA+ lease revenue bond for, know, the city of Sunnyvale - it’s a nonrated land- secured financing and it has a little bit higher yield than a rated transaction. And you have investors who are seeking that higher yield for their individual portfolios or for their fund portfolios. Then, you know, the overall perception of the real estate market also has bearing on the interest rate that CFDs bonds have. I mean, housing is hot right now. It's almost counter-intuitive when you think about how COVID-19 is running rampant in California and the country, yet you know you have housing demand at skyrocketing rates. And, you have, you know, just good, good demand everywhere in California. I mean, Sacramento area, the Bay Area, Southern California, and you do kind of scratch your head and think, well, is this going to last, is it sustainable with the COVID-19? But, you know, right now, there's a great demand for housing, and I think that's a good factor for CFD bond issuance. So with that, I'm going to turn it back over to Brad.
Slide 12 – Disclosure to Bond Market, Preliminary Official Statement (“POS”) 38:18
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BRAD NEAL: You can't shelter in place without shelter, Jim.
JAMES FABIAN: That's true.
BRAD NEAL: Municipal bonds are federal securities and investors have rights under federal securities laws. They are not subject to the registration requirements for stocks, but they are subject to the federal anti-fraud laws. The primary offering document that provides all of the information to investors, as we've said before, it is a preliminary official statement, or POS, that becomes an official statement once the bonds are priced. And the official statement must contain all of the material facts with respect to the bond issue and cannot contain any omissions of material facts or misstatements which make the facts, stated in the official statement, in light of the circumstances in which they were made, not misleading. So, what is material? It's intentionally a subjective and squishy word, but it is the material that would be important to an ordinary investor in making a decision on whether or not to invest in the bonds. You can go to the next slide, Susan.
Slide 13 – Disclosure to Bond Market, Continued 39:44
BRAD NEAL: So, the official statement is all the material facts, with respect to the bonds. So, how do we organize those facts in a cohesive manner to make it easy for investors to understand the bond issue and find the information that they find to be important?
So, the first section of an official statement after the introductory information is provided, is a description of the bonds. So, the authority for the issuances describes all of the information concerning the formation of the community facilities district, the resolutions of intention and formation that were described in the previous webinar, and the ordinance authorizing the levy of the special tax, and the, notice of the special tax lien that is recorded on the property is all described. The terms of the bonds are all described, when are bond owners is being paid and what redemption provisions are there? When can an issuer choose to optionally redeem the bonds, are they redeemable after year 7, 8, 9, 10? Is there any premium that is paid to bondholders if the bonds are redeemed? Do they get 103% of the principal amount, or is it redeemed with no redemption premium at all? It also describes the mandatory redemption features when a property owner prepays their special taxes. There is the debt service schedule that is provided showing all the principal, interest and debt service that is annually paid on the bonds. And a sources and uses a chart that shows what the bond money is going to be used for - funding the project, the reserve fund, admin and cost of issuance.
Then there's also a summary of the infrastructure to be financed. So, what is the bond proceeds going to be used for? Is it funding schools, roads, water and sewer facilities, that kind of stuff, that's all described in this section, as well.
The security for the bonds section describes the pledge of the special taxes, how it's going to be levied, what types of things the special tax going to be used for and what the priority is. So, administration, for example, would be the first priority so that the CFD can function. And then the principal and interest funding reserve funds. All that kind of stuff is described. The rate and method of apportionment is described, how the special tax will be levied, in other words. The reserve fund is described, that's the fund that is dedicated to the repayment of the bonds in the event that the amount of special taxes that are collected are insufficient to pay the debt service on the bonds. As Jim described, the value-to-lien ratios are described there. There'll be tables and the official statement which show the value-to-lien for the CFD overall, and then broken down by property
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 10 CDIAC TRANSCRIPT November 17, 2020 category. So, a value-to-lien by homes owned by individual homeowners, a value-to-lien by the homes that are currently under development by the developer, and value-to-lien of the property that remains unimproved. The security section also describes the covenants that the CFD enters into for the protection of the property owners, and this includes the foreclosure provision. Like I said before, a typical one would be that the CFD obligates itself to initiate judicial foreclosure proceedings on any properties which are delinquent in the payment of special taxes exceeding $5000 by October 1 following the fiscal year in which those delinquencies are made if less than 95% of the special tax levy is collected. It will also describe the additional bonds test, which is, if the indenture authorizes additional bonds to be issued for new money purposes, for purposes other than refunding the current bonds that are outstanding, bond owners want to know that their security isn't going to get “watered down” there. The value-to-lien that is shown to them in the official statement is going to be maintained and their debt service coverage is going to be maintained. So, the additional bonds tests will describe the parameters under which future bonds may be issued.
Slide 14: Disclosure to Bond Market, Continued 45:03
BRAD NEAL: So, the next section of the official statement describes the CFD itself and the developer and the developer's development plan and status. So, it describes: What is the developer building? Who is the developer? What kind of experience do they have? What other projects in the area have they done? And what is the current status of what they're building? How many homes have been conveyed to individual homeowners? How many units do they have currently under development? And when [do] they expect to be finished with the project, when is the build-out date?
And it will also describe their plan of finance. So, how much money have they currently generated from home sales? How much costs do they have remaining to be incurred in order to complete the development? Is there any additional infrastructure that the developer needs to complete in order to get to build-out? All that information is described in the Development Plan and Status section of the official statement.
It'll also describe the unique market and project risks. So, the special risk factors, with respect to the bond issue. For example, with COVID-19, this is a new risk factor that is in pretty much every official statement at this point, and are there risks to the developer with respect to completing home sales from COVID? Or is COVID making the materials that the developer has to obtain in order to complete the project more expensive? Is it going to, if it gets worse, or in the future, make it more difficult for the developer to complete its development in the timely manner that's been described in the development plan? All this kind of stuff is disclosed now in a COVID-19 risk factor. Are there unique geologic or seismic or topographic risks related to the project? Is it in a wildfire zone? Are there unique risks to wildfires with respect to this project? Are there unique risks with respect to earthquake or liquefaction in the event of an earthquake? Is it in a floodplain zone? All these types of things are described in the Special Risk Factors section.
The appraisal would be attached to the official statement and so would a market absorption study if a market absorption study is done. And, like Jim said, the value of a market absorption study is really for the larger build-out horizons when a project is going to take longer. It serves as a check on what the developer is telling the issuer regarding their plans. Is their build-out plan reasonable? Are they going to be able to sell and convey to individual homeowners the number of units per year that they are projecting in the official statement?
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 11 CDIAC TRANSCRIPT November 17, 2020
The rate and method of apportionment of special tax is also attached to the official statement. That's the manner and how the special tax is levied, as Susan described in the in the last webinar.
And the continuing disclosure agreements. It's mandatory that the issuer enter into a continuing disclosure agreement to provide certain information concerning the community facilities district on an ongoing basis. And if the project isn't very near build-out, it's usually required that the developer itself enter into a continuing disclosure agreement to provide the market with updates on its development and the project status until it gets closer to substantial build-out of the project.
And then there's a summary of key legal documents attached to the official statement. That's a summary of the provisions of the indenture that weren’t already described in the section of the official statement describing the bonds.
Slide 15: Securities Law Considerations 49:37 BRAD NEAL: So, as I said before, the CFD bonds are municipal securities and they are subject to Rule 10b-5 of the 1934 Act and it requires all material information with respect to the CFD to be disclosed. And it applies to all material, municipal bond issues. It also applies to all of the continuing disclosure statements to the marketplace. So, after the bonds have been issued and annually, at least annually, the issuer is providing the marketplace with the continuing disclosure reports that are uploaded to EMMA, to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website, which everyone in the industry just refers to as EMMA. Each time that the issuer is providing that continuing disclosure report to the marketplace, they are required to comply with federal securities laws. All material information, with respect to the statements that are being made must be included in that continuing disclosure report.
Oh, one more thing on that last slide, Susan, sorry.
Anytime an issuer is speaking to the market, it can also mean statements outside of the official statement and the continuing disclosure reports. There was a case in Harrisburg where a mayor at a State of the City luncheon, told all the attendees how wonderful the city was doing financially. When, in fact, they were well aware that the city was in very serious financial trouble. And the court in the case ruled that because the City had not been complying with its continuing disclosure obligations and hadn't spoken to the marketplace in two years that a reasonable investor would be looking for that information elsewhere, including the State of the City address by the mayor. So, it's just a warning to take the continuing disclosure obligations very seriously and to be circumspect when making statements in any place, including your website, including these kinds of speaking engagements, very seriously. And the negligence standard applies, this means that all material facts that the issuer is aware of need to be disclosed, but also that the issuer is held to the standards, all facts you knew, or should have known through reasonable diligence. So, you can't be ignorant of facts and get away with it, you need to do proper diligence.
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Slide 16 – Securities Law Considerations, Continued 52:48
BRAD NEAL: So, the official statement is the issuer’s offering document to investors. So, the issuer engages with a financial advisor, special tax consultant, bond counsel and the disclosure counsel. And all these people help the issuer in the crafting the official statement and publishing it to EMMA for investors. But at the end of the day, the official statement is the issuer's offering document. They're the ones that are responsible for making sure that all the material facts are included within the official statement.
And so how does an issuer do this? Well, they need to have in place policies and procedures to ensure that all the staff in all the departments are empowered to gain material information, ask the right questions, raise material issues. For example, a city oftentimes will have their financing team on the distribution lists with respect to a CFD. But they may not know to ask their public works people or people in other departments, “Do you know of any information concerning this property that we should be disclosing? Are there, you know, endangered animals on the property? Are there hazardous chemicals? Are you aware of anything?” And, not often, but sometimes the answer is yes. And people that aren't on the financing team would not have known about that information, had they not been trained, had policies and procedures in place to ask the right questions to the right people.
Before the, preliminary official statement is officially published on EMMA, there is a series of meetings and conference calls, where everyone on the financing team has the opportunity to ask questions or provide additional information in order to finalize the preliminary official statement. And so, the issuer can feel comfortable, that we've asked the right questions, and we've got all of the material information in the preliminary official statement and we're ready to print.
And failure to do so, failure to disclose all of the material facts can get people into trouble. It’s led to fines against bond issuers, charges against individual officials within the municipality along with the issuer and fines against individuals, where the SEC has gone further in saying that the issuer is prohibited from paying the fine against the individual who worked in the municipality - that they wanted the individuals to be forced to pay that fine themselves. And officials have been barred, based on their conduct from being involved in future municipal finance offerings.
Slide 17 – Ongoing CFD Administration 56:05
SUSAN GOODWIN: Okay, so what I wanted to talk about now is now - we've walked you through CFD formation on the last webinar and issuance of bonds. Now you're in the position of having a district in place, having bonds sold with investors who expect to receive their payments, and so now, the ongoing administration of the CFD starts. And we're going to talk at the end about options to do the administration in-house or to farm it out to consultants who do that. But let's talk first about what the ongoing administration entails.
Each year now, unlike an assessment district - with a traditional assessment district for infrastructure there is a fixed lien assessment on the property and that fixed lien assessment is just amortized every year. Same payments generally every year. A Mello-Roos district, however, is a special tax and that special tax is actually set each year, meaning it can vary. We talked last time that it shouldn't vary on homeowners, it should vary on how homeowners as little as possible, but it is set each year. And
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 13 CDIAC TRANSCRIPT November 17, 2020 some of the items that need to be looked at and some of the things that lead to changes as to what's assigned to each parcel, are the things that need to be done as part of the administration.
So, one of the first things is figuring out what taxable parcels you have in your CFD each year. And so initially when you form the CFD, you might have 4 to 10 large parcels created by a large lot parcel map. Those parcels then will start subdividing. Particularly if it's a residential project, you'll have small lot final maps recorded. And every year, the administrator needs to determine what are the new taxable parcels that will be valid for the fiscal year for which the tax is being levied. And then the administrator needs to look at the status of each of those parcels and determine which special tax category it's in.
So, first of all, we, we talked last time about - there's developed property and undeveloped property. There can be things in-between but those are the two big categories. And developed property might be defined as parcels that have building permits issued by a certain cutoff date in the prior fiscal year, usually June 30th is what we see the most in in current CFDs.
So that means, as of July 1st of a fiscal year, the administrator needs to determine how many building permits have been issued by June 30th, the prior day, in the whole prior fiscal year? How many new permits are there? And if there are multiple special tax categories, let's say they're based on the size of the home or the size of the lot, the administrator needs to determine, okay, if it's based on the size of the home, let's look at the building permits and see what the square footage is for each of those units for which permits were issued, and assign those parcels to the special tax category that's in the rate method of apportionment.
So, that's determining who is going pay in what category they're in, and then the second bullet here is: How much needs to be collected? And that is what we generally termed the special tax requirement. That will include the debt service that's going to be paid in the upcoming calendar year. Again, there's usually March and September bond payments, so they fall within full calendar year. So, we need to look at what's going to be in the next March 1st and the next September 1st. What’s due, principal and interest. We coordinate with our public agency clients and find out what are the estimated administrative expenses. So, it's the cost of the CFD administrator, and then it's the fiscal agent, and then it's the county fee usually charges a fee to collect the special taxes. Anybody else if there's a consultant that's helping with the acquisition of facilities and reviewing invoices, and that type of thing, to make sure the facilities get paid, then they should be included in the administrative expenses. If they are a pay-as-you-go facility - so, we might have bonds sold and pay debt service, and at the same time, be collecting special tax revenues to start paying for additional facilities, especially the design and engineering of new facilities that are coming up in future bond sales, then that pay-as-you-go cost needs to be factored in as well. If there are services that are going to be funded through the CFD we need to find out, and again, we coordinate with our public agency clients each year and say okay what what's going to be needed to pay for landscape maintenance or public safety or whatever is included in the CFD and that also needs to be factored in.
Then the RMA needs to be applied to figure out the special tax for each parcel. So, we have the parcels and their categories, we have what needs to be paid, and then pursuant to the steps in the RMA, we figure out who pays in what order until the full special tax requirement is covered.
Slide 18 – Ongoing CFD Administration, Continued 1:01:39
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SUSAN GOODWIN: The special taxes in a Mello-Roos district are usually the special tax ordinance that's adopted when the CFD is formed, usually grants - it's an evergreen ordinance, basically, which grants the ability to levy the tax in all future fiscal years without going back to the legislative body. So, this is a really nice public agency. Clients usually love this aspect of Mello-Roos, unlike a landscape and lighting district, for instance, the assessment districts that are available for services were those - there's an engineer's report, brought back to the council or the board every year, that's not required in Mello-Roos. So, that's a good thing.
Usually we'll calculate the special taxes, well, we provide them to staff for review and then we submit them to the county auditor. So, we need to know, or whoever's doing the administration, needs to know the specific requirements of your county auditor. They're specific, each auditor has things that are a little bit different. They'll have a certain format, they'll have a certain deadline, they'll have a certain fee that needs to be paid, and so you want to make sure you know those in advance, so you don't run into obstacles as you're trying to submit the levy. And then, all the auditor wants to know is what are the parcels and how much is the levy? So, there's an electronic submittal, a parcel-by-parcel breakdown in the auditor’s format and then the special tax that goes along with each of those parcels.
Slide 19 – Ongoing CFD Administration, Continued 1:03:24
SUSAN GOODWIN: So levying the taxes, the most important part [is] getting it on the roll, but then another key component of the CFD administration is delinquency management. The delinquency management and the accelerated foreclosure provisions and Mello-Roos is what made Mello-Roos perform so well during the Great Recession. There was only about a half a percent of Mello-Roos bonds that actually went into full default, and the bond holders were either not paid or they were paid pennies on the dollar. The reason why Mello-Roos did so well, two things.
One is, the Mello-Roos special tax is senior to any first trust deeds on the property. So, what residential had some major challenges during the recession. We all were aware of the foreclosures that were going on. But the Mello-Roos Districts stepped right in front of the banks and credit unions that held the loan, the mortgages on those properties. So, if the homeowner lost their home in foreclosure, those banks and credit unions stepped in and started making the special tax payments. So, that was one of the key components that made Mello-Roos do so well.
The other is the accelerated foreclosure provision, unlike property taxes that take five years to pursue a foreclosure on property taxes. Brad talked about the foreclosure provisions in an official statement, and basically within the year, it could be within the week after a delinquency that you start foreclosure, but generally, within the year you commit to start foreclosure on property. You as a public agency, are committing to the investors that if those payments are not made, you are going to start foreclosure within generally a year. So, in order to know whether you need to – foreclosure, by the way, is very rare in a Mello-Roos district, it usually never gets that far. But in order to know whether you're even in a position where there are delinquencies, someone needs to be monitoring those delinquencies on an annual basis.
As it says here, even if your counties that teeter plan county. For those of you who might not know what that is, in a teeter plan county, if the Mello-Roos district is covered under the teeter plan then the county, if you levy a million dollars the county just pays you as, let's say your city, they just pay you the million dollars. Even if they've only collected $980,000, they're paying you a million and then they're going to pursue that delinquency, the county is, and they're going to keep the penalties and interest when they
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 15 CDIAC TRANSCRIPT November 17, 2020 collect that delinquency. So that means from your perspective as a city or a special district, you're getting all your money and it could be tempting to just ignore the delinquencies. However, you can be thrown off the teeter plan if you don't pursue your delinquencies. And so, someone needs to be tracking them, and someone needs to be following up on the delinquencies even if you are on a teeter plan county.
There are delinquency thresholds, Brad talked about $5,000 is a common one, or two missed payments on special taxes. That way with the threshold, you're not forced to go after a homeowner who misses one payment, sometimes even two payments. No legislative body likes to be in that position to have to foreclose on homeowners, but it reaches a certain threshold where the investors want to know you're going after them.
The first step though is not going straight to foreclosure. Generally, there's notices to delinquent owners. Our office generally provides two notices, we send letters to those owners. The first one is very friendly, “Hey, just a reminder, you're in this Mello-Roos district, there is an accelerated foreclosure provision in that Mello-Roos District, so we wanted to remind you to get your special taxes paid.” The second one is a little bit less friendly. We start with a date as to if the payment is not received by such and such a date then foreclosure is going to have to commence. Then at that point, if they're not making payments, the delinquent taxes have to be stripped from the tax roll, if you're going to pursue foreclosure. Then there's a new player on the team, who you never want to have to have on the team, and that's the foreclosure counsel. There are legal counsels who specialize in this type of foreclosure action, and so then they would get involved.
Another thing that needs to be done with admin is the arbitrage rebate calculations. For those of you who aren't familiar with what positive arbitrage is, it means that if, and this is fairly rare especially in today's interest rate markets, but if you are able to earn from bond proceeds deposited in an account, if you were able to earn an interest rate that's higher than the bond rate. That differential needs to be refunded to the federal government. And the federal government requires that that rebate is paid to them once every five years. But you don't want to be doing the arbitrage rebate calculation once every five years and find out that you had five years of positive arbitrage and now you owe hundreds of thousands of dollars to the federal government. You want someone to be looking that on looking at that on an annual basis so you can be building that into the tax levy and making sure you have money set aside to pay that rebate.
Slide 20 – Ongoing CFD Administration, Continued 1:09:11
SUSAN GOODWIN: Another thing is the disclosure of the special tax to homebuyers. This has gotten much, much, better over the years with Mello-Roos. There is now a form that's specified in the law that it's a requirement down to the font size and the language it's in there. What really happens – and that disclosure, by the way, is supposed to occur in the sales office, it is supposed to occur prior to a home buying decision having been made, before they put a deposit down on the property. The reality is, sometimes that happens and sometimes it doesn't, but there is a Department of Real Estate form that is part of the sale of any property now, resale or initial sale. But the initial builders for that first sale, they are responsible, and the law says that they're responsible for damages if that special tax is not disclosed to a buyer.
Slide 21 – Ongoing CFD Administration, Continued 1:10:13
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 16 CDIAC TRANSCRIPT November 17, 2020
SUSAN GOODWIN: So, this is the slide that keeps growing, and in fact I realized last night it should have been even longer now. Every time something goes wrong in the market, this slide grows because the disclosure just keeps growing, and growing, and growing. There is federal disclosure, there is state disclosure, there's now local disclosure. So, if you're administering this in-house – if you're administering your CFDs in-house, you need to make sure there's someone constantly paying attention to new bills that are passed, because in the last several years there's something new every year. I'm going to blow through these, and I’ll mention the one that I realized last night was saved over, I think.
So first of all, the federal disclosure, this is the Securities and Exchange Commission. This is a critical, critical disclosure. Brad mentioned EMMA, the Electronic Municipal Market Access system, and that is where the federal disclosure reports are filed and any notices of significant events are posted.
There's two obligated parties. One is the issuer, so you, as the city, county, special district, and then the developer(s) or builder(s). It's basically – it set forth who is an obligated person when it comes to the developer, and how long are they obligated. It might be related to how many units they've built. It might be more typically related to the percentage of the total special tax levy.
And then the continuing disclosure agreement talks about what has to be disclosed in the annual report. For a developer, it's generally things like: What have you built? Has anything changed in your financial situation? Have you sold to builders, if you were a developer? That type of thing. For the agency it's: What have you collected? What have you spent the money on?
And then, the notices of listed events. Those are the things that we, as administrator, need to report or post on EMMA. It’s things like bankruptcy, if the developer filed bankruptcy, or if there was a lawsuit that was going to slow down development in the CFD, we need to post that. And all this is posted to the secondary market, people who are looking to buy these bonds, can look on EMMA, and see, “Oh, okay, wait a minute, that CFD is run into a snag.” All of this was put in place [with] 15c2-12 because there was not enough disclosure available to the secondary market to find out about the status of these CFDs.
On the state level, our friends at CDIAC have a variety of items that need to be reported to them. They make it very simple, and I'm not just saying that they're listening, but they make it very simple by providing very straightforward forms to be filled out. So, there's a Yearly Fiscal Status Report that's due by October 30th for each CFD, there's an Annual Debt Transparency Report that's due by January 31st, and then there's a significant event report, 10-day reporting. Forms are provided for all of those. So, again, if you're doing this in-house, and you don't have a consultant doing this for you, go ahead and look on CDIAC’s website, and you'll find the forms for those, and you'll see they make it nice and easy to fill those out.
So then, we get into the bills that started coming. So, AB 2109 required that there's reporting related to this special tax and bonds in your financial transaction report, and that's provided to the State Controller's Office every year, and that's something that the agency's responsible for doing.
SB 165, and there was a question I know from someone from the last webinar about SB 165, this is one to pay attention to. This came out of a feeling that there wasn't enough accountability about the special taxes and the bonds, thus, the name, Special Tax, and Bond Accountability Act. There is now required that a report is filed each year with the city clerk or the clerk of the board that talks about the special taxes and bond proceeds that were collected and expended, and how they were expended and the status of projects – the authorized projects. Generally, if you have an outside consultant doing this, we produce
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 17 CDIAC TRANSCRIPT November 17, 2020 annual administration reports that we submit to our clients. Generally, everything would be in the administration report. So that admin report could be filed with the clerk, and that will check the box for SB 165.
A new one this year is AB 1483. And this, I will mention, the one that's missing here, which was AB 1666, and I'll mention, tie them together because they both require postings on your public agency website. 1483 came from the building industry feeling like they could not get their hands on a summary of what the exactions and fees were and affordable housing requirements from particular agencies. So now, agencies are required to post on their website a schedule of fees, exactions which includes special taxes and assessments, and affordability requirements on new housing developments. AB 1666 also requires that certain reports are posted on your website. The report, the AB 2109, the State Controller's Office report, that has to be posted, and then basically the admin report would do the job for the other things need to be available through your website. There's another report. If a homeowner requested a report all about the CFD budget, we've never had that happen and we administer hundreds of CFDs. But there is another report that at the request of a homeowner or taxpayer in the CFD, you would also have to post that on your website.
Slide 22 – Other Administrative Items 1:16:21
Some other thing, let me just check time. Okay, so I'm going to wrap this up pretty quickly. Some other things are reviewing the bank statements. This means looking at the fiscal agent statements and trustee statements. They have a separate statement for each fund. We review those on behalf of our clients, and I'll suffice to say, someone should be reviewing them.
Prepayment calculations. On infrastructure CFDs there's usually an option to prepay all or a portion of the special tax. Someone needs to be doing those calculations when they're requested.
Every time you form a CFD and when you annex property into a CFD, somebody needs to be recording the special tax lien initially, and then if they prepay their tax someone needs to record a release of that special tax lien.
The acquisition of facilities, that's the whole - bond proceeds are sitting in an account, a developer comes forward and says, “I finished this road.” Someone needs to be either in-house or hired out, reviewing the invoices, reviewing the checks and doing an inspection of the facility before requesting money from the fiscal agent to pay for that facility.
And then answering questions from homeowners, appraisers, realtors. Usually, when you put in place a special tax, well, always, when you place a special tax on the tax roll, the treasurer tax collector's office is going to want to know: What is the phone number and who or which agency is the contact? And, for the clients that we administer, and I know, our competitors who also administer CFDs do this as well, it's their phone number and our company name. So, we field hundreds of calls a year from homeowners and appraisers, anyone who wants to know about the CFD. So that's another thing our clients like about farming it out.
Slide 23 – Consultants or Staff? 1:18:14
SUSAN GOODWIN: So, the last question, quickly is: Do you do it in-house or do you farm it out? Generally, that comes down to these five things. Four things, really. One is the staff's experience with CFDs, as we've
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 18 CDIAC TRANSCRIPT November 17, 2020 tried to encapsulate very quickly in the short time, there's a lot to it and there's a lot to the administration and the disclosure keeps growing. So, you want to make sure that staff has experience and the time if they're going to be administering it in-house. So, the existing workload, a lot of our clients couldn't possibly do it because they're working on skeletal staff as it is. The number and complexity of your CFDs - if you only have one or two CFDs, it probably doesn't make sense to have staff learn everything and keep track of everything going on with CFDs. The clients I have, where I form CFDs and they do administer in- house, they generally have 10 or more CFDs, sometimes 20 or more CFDs, and so, they have a staff that actually does it in-house. But I would say probably 90 to 95% of our CFDs we actually administer as well as form.
And with that, I'm going to turn it back to Robert, so we have some minutes for the initial Q&A.
Slide 24 – Q&A 1:19:25
ROBERT BERRY: Thank you, Susan. There's a few questions that have come in, so l let’s see if we can spend just a few minutes and get some of these answered. A question regarding teeter plans, teeter plan counties, and CFDs in those counties. You mentioned it is important to monitor delinquencies. Is it the case that the whole district can potentially be taken out of the teeter plan, or kicked out? Or is it the case that sometimes it's just the delinquent parcels, the recurrent delinquent parcels that are kicked out?
SUSAN GOODWIN: My experience has been, it's all or nothing. They're either teetering the CFD or they're not teetering the CFD, so it's not a parcel-by-parcel thing.
ROBERT BERRY: Okay. Jim, I mentioned, CDIAC collects a great deal of information on Mello-Roos debt. Occasionally, we do get reports of bond anticipation notes [BAN] being issued by CFDs. What are the conditions under which a CFD would issue a BAN?
JAMES FABIAN: Yeah, personally I have not had an experience of issuing BAN for a CFD. So, I don't have any personal experience to be able to share with the audience today, regarding that. I mean, usually a BAN is done because you're not ready to go final on the bond issue, due to, maybe you're not quite ready from a development perspective. I would be interested to hear, Brad’s opinion about a BAN for a CFD, if he's ever done one.
BRAD NEAL: Yeah. No. That would be a new one for me and it's hard to even conceptualize the fact circumstances where where such an instrument would be considered because, you know, with the BAN, you'd have the same issue regarding the source of repayment for the BAN that you, that you would have with a CFD issuing a bond secured by the raw unimproved land. So yeah, I've never heard of that.
ROBERT BERRY: Fair enough. Susan, we have a question relative to the combination of service CFDs and infrastructure CFDs into one district. Are their rules of thumb or conditions under which it would - instead of having two separate CFDs, is one service and one infrastructure that you would combine those into one?
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SUSAN GOODWIN: Yeah, it's almost always easier if this service obligation is specific to that project that's also funding infrastructure, it's always easier to have it in one CFD. We have two separate special taxes in one community facilities districts, so we have a facility special tax, which is a defined term and a defined amount. And by the way, the facility's special tax has to have a sunset date and can only escalate a maximum of 2% per year. And then we have a services special tax that is a separate identified amount, separate defined term, does not have to have a term, usually goes in perpetuity, and can have whatever escalator the public agency deems appropriate.
The times where we see them separate is when, let's say we have a project that's funding infrastructure, and that project is going to be the kernel for a growing services CFD where other properties are going to be annexing in. Then, sometimes, we will see that project included in two separate CFDs. And they're just part of what's going to be a larger CFD for services over time. That's a good reason to separate them from the beginning.
ROBERT BERRY: We have a question here from our good friend Sam, you know Sam. He wants to know about the status of the issue of a parcel becoming exempt from the special tax under the welfare exemption for affordable housing units.
SUSAN GOODWIN: So, I am very pleased to say that that was a big concern this past year for the industry. And in a nutshell, based on time constraints, I'll just tell everyone listening that, I think, that was a problem with the legislation as written. Because it's always been that with public property it's exempt unless a public agency comes in and takes over taxable property and then to protect the bondholders, we still have the legal authority to tax that public property. Well, what happened was there was an exemption provided - because of the push to provide affordable housing statewide, there was an exemption provided for affordable welfare exemption housing. Without that backstop, that if that ended up on property that the investors had relied upon as taxable, we could still tax it. That initially wasn't in there, and I'm pleased to say we had some cleanup legislation presented and approved, and that is no longer an issue going forward.
ROBERT BERRY: Okay, maybe you could just quickly touch on Susan, there's been several questions relative to, they came in at registration, especially that are pointed at the use of infrastructure financing districts [IFD] and Mello-Roos districts in conjunction with each other. Quickly, can you address what the benefits of that might be in general, and maybe what some of the pitfalls, if any?
SUSAN GOODWIN: Sure, so now, the IFD, now an EIFD and what an infrastructure financing district does is it replaces redevelopment. It's forming a specific geographic area and taking the tax increment or a portion of the tax increment, I should say, from that area, and using it to pay for authorized improvements, so it is the backfill for redevelopment. There aren't many and, in fact, IFDs have been around since 1990. So, the law came way before the end of redevelopment, but they were never used. Now, we're starting to see them used, and they can be tied together with CFDs, and they are. We're starting to see that a little bit more. Most of our public agency clients don't have any extra public and property tax revenue to give away, so unless there's something about the project that is extraordinary, you're not going to see these that much. But in San Francisco, I am lucky to be working on some extraordinary projects. And there are a number of projects that are combining IFD revenues and CFD revenues.
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The thing about tax increment is it's only generated when there's a growth in assessed value, which means development has occurred. So, upfront, there are no tax increment revenues and that's where you see these two combined. A CFD can be put in place at the beginning and bonds can be sold to jumpstart the infrastructure and jumpstart the development. And then as the tax increment is flowing in, two things can happen. One is the CFD bonds could be paid off with tax increment bonds, and what's happening more frequently now is the tax formula is written so that the special tax levy reads that the first step is, calculate how much is needed to be collected, and the second step is apply any available tax increment revenue, third step being levy the net amount as a special tax if you don't have enough tax increment to offset the amount that would otherwise need to be levied. So, that’s, in that very tiny nutshell, that's when people can e-mail me if there's specific questions. But they are used in combination and very effectively when they are.
ROBERT BERRY: Alright, I want to give you each a chance to with our last couple of minutes here, to have 30 seconds of final word here. You know, we've talked about, and our participants have asked about a CFD is for resilience projects, reserves for risk mitigation, clearly the use of CFDs is for services is expanding, we talked about a little bit about EIFDs and the use of CFDs in combination. Are you observing any new or emerging trends in the use of Mello-Roos CFDs, especially as it relates to the emergence from the pandemic. Why don't we just start with, with Jim? 30 seconds, Jim.
JIM FABIAN: Yeah, no, not yet. But, you know, I think that the one thing about CFDs, using the resiliency term, they're very resilient. I think they can be used for a lot of different things and I think as trends develop, the CFDs will react to it.
SUSAN GOODWIN: Okay, I'll jump in and just say, I don't think any of us – I don't think we're out of the pandemic yet, so I don't think we're recovering from it yet, but I have no doubt with the budgetary constraints that we're going to see an even more growing trend towards service funding. But one thing I will mention is sea level rise, there's an example of something I never thought in my career I'd be funding. But I'm working on Treasure Island, for instance, in San Francisco, and all along the Port of San Francisco projects. Sea level rise has become something that is included in CFDs and is going to be a huge part of the funding solution in the Bay Area. Brad, I'll turn it over to you.
BRAD NEAL: I haven't seen anything new in terms of how CFDs are being used, but just that the new house market is on fire, and that there's been a flight to the suburbs from dense apartment living and condominium living in urban settings, that that, that people are in response to COVID and being locked down. That people are en masse, moving to the suburbs and buying new homes.
Slide 25 – Extended Q&A 1:30:05
ROBERT BERRY: Alright, thank you all. We're just about out of time. Actually, we are a minute over. But, again, I want to provide you the opportunity to engage directly with Jim, Susan, and Brad in our extended Q&A session, immediately following the webcast. We'll run this session that just the same way as we did last week. Following this program, you can follow the URL listed on the screen. And that link will also be posted in the Chat Box. We'll hold the webinar session open for a few screens to allow you to go into that chat box and click on the link. Then it's important that you join using your
The Mello-Roos Community Facilities District Bond Issuance and CFD Administration P a g e | 21 CDIAC TRANSCRIPT November 17, 2020 browser. Use the join on browser option, it's the best way to join into the extended Q&A. Then choose your microphone and speakers option there. Here we go.
Slide 26 – CDIAC Resources 1:31:02
ROBERT BERRY: So, before you go, I'd like to remind you of the variety of CDIAC resources on land-secured financing. Our all new Debt Financing Guide can help fill in some of the gaps that weren't covered in our last two sessions here. It's accessible from our front page of our website in PDF form. We're getting very close to launching a new Debt Financing Guide application that we think you all enjoy our customized version of the guide was more utility.
Slide 27 – Connect With CDIAC 1:31:31
ROBERT BERRY: Then, remember, all of our past webinars are available on our website, including both of these. In a couple of weeks we'll post this session and an e-mail and send a link out to everyone. You can always go back and pick up on any programs that you've missed even if you didn't originally register for that program. And then, of course, there's a variety of ways to connect with CDIAC. Stay up to date on our programs and publications. The best way is to go to our website and subscribe to our ListServ. We also use social media to announce programs when you can always give us a call or send an e-mail.
ROBERT BERRY: In closing, on behalf of CDIAC and our chair, Treasurer Fiona Ma, I'd like to thank Susan Goodwin, Bradley Neal, and Jim Fabian for another great program and for all the time that goes into preparing a program like this. We very much appreciate it. And a big thank you to our CDIAC education team, Karen McMillen, Angela Ayala, Forrest Gardens, for their hard work. A lot of work goes into this before and after behind the scenes. And of course, thank you to all of you for joining us this morning be on the lookout for announcements of upcoming CDIAC Programming. And we look forward to you joining us in the future. That will conclude our main webinar. We will begin the extended session in just a few minutes so for those of you that will not be joining us in the extended Q&A session, happy holidays to everyone, stay well, and have a great day.
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