Approval of the Issuance of the 2021A Bonds
The City is authorized to levy facilities special taxes (“Special Taxes”) and incur indebtedness for and on behalf of the CFD to finance the costs of infrastructure associated with the Project.
The City issued the 2020A Bonds as the initial series of bonds with respect to Improvement Area No. 1 in July 2020. The 2020A Bonds were issued pursuant to a Fiscal Agent Agreement (FAA), dated as of July 1, 2020.
The City will use the proceeds of the 2021A Bonds to acquire authorized public improvements from One Lake Holding, LLC, the master developer of the Project (the “Master Developer”) and to finance acquisition of property for a fire station. Based upon current market conditions, the 2021A Bonds are estimated to be issued in the amount of $11,740,000 (not including original issue premium) and carry a true interest cost of approximately 3.46%.
Based on the appraisal completed by BBG, Inc., the value of the property in Improvement Area No. 1 has been determined to be not less than $177,860,000. The City’s Goals and Policies require a minimum value to lien ratio for CFD financings of 4:1 (the value-to-lien calculation compares the market value of the property to the principal amount of the 2020A Bonds and the proposed principal amount of the 2021A Bonds). The FAA also requires a 4:1 value-to-lien ratio for bonds issued on a parity basis with the 2020A Bonds. If the 2021A Bonds were issued in the maximum authorized principal amount of $13 million, the value-to-lien ratio for Improvement Area No. 1 would be 6.2:1 based on the outstanding principal amount of the 2020A Bonds and 2021A Bonds.
The FAA also establishes a 3:1 value-to-lien ratio for Undeveloped Property if any portion of the outstanding 2020A/2021A Bonds is expected to be paid from Special Taxes levied on Undeveloped Property in Improvement Area No. 1. If the 2021A Bonds were issued in the maximum authorized principal amount of $13 million, the value-to-lien ratio for Undeveloped Property in Improvement Area No. 1 would be 3.2:1 based on the outstanding principal amount of the 2020A Bonds and 2021A Bonds.
The financing is expected to close in October 2021. Debt service on the 2021A Bonds is payable only from Special Taxes levied annually on taxable properties within Improvement Area No. 1 in the manner set forth in the Rate and Method of Apportionment of Special Tax (RMA) approved by the council in connection with the formation of the One Lake CFD and Improvement Area No. 1. The 2021A Bonds will not have any impact on the City’s General Fund.
In order to complete the financing, council is being asked to approve each of the following:
- Resolution: Resolution authorizing the issuance of bonds for the CFD with respect to Improvement Area No. 1.
- Preliminary Official Statement: The POS is the primary document for investors in the 2021A Bonds. A POS will be circulated to potential investors prior to the pricing of the 2021A Bonds. Once priced, a Final Official Statement will be circulated to investors and should be identical to the POS except for the addition of pricing information.
The POS describes the Special Taxes to be levied in Improvement Area No. 1 and the development plans and status for the property within Improvement Area No. 1, and information on the Master Developer and merchant builders for Improvement Area No. 1, currently Lennar Homes, TRI Pointe and Brookfield (the “Merchant Builders”). The POS will also include the appraisal of the taxable parcels in Improvement Area No. 1.
The POS is prepared by Jones Hall, serving the City as disclosure counsel for this transaction, with the assistance of the financing team, including City staff, the Master Developer, the Merchant Builders, the City’s municipal advisor, the underwriter of the 2021A Bonds, and the City’s special tax consultant.
The POS was reviewed and approved for transmittal to the council by the City’s financing team. The distribution of the POS by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor in the 2021A Bonds. Material information is information that there is a substantial likelihood would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the bonds. If the council concludes that the POS includes all facts that would be material to an investor in the 2021A Bonds, it must adopt a resolution that authorizes staff to execute a certificate to the effect that the POS has been “deemed final.”
The Securities and Exchange Commission (SEC), the agency with regulatory authority over the City’s compliance with the federal securities laws, has issued guidance as to the duties of the council with respect to its approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761 / January 24, 1996), the SEC stated that, if a member of the council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 2021A Bonds, whether relating to their repayment, tax-exempt status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the POS. In the Release, the SEC stated that the steps that a member of the council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts.
The key sections of the POS are summarized below:
- "THE 2021A BONDS" - Summarizes the key terms of the 2021A Bonds, including payment dates and redemption provisions.
- "SECURITY FOR THE 2021A BONDS" - Summarizes key security terms, including the City’s pledge of Special Tax revenues, its covenant to levy Special Taxes according to the RMA and its covenant to foreclose on parcels that are delinquent in the payment of Special Taxes. The 2021A Bonds are a limited obligation of the City, payable only from Special Taxes levied in Improvement Area No.1 and moneys in the funds and accounts established under the FAA described below.
- "THE DISTRICT AND IMPROVEMENT AREA NO. 1" - Summarizes certain features of the Area, including the appraised value of taxable property, overlapping taxes, assessments and debt and anticipated debt service coverage provided by the maximum special taxes that may be levied under the RMA.
- "PROPERTY OWNERSHIP AND DEVELOPMENT STATUS" - Includes information provided by the Master Developer and the Merchant Builders and describes the proposed development in the Area and its current state.
- "BOND OWNERS RISK" - Highlights the primary risks associated with the 2021A Bonds, including failure to complete development, natural disasters and failure of the property owners to pay their special taxes.
- "LEGAL MATTERS - TAX EXEMPTION" - Describes the tax-exempt nature of interest on the 2021A Bonds.
The POS, in various sections including one entitled “BOND OWNERS’ RISKS - Public Health Emergencies,” also describes the COVID-19 pandemic and its impact on the City and the Project. The POS includes cautionary language that the City cannot predict the ultimate effects of the COVID-19 outbreak or whether any such effects will have a material adverse effect on the developers’ ability to develop the Project as planned, or to sell completed homes, or the availability of special taxes from Improvement Area No. 1 in an amount sufficient to pay debt service on the 2021A Bonds.
- Continuing Disclosure Certificate: Under SEC Rule 15c2-12, the underwriter of the 2021A Bonds may only purchase the 2021A Bonds if it has determined that the City is obligated to provide continuing disclosure, including annual updates of the financial and operating data included in the Official Statement and notices of certain specified events. The Master Developer and the Merchant Builders each will also provide continuing disclosure on a semi-annual basis until the property they each own in Improvement Area No. 1 is no longer responsible for 15% or more of the special taxes.
- First Supplemental to FAA: This document supplements the FAA and governs the 2021A Bonds and the use of Special Taxes from Improvement Area A to pay debt service on the 2021A Bonds. The fiscal agent is The Bank of New York Mellon Trust Company, N.A. The special taxes will be levied on the regular County tax roll and collected by the County from each taxable parcel in Improvement Area No. 1. The County will remit these special taxes to the City. The City will remit them to the fiscal agent as provided for in the FAA. The fiscal agent will use the revenues to (1) pay administrative costs of the CFD and (2) pay principal of and interest on the 2021A Bonds to the bond owners.
- Bond Purchase Agreement: At the time the bonds are sold, the City will enter into a Bond Purchase Agreement with Stifel Nicolaus and Company, Incorporated, who will agree to underwrite the 2021A Bonds subject to satisfaction of the conditions described in the Bond Purchase Agreement. The resolution provides the underwriter’s discount on the purchase of the 2021A Bonds shall not exceed 2.00% of the par amount of the 2021A Bonds.
Confirmation of Annexation of Neighborhoods 8 and 9
As described above, at the time the CFD was formed, the council established the Future Annexation Area. The purpose of establishing a Future Annexation Area is to identify properties that can annex into the CFD in the future through a streamlined process. More specifically, the owners of properties in the Future Annexation Area can annex those properties into the CFD by executing a unanimous approval. The Mello-Roos Act provides that a unanimous approval constitutes the vote of the qualified elector in favor of the matters addressed in the Unanimous Approval for purposes of the California Constitution.
The council has received a unanimous approval executed by the owner of the property to be developed as Neighborhoods 8 and 9 of the Project, in which the property owner agrees to the annexation of the property into Improvement Area No. 1. In accordance with the Resolution of Formation, the city clerk has recorded a notice of the annexation in the real property records of County.
Pursuant to the proposed resolution, council will confirm the annexation of Neighborhoods 8 and 9 into Improvement Area No. 1 and direct recordation of a consolidated boundary map for the CFD.