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HomeMy WebLinkAbout1992-11-10 - AGENDA REPORTS - GVR ASMT DIST BOND SALES (2)Clty Manager Item to be presented by: UNFINISHED BUSINESS KT P I k m DATE: November 10, 1992 / SUBJECT: GOLDEN VALLEY ROAD ASSESSMENT DISTR CT STATUS REPORT ON SURETIES STATUS REPORT ON BOND SALES DEPARTMENT: City Manager Background The Golden Valley Road Assessment District was formed in cooperation with five developers for the purposes of building Golden Valley Road from 1-14 to Sierra Highway. The five developers are: Tract 45022, G. H. Palmer Associates, 103 units - map expires March 27, 1993 Tract 43145, WattlParker, 82 units - map expires May 1, 1993 Tract 48893, Showcase Homes, 161 units = map expires July 3, 1993 Tract 48892, HunUHeeber (AFA COMMEX), 119 units - map expires August 21, 1993 Tract, 48117, AMCAL, 104 units - map recorded The City has established the District and has been ready to proceed with the sale of bonds since approximately June 1992, under the terms of the funding and acquisition agreements approved by the City Council on April 2,1992. -Several significant concessions have been made along the way to facilitate and finalize the District, as was reported to the City Council on September 8, 1992. The City has hired bond counsel, an underwriter and a financial consultant to finalize the bond sales. All discussions, agreements, and performance expectations have been built on the foundation that developers would be able to demonstrate a 3:1 value to lien ratio in accordance with the City's adopted public financing guidelines. (The adopted guidelines call for a ratio of 3.5:1. One of the concessions along the way was the agreement to reduce this ratio to 3:1 for each developer and the district as a whole.) The developers were given several deadlines to provide the needed sureties to make the 3:1 ratio. The latest deadline was September 7, 1992. The sureties provided on September 7 are inadequate according to City experts and would pose serious financial impact on the City if they were to be accepted as presented. The surety presented on behalf of G. H. Palmer Associates is $1,000,000 short, and proposes procedural mechanisms that are unacceptable to the City. The surety for Showcase proposes unacceptable time frames. The property with the lowest lien to value ratio, HunUHeeber, has not yet provided the executed written instrument showing howthe 3:1 requirement would be met, although verbal assurances have been given. All sureties were due on September 7. APPROVED -Agenda Item. Golden Valley Road Assessment District - November 10, 1992 - Page 2 The fact that funding and acquisition agreements adopted on April 2,1992, called for the criteria and the dollar amounts of the sureties to be provided to achieve the value to lien ratios, compounded by the fact that the forth of these sureties are brand new type instruments, never before used in a bond sale of this sort, has led staff and related consultants to proceed cautiously. Additionally, the developers have not deposited funds to cover the expenses from reviewing this item the last three months. Staff feels we should no longer expend staff time and City resources trying to proceed with the sale of bonds. Our consultants findings are attached, and a copy of a letter that was provided to Mr. Steve Krueger as representative for the five developers. AMCAL Status The City, In adopting AMCAL's funding and acquisition agreement, allowed AMCAL to begin construction of homes at the corner of Green Mountain Drive and Golden Valley Road. That agreement further provided that in the event the other developers were not able to proceed with the District, the City would consider a smaller, single issue bond sale to complete Golden Valley Road improvements for frontage on the AMCAL property. Since the record of performance by the other four developers, the shortfall in the Palmer surety, and the unique aspects of the proposed financial arrangements have become matters of significant concern, staff recommends that the City seriously consider this smaller, single issue of bonds for this portion of Golden Valley Road. This amount would be approximately $880,000,plus associated costs, and staff would return with the appropriate papers to approve sale of bonds at the next City Council meeting. AMCAL has the strongest value to lien ratio and did not need to provide surety. Proceeding with AMCAL's single issue removes them from the other four developers and could impact the overall district's value to lien ratio. The other developers are aware of this and have previously agreed that AMCAL should have a separate issue as described above. The estimated assessment for each of 104 AMCAL homes is $760 for 30 years. The Palmer map is the first to expire, in March 1993. The developers were granted one year time extensions in 1992 based on promises to fulfill the requirements of the funding and acquisition agreements. This was another significant concession on the part of the City. The projects cannot proceed without Golden Valley Road. The projects were approved before the City's Hillside Development Ordinance was adopted, and the City could benefit by compliance with the ordinance. Staff feels it would be appropriate to allow these maps to expire, thereby necessitating new project submittals sometime in the future. Costs Staff has been diligent in requiring prepayment of staff related costs in forming the assessment district. To date these costs have exceeded $186,000. This money was to be paid back to the developers out of bond sale proceeds. There is currently an outstanding request for $25,000 to cover costs incurred over the past three months; and the developers have not yet deposited a check to cover this amount. Without a sale of bonds, no reimbursement occurs. A portion of AMCAL's expenses could be recovered from the single bond issue. Golden Valley Assessment District - November 10, 1992 - Page 3 Staff recommends: 1. That City Council direct staff to proceed with the single issue sale of bonds for AMCAL; 2. All other City and consultant work be suspended; 3. That final costs of district formation be calculated and Invoices sent to the developers; 4. No further map extensions be granted; 5. Any request from the developers to proceed with bond sales be taken under consideration only if a legally sufficient and fiscally sound instrument of surety for each of the developers is provided, appropriate funds are provided, and sufficient time exists for a complete and thorough review before a map expires. gv1110cc Attachments Letter to Steven J. Krueger dated 10-16-92 Letter from Fieldman, Rolapp & Associates dated 10-16-92 Letter from PaineWebber dated 10-2.92 Letter to Steven Krueger dated 9-9-92 City Council Agenda Report dated 9-22-92 .M r' City of Santa Clarita Jill laalic Mayor Jan Heidt Mayor Pro -Tem Carl Boyer Coundmember Jo Anne Darcy. Coumlmember George Pederson CouncUmember 23920 Valencia Blvd. Suite 300 City of Santa Clarita California 91355 October 16, 1992 Phone (805) 259-2489 Fax (805) 259.8125 Mr. Steven J. Krueger Showcase Homes 14482 Beach Blvd., Suite W Westminster, CA 92683 Re: Golden Valley Sureties Dear Steve, This letter is in response to your October 14, 1992, FAX communication to this office, conveying a request from Lew Feldman that you receive, in writing, the exact requirements of the revised surety. Our consultants have been in regular, if not constant, telephone contact directly with Lew Feldman. Lew, having been one of the original participants of the drafting of the Funding and Acquisition Agreements, is also aware of the requirements for funding. It is, therefore, particularly disappointing to have received your October 14 communication saying that you cannot diligently complete necessary work until you receive documentation from the City in writing. . We are concerned that upon being notified by telephone by me on October 8, as the developers' representative for the Palmer shortfall amount, you were then unavailable, and, further, did not provide any response to our request thatyouu " contact Palmer and obtain commitments from Palmer that the shortfall will be - addressed in order to proceed. It appears these actions may have been designed to require delay of the City Council action to approve the sale of bonds for October 13. We have also not been provided the surety commitments or alternative arrangements that are being made on behalf of the other two property owners, who were also required to provide sureties as of September 7, 1992 (reference Ken Pulskamp's letter of September 9, 1992, copy attached). Attached is Fieldman, Rolapp & Associates findings, Identifying those sections of the Funding and Acquisition Agreements that the submitted sureties are not in compliance with. Also attached please find PaineWebber's findings on the proposed surety agreement. In brief, both letters identify areas of significant concern, including: 1. A shortfall on the proposed Palmersuretyof approximately $1,000,000, and only fouryears of debt service; both amounts significantly less than required for the Funding and Acquisition Agreements. Please be advised that this proposal is not acceptable. FILE CCS Mr. Steven J. Krueger October 16, 1992 Page 2 2. We require the sureties should not be released upon a sale or transfer of the property as currently permitted in the proposed sureties. I am sure this. requirement has been previously discussed with your attorneys. This is also not acceptable. On a final note, in accordance with your agreement with the City last July, please be advised it remains our intention to decrease the percentage of capitalized interest allowed for every month's delay. Thus, having missed the October 13 City Council meeting, the capitalized interested will be a reduced amount from that in the draft - surety agreement. have mailed, under separate cover, the information you requested concerning the need for further developer deposit monies to continue processing the assessment district. As you know, we require a minimum of $25,000 to be added to the deposit account for reimbursement out of bond profits at a later date. Please provide the new drafts of the sureties as required so we may proceed to the October 27 City Council meeting. You will note the City has been attempting to proceed with approval for sale of the bonds on our mutual behalf since last July. - Sincerely, L nn M. Harris Deputy City Manager LMH:scw gv1016 cc: Ken Pulskamp Steve Stark Dick Kopecky Carl Newton, Esq. Peter Tremblay, Esq. Maryann Goodkind, Esq. Robert Porr Mark Adler David Oster Dan Palmer Xavier Mendoza Percival Vaz Hank Heeber David Hunt Lew Feldman, Esq. PRINCIPALS WILLIAM L. HELDMAN R. MICHAEL MCNAMARA LAWRENCE G. ROLAPP October 16, 1992 SOUTHERN CALIFORNIA OFFICE 2100 S. E. MAIN STREET Mr. Kenneth Pulskamp SECOND FLOOR AssistantCity/ Manager IRVINE, CA 92714 City of Santa Clarita 23920 Valencia Blvd., Suite 300 714.660.8500 Santa Clarita, CA 91355 FAX 714 -474-8773 Heldman, Rolapp & Associates INDEPENDENT FINANCIAL ADVISORS TO LOCAL GOVERNMENT RECEIVED i t: T i 9 19y� LYNN M. HARRIS Director.ot CommunIy DOY. RE: City of Santa Clarita Assessment District No. 92-2 (Golden Valley Road) HERN CALIFORNIA OFFICE 510.933.6096 FAX 510.933.6098 Dear Mr. Pulskamp: We have reviewed the draft surety documents submitted by Showcase Homes and G.H. Palmer & Associates in connection with the Golden Valley Road CHARTER MEMBER Assessment District. While the form of the Sureties is nearly satisfactory, '.. NATIONAL ASSOCIATION subject to some of the modifications suggested by Jones Hall Hill & White, the OF INDEPENDENT PUBLIC amount of the Sureties is less than the amount the developers agreed to -provide - in the respective Funding and Acquisition Agreements (the "Agreements"). FINANCE ADVISORS Section 8 of the Agreements, and Exhibit F thereto, set forth the security requirements that must be met prior to a bond sale. Exhibit F provides fortwo alternative surety devices: 1. a cash flow guaranty security of investment grade or bearing an "A" or better rating from Best's, ` so that as determined by an underwriter selected by the Citybond payments are assured for. the difference throughout the life of the Bonds or until the 3:1 value -to -lien ratio is met, or 2. Surety which meets the following criteria: Amount of Surety: Amount by which lien exceeds one-third (1/3) of property value. Term: At least two years, with renewal mechanism. Beneficiary: City. Draws: City will draw on surety (in full (sic) if assessment . installments are not paid. Funds will be used to redeem bonds after superior court foreclosure judgment, but prior to foreclosure sale. Replenishment: City will return funds if delinquency is cured prior to foreclosure sale and prior to bond redemption. Expiration Draw: If surety is not renewed, City will draw full amount one week prior to expiration. Draw will be replenished upon delivery of replacement surety. Release of Surety: Upon receipt by City of an appraisal (from an appraiser selected and retained by City) that demonstrates that the property value is in excess of three (3) times the outstanding lien amounts. The release can also occur incrementally. Surety provider: Surety provider must be a bank, insurance company or other financial institution acceptable to City. City will considerthe financial strength and ability to honor draws of provider. City will also consider rating of provider by independent bank or insurance company rating agency: Fees: All fees, charges and costs relating to surety ;will be collected from property for which surety is provided. The Sureties provided by the developers are designated to fall under definition No. 1 above, that is, a "cash flow surety." However, while Exhibit F calls for a cash flow guaranty for the life of the bonds (language that we accepted directly from Mr. Palmer), the Sureties submitted only provide cash flow coverage for about 4 years. In our June 25, 1992 and July 6, 1992 memoranda to the parties to the financing, we set forth the "shortfall amount" of bonds needed to be guaranteed to achieve a 3:1 value -to -lien ratio. The amounts for Showcase and Palmer are: Showcase Homes $1,330,176 $129,500 G.H. Palmer $2,585,900 $251,800 In accordance with Exhibit F, definition No. 1, the surety would need to cover the annual payment amount for the life of the bonds. The Showcase Surety equals $600,000, or, about 4.6 years of debt service on the shortfall bonds allocable to Showcase's property. The Palmer' Surety equals $1,000,000, or 4.0 years of debt service on the Palmer shortfall amount. Since these amounts are less than required by the Agreements, the City must now decide whether to accept these amounts. It is our opinion that the decision should rest in large part upon the underwriter, Paine Webber. We have asked Mark Adler to review this letter and the Sureties to provide us with his opinion regarding the marketability of the bonds. A copy of his letter dated October 21 1992 is attached hereto. We generally concur with the requirements and conclusions of his letter. Specifically, we agree that the Surety should not be released upon a sale or transfer of the property. If the property is transferred, either (a) the new owner will post a surety, (b) the original Surety will be drawn upon in full and the proceeds held as a cash reserve, or (c) the original Surety will remain in place and available to the City. We agree with Mr. Adler's recommendation that the Palmer Surety be increased by an amount sufficient to cover eight (8) years of debt service, or $2,000,000. With a 1.17 value -to -lien ratio, bondholders face too much risk to be willing to invest in a project with only four (4) years' coverage. Finally, we support the guidelines Mr. Adler has outlined in item 7 of his letter. Until the Surety sizing issue is resolved, we cannot support moving into the bond marketing phase. If the bonds can be marketed, as outlined by Mr. Adler, to a sophisticated investor who acknowledges the risks associated with the bonds and receipt of all disclosure materials, we feel that the City should consider selling the issue. As a final matter, we want to point out that the use of a surety on a financing of this type is still a novel approach. The few sureties used to date in California have each been quite unique, and have been structured for unique circumstances. There exists no "off-the-shelf" surety structure. We encourage all financing team members to understand that we all have some work ahead of us to clean up the documents and other details. We recommend that the City reserve final judgment of the deal pending final documentation. Please feel free to call me at any time with questions or concerns about the project. I think that the City staff involved with this financing and the City's consultants should have a conference call or meeting soon to discuss the sale more thoroughly. Very truly yours, FIELDMAN, ROLAPP & ASSOCIATES Robert A. Po Senior Associate Capital Markers 11jinv%Vcbbcr Incorporated 725 South Hpicroa Strcct. 41st Phxrr Los Angeles. CA 90017 313972-179', C(,` .' ti1A ra NO - October 2, 1992 PaineWebber Mr. Robert Porr RECEIVED Fieldman, Rolapp & Associates 2100 S.E. Main Street JCT 14 195;, Second Floor Irvine CA 92714 LYNN M. HARRIS brtt� of fbnlmuhl�y lacr, Re: City of Santa Clarita Assessment District No. 92-2 (Golden Valley Road Dear Robert: we have reviewed the draft surety documents submitted by Showcase Homes and G.H. Palmer & Associates. In addition,.we have reviewed certain financial information of the surety provider (Amwest Surety Insurance Company). Given our review as well as our due diligence on the property, property owners and appraisal, we have the following observations and suggestions. Suretv Aareements forShowcaseand Palmer (1) Our largest concern on the Surety Agreement is the weak release provision as a result of a transfer of the property (Section 1.2). It would be our' recommendation that any sale or transfer (voluntary or involuntary) would still need to have the Surety requirement unless a 3:1 value -to -lien test was met for the given parcel. (2) No one should be ,mislead in believing that Amwest is an investment grade (as defined by Standard & Poor's and-Moody's) insurance company. Despite an "All rating by Best rating services, its total .market value of its parent is less than $25 million and its net income has varied between $1.5million to $5.2 million during the period 1988-90.. While the Surety does add some level of comfort, it is not comparable to an investment grade rated letter of credit or insurance guaranty. (3) Given the value -to -liens of the properties, the amounts of the sureties still leaves the bondholders the potential risk of insufficient coverage to pay debt service in the event of a delinquency in the years after the expiration of the sureties. This is especially relevant for the Palmer parcel which has a 1.17 value -to -lien ratio. I ., HlinOWfbhcr Mr. Robert Porr 10/2/92 Page Two Cash Holdbacks for Hunt/Heeber and Watt/Parker '(4) Even though we have not reviewed the language which will be incorporated into the documents to establish a cash deposit, it appears that conceptually it would work. Of course, we do want to review the actual language. Timing of AMCAL bond issue (5) We have reviewed AMCAL's project as well as certain due diligence forms and believe that the AMCAL financing (if- sold on a stand alone basis) would carry substantially lower rates than'the composite issue. This is obviously due to the higher level of security. However, if included as part of the composite issue, AMCAL's presence would be beneficial to all parties as it would bring up the overall value -to -lien, further diversify the issue and demonstrate home sales activity in the District. Putting policy issues aside, it would be our recommendation to include AMCAL in the composite issue. Capitalized Interest (6) Investors would prefer a longer capitalized interest period, subject to keeping value -to -liens the same. Hence, it may be necessary for certain developers to provide some equity in order to increase the capitalized interest period. Marketability of Bonds (7) Given the low value -to -lien of certain parcels, the lack of construction financing for private improvements for a number of projects, the stage of development and the unwillingness of certain developers to provide due diligence forms and financial information, it is our opinion that these bonds -.are- an inappropriate investment for retail investors. It may be possible to market these bonds to sophisticated institutional investors, and it is clearly our desire to develop a comprehensive, successful marketing plan to- these type of investors, but only upon acknowledgement -of the investors of all disclosure issues. Unfortunately, until we have all due diligence forms and financial information, it is premature to give a definitive answer on the marketability of the bonds. However, we would anticipate.a high level of concern on the Palmer property (given the 1.17 value -to - lien ratio) and the Hunt/Heeber .property (given the lack of development plans). • PaincWcbbcr Mr. Robert Porr 10/2/92 Page Three Please fell free to call me at (213) 972-1713, if we can be of any assistance. sincerely, Mark J. Adler First Vice President and Manager MJA/ls porr.al0 City of Santa Clarita 23920 Valencia Blvd. Suite 300 City of Santa Clarita California 91355 September 9, 1992 Mr. Steven Krueger Showcase Homes Phone (805)-259-2489 Fax (805)259-8125 14482 Beach Blvd., Suite W Westminster, CA 92683 Re: Sureties for Golden Valley Developers Dear Steve, JillKailo Yesterday you personally delivered two surety commitment letters from Amwest - Mayor Surety Insurance Company of San Bernardino. These sureties are designed to Jan Hetdt provide the interim value so as to meet the. City's 3:1 lien to value ratios. Mayor Pro -Tem While we are encouraged that both surety commitments were received in accordance Can Boyer with our August discussions and agreement, we note that two other property Councflmember owners, Hunt-Heeber and Watt/Parker, are also required to post sureties before we Jo Anne Darcy, can proceed with bond sales. The deadline of submittal of September 7, 1992, CoundImember applies to all four properties needing sureties. As you know, we.are specifically concerned about the Hunt-Heeber property, as they.had one of the largest lien to George Pederson value ratio deficiencies. Courrcllmember We are giving review of the sureties provided to date top priority and are planning to call an in-house review meeting as early as Thursday, September 17. Could you please use your best efforts to provide the remaining two.developers' sureties on or before Tuesday, September 15. This should be considered one final extension of the September 7 deadline, and receipt of the remaining sureties is necessary before the in-house review will take place. Steve, as I informed the City Council last night, we are much encouraged with the two sureties provided, however, as both Lynn Harris and I said to you yesterday, the surety requirement applies to all four developers, and it remains our intention to do one bond issue. We intend to return to the City Council at the City Council meeting of September 22 for approval to sell bonds. This extended. deadline on behalf of Hunt-Heeber and Watt/Parker is the absolute last date available in order to proceed with the bond sate. Thank you for all your assistance. I look forward to hearing from you as soon as possible. Please call me if you have any questions. truly y rs, Ken Pulskamp Assistant City Ma ager FILE COP Y AGENDA REPORT City Manager Approval Item to be presented by: Ken Pulskamp CONSENT CALENDAR DATE: September 22, 1992 SUBJECT: GOLDEN VALLEY ROAD ASSESSMENT DISTRICT DRAFT SECURITY DEPARTMENT: COMMUNITY DEVELOPMENT BACKGROUND At your meeting of September 8th, staff had Informed the Council that we had received sureties from two of the developers, which was the next step toward a bond sale for the project. There was Insufficient time to review the details of this surety, and It was suggested and the Council directed staff to bring a recommendation back on the meeting of September 22,1992. Staff, as well as the financial, legal, assessment and underwriting consultants, have discussed the context of the surety with Lou Feldman, the developers' attorney. The draft surety Is somewhat unique for this type of district and may be affected by Federal tax laws, as well as State statutory requirements for assessment districts. The details of these unique features are fairly complex, and staff and the consultants need additional time to be certain that these sureties will meet the City's financing policy existing statutes, as well as the. Council's. goals. For that reason, we .are suggesting that the Council allow staff and the consultants additional time to review these items. We expect to complete that review during the next few weeks and would be bringing back a recommendation to authorize the sale of the bond or discontinue the project, whichever seems appropriate. RECOMMENDATION The City Council direct staff to continue their efforts to work with the developers' attorney toward a bond sale or alternate recommendation. hds:golval.rk AMCAL DIVERSIFIED CORP. November 10, 1992 Mr. Ken Pulskamp Ms. Lynn Harris City of Santa Clarita 23920 Valencia Boulevard Suite 300 Santa Clarita, California 91355 RECEIVED AND MADE A PART OF THE RECORDAi MEETING MDA Ref: City Council Meeting, Tuesday November 10, 1992 AMCAL Agenda Item Dear Mr. Pulskamp & Ms. Harris: We respectfully request and strongly urge you to proceed with staff recommendation for a separate issuance of bonds for AMCAL and disregard some of the other developers requests sent to you at the eleventh hour. Our request is based on legal and equitable reasons outlined below: 1. The funding and acquisition agreement signed by the City and AMCAL in January this year requires the City to issue separate bonds for AMCAL if the other developers were not able to proceed. Both the staff report and Cox, Castle &', Nicholson (developer's attorneys) letters sent to the City support this position.. 2. The other developers allegation that AMCAL is not supportive of the district is false. AMCAL has vigorously supported the district and has issued in excess of $ 450,000 of the $ 1.1 Million spent to date even though AMCAL's share is only 7% Additionally, AMCAL has been able, ready and willing to meet City conditions for bond issuance for over two years at an additional carrying cost in excess of $ 500,x• 3. We strongly disagree that the other Golden Valley developers are being treated unequally or unfairly. We feel it is AMCAL who has been given unfair and unequal treatment because it is the only developer who has complied with City policy for bond issuance yet has had to incur enormous carrying costs while the City and the other four developers debate whether or not they are in compliance with City policy for sale of bonds. Additionally this already has and will continue to rause enormous damage to AMCAL to wait because of high interest costs to borrow money, for district work, during this credit crunch and the necessity to discount home prices to buyers because the assessment was levied in June and the benefits (roadway landscaping, 31324 VIA COLI NAB, SUITE 'I OB, WEBTLAKE VILLAGE, CA 99362 BIB/70G-0694 Pg. 2 of Itr. did. 11-10-92 Pulskamp/Harris bike path) will not be received until some indefinite time in the future We thank you for your consideration. Sincerely, For AMCAL Golden Fund XXVIH President AMCAL Diversified Corp. General Partner PV/IV CC. Road District Developers Lew Feldman