Staff recommends that the City Council approve a resolution authorizing the issuance of Bond Anticipation Notes (Notes) to finance the construction of two parking facilities as part of the Town Center remodel project. Staff also recommends that the City Council approve a resolution authorizing the future issuance of Special Tax Bonds (Bonds) that will pay off the Notes and provide long term financing for the parking construction.

The Notes will finance the construction of parking facilities required by the remodel of the Town Center. At its January 12, 1999 meeting, the City Council initiated the formation of a Community Facilities District (CFD No. 1) that will provide a financing mechanism for the parking construction. This action included approval of the hiring of a financing team for the Notes and the Bonds to be issued by CFD No. 1, including E. J. De La Rosa & Co. as underwriter and Jones Hall as bond counsel. At its meeting on February 23, 1999, the City Council approved the formation of CFD No. 1. The City Council also established the maximum amount of debt for CFD No. 1 at $25 million. At its meeting on March 11, 1999, the City Council authorized the land exchange between the Redevelopment Agency (Agency) and American Mall Properties (AMP) and approved the Special Development Permits and the Tentative Map for AMP’s remodeling of the Town Center. At its meeting on April 6, 1999, the City Council approved a change in the leased asset for the 1998 Certificates of Participation. The two new parcels the Agency will acquire from AMP were substituted for the middle portion of the existing Town Center parking facility. This substitution is required before the Note sale.

The Goals and Policies adopted by Council outline how projects eligible for CFD financing will be evaluated. These policies are generally designed to ensure that the CFDs created are made for the public good. They define credit requirements for projects under consideration that protect bondholders from default and set forth disclosure requirements that notify prospective property purchasers of the lien associated with the properties they seek to buy.

The Notes will not be issued until all agreements between the City, the Agency and AMP have been executed. These include a number of agreements before the City Council at this meeting: the Public Improvements Development Agreement, the Parking Demolition Agreement, the Operation and Maintenance Agreement, the Existing Parking Improvement Agreement, the Second Amendment to the Sublease, the Agreement for Exchange and Development of Properties, and Amendment No. 3 to Construction, Operation and Reciprocal Easement Agreement (REA). Furthermore, the exchange of properties must be completed and the REA must also be approved by Macy’s, J.C. Penney and Montgomery Ward.

AMP plans to commence construction of the parking facilities in January. However, it may be advisable to issue the Notes a few months before construction begins. This would be done both to lock in interest rates (if it is expected that interest rates are on the rise) and to provide AMP’s lenders for the private improvements with evidence that financing for the parking facilities is in place. It is expected that the required business conditions will be met such that the Note sale can proceed as early as July or August.

At the time of issuance of the Notes, the conditions necessary to ensure that they can be refinanced with long-term Bonds may not be in place. If so, the Note proceeds will be placed in an escrow and released only after certain conditions related to the eventual value of the mall have been met. The value of the private property on which the special tax is imposed is the primary protection for purchasers of Mello-Roos bonds by making the threat of foreclosure in the event of non-payment a compelling reason to pay the special tax. To this end, State law and the City’s Mello-Roos policy (adopted by the City Council on January 12, 1999) require that the property subject to the tax has a value at least three times the amount of bonds issued. (An exception to this policy is allowed with City Council approval.) Because AMP’s private mall improvements and the construction of the parking garages must occur simultaneously, AMP’s property has not yet attained the value needed to support the expected amount of bonds required to finance the parking facilities. The conditions that must be met to allow release of Note proceeds for construction are indicators that the mall’s value will be at least three times the amount of bonds that must be issued at the time the Notes are refinanced with the Bonds. These conditions are:

• A guaranteed maximum price contract for each of the garages;

• An appraisal of AMP’s property, based on signed leases in place at the time of the appraisal, showing the mall’s value to be at least three times the amount of bonds required to finance the guaranteed maximum price contracts;

• A determination of the cost of constructing the mall improvements needed to meet the space required by the signed leases; and

• Evidence of financing for such improvements.

Upon completion of the two parking garages, the City will issue Special Tax Bonds that will pay off the Notes and provide long term financing. The Bonds will be 30 years in length. Debt service payments on the Notes and Bonds will be paid from special taxes paid by AMP.

The City Council is being asked to approve a resolution authorizing issuance of the Notes and a separate resolution approving the issuance of the Bonds. The security for the Notes is that Bonds will be issued to refinance them. As a result, it is necessary for the City Council to approve the issuance of the Bonds prior to the issuance of the Notes to give investors in the Notes the comfort that there are no discretionary acts still to be taken to enable issuance of the Bonds that will refinance the Notes.

Approval of a Resolution Authorizing the Issuance and Sale of Bond Anticipation Notes, and Approving and Authorizing Related Documents and Actions (Community Facilities District No. 1) will authorize the execution of the following documents:

• Fiscal Agent Agreement. The Fiscal Agent Agreement describes the Notes, specifies how the Note proceeds may be used and sets forth the City’s obligation to repay the Notes. The agreement will be entered into by and between the City and U. S. Trust Company, N. A. as Fiscal Agent for the Notes. U. S. Trust Company, N. A. has been selected as Fiscal Agent for the Notes and the Bonds through a competitive bidding process.

• Preliminary Official Statement. The Preliminary Official Statement is distributed to potential investors and provides all information of a material nature about the Notes necessary for investors to make an informed decision about whether or not to buy the Notes.

• Note Purchase Contract with E. J. De La Rosa & Co., Inc. The Note Purchase Contract details the obligation of the City to sell the Notes to E. J. De La Rosa & Co. and the obligation of E. J. De La Rosa & Co. to buy the Notes from the City. As stated in the resolution, the purchase price paid by E. J. De La Rosa & Co. will not be less than 98.5%. The interest rate is left blank at this time and will be established on the date on which the Notes are actually sold. If the Notes were sold today, the interest rate would be about 4.75% to 5.00%. The actual rate will reflect changes, if any, in the market level of interest rates between now and the sale date. However, the interest rate will be no higher than 6.00%, as set in the resolution.

• Continuing Disclosure Certificate. Pursuant to S. E. C. Rule 15c2-12, a Continuing Disclosure Certificate must be prepared and periodically updated to provide investors with up-to-date information about the Notes after issuance. This approves the form of the Continuing Disclosure Certificate.

Approval of a Resolution Authorizing the Issuance and Sale of Special Tax Bonds, and Approving and Authorizing Related Documents and Actions (Community Facilities District No. 1) will authorize the execution of the following documents:

• Fiscal Agent Agreement. The Fiscal Agent Agreement describes the Bonds, specifies how the Bond proceeds may be used and sets forth the City’s obligation to repay the Bonds. The agreement will be entered into by and between the City and U. S. Trust Company, N. A. as Fiscal Agent for the Bonds. U. S. Trust Company, N. A. has been selected as Fiscal Agent for the Notes and the Bonds through a competitive bidding process.
• Preliminary Official Statement. The Preliminary Official Statement is distributed to potential investors and provides all information of a material nature about the Bonds necessary for investors to make an informed decision about whether or not to buy the Bonds. After the sale of the Bonds, a final Official Statement will be distributed that incorporates the final terms, including interest rates, on the Bonds. While the City Council is being asked to approve the distribution of a Preliminary Official Statement, an updated draft of the Preliminary Official Statement will be presented to the City Council for its subsequent approval immediately prior to the issuance of the Bonds.

• Bond Purchase Contract with E. J. De La Rosa & Co., Inc. The Bond Purchase Contract details the obligation of the City to sell the Bonds to E. J. De La Rosa & Co. and the obligation of E. J. De La Rosa & Co. to buy the Bonds from the City. As stated in the resolution, the purchase price paid by E. J. De La Rosa & Co. will not be less than 98.5%. The interest rate is left blank at this time and will be established on the date on which the Bonds are actually sold. If the Bonds were sold today, the interest rate would be approximately 6.00%. The actual rate will reflect changes, if any, in the market level of interest rates between now and the sale date. However, the interest rate will be no higher than 7.00%, as set in the resolution.

• Continuing Disclosure Certificate. Pursuant to S. E. C. Rule 15c2-12, a Continuing Disclosure Certificate must be prepared and periodically updated to provide investors with up-to-date information about the Bonds after issuance. This approves the form of the Continuing Disclosure Certificate.

All costs of issuing the Notes and Bonds, as well as debt service payments on the Notes and Bonds, will be paid by AMP. Issuance of the Notes and subsequent Bonds will provide AMP the financing necessary to proceed with the construction of the downtown parking facilities as part of the Town Center remodel project.

Public contact has been accomplished through publication and posting of the Council agenda. Additionally, Reports to Council are available in the Library and on the City’s web page.

Staff recommends that the City Council authorize the issuance of Bond Anticipation Notes and the future issuance of Special Tax Bonds by adopting the resolutions as set forth in Attachments A and B:

1. Authorizing the Issuance and Sale of Bond Anticipation Notes and Approving and Authorizing Related Documents and Actions (Community Facilities District No. 1).
2. Authorizing the Issuance and Sale of Special Tax Bonds and Approving and Authorizing Related Documents and Actions (Community Facilities District No. 1).

Prepared by:

Grace H. Kim
Management Analyst - Budget

Reviewed by:

Mary J. Bradley
Director of Finance

Approved by:

Robert S. LaSala
City Manager