Reserve LLC FAQs

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The Proposed Headlands Reserve LLC
Community Facilities District No. 2006-1

Frequently Asked Questions

1. If the City has no financial obligation in the formation of the CFD why is 2/3-voter approval required?

The 2/3's vote requirement is a product of Article XIIIA, Section 4 (Prop 13) which requires all "special taxes" (taxes dedicated to a special purpose) to be approved by a 2/3's majority vote. This requirement was reiterated in the Mello-Roos Act and was, in fact, the under pinning for the act being enacted. The 2/3's vote requirement was reiterated again in Article XIIIC (Prop 218), passed in 1996. The 2/3's voting requirement should not be confused with the general obligation bond voting requirement which is also 2/3's majority, but which emanates from that requirement in the California "Constitutional Debt Limit."

2. The Headlands Reserve is a Limited Liability Corporation. My concern is what happens if there are unanticipated financial problems? What if the sales of the homes are not sufficient to fund the repayment of the Bond? What recourse will the Bondholders have? Would they gain control of the property?

The special tax obligation (and hence the obligation to repay the bonds) is solely secured by the real property comprising the CFD, i.e., the Headlands project. In the event of non-payment of the special tax by Headlands or the homeowners who take title from Headlands, the CFD will covenant in the bond fiscal agent agreement to undertake judicial foreclosure proceedings against such delinquent properties within a specified time period, usually the time which elapses between December 10th and April 10th (the tax installment dates) plus a period for reports to be generated by the County Tax Collector. It is unusual for property to go into foreclosure by reason of the fact that the special taxes constitute a FIRST lien against the property, co-equal with the lien for ad valorem property taxes, and superior to any consensual lien, such as a deed of trust. If a delinquency occurs and judicial foreclosure is imminent, the deed of trust beneficiary would pay the amount of the tax delinquency, add it to the unpaid balance of the loan and foreclose itself on the mortgagor homeowner.

3. There is also another provision stating that a 50% protest stops the CFD process. What comprises 50%, the people at the public meetings, the registered voters or the City Council?

The majority protest is measured in uninhabited CFD's by ownership; i.e., that 51% or more of the property OWNERS must protest the formation. The proposed Headlands CFD has a single property owner/entity. Members of the public can speak at the public hearing for formation, but a majority protest only exists if the property owner(s) lodge the protest in accordance with the Mello-Roos Act. The public hearing is scheduled for June 14, 2006 at 6:00 p.m. in the City Council Chambers.

4.  While page 4 of the Agenda Report dated June 14, 2006 states that the City has no “contingent payment liability” for the Mello-Roos taxes, the report does not explain what happens if the developer or property owners default on payment of them.

In the event of a default, the CFD would foreclose on the property in default on behalf of the bondholders.  Typically, the mortgage holder (if any) will cure the default before this happens since the bonds are in a superior position to the mortgage.

5.   The CFD Bond is too big…the largest in California.  Dana Point will be known as the place where the highest tax rate exists. 

This is not correct…the tax rate is around 1.4% which is much lower than many other projects, and well below the industry “bright line” of 2%.

6.  Although the risk may be small, there is a risk to the city that could cause the city to go bankrupt.  One issue: if the lots do not sell by the time the money for interest and like runs out, somebody will be on the hook. Let’s make sure the risk to the city is zero.  There is a simple solution: Just charge a small amount more for the lots. 

This is not true.  There is no risk to the City’s finances.  The only security is the land itself, not the City’s General Fund.

7.  What happens if the developer doesn't sell the lots in enough time to cover the cost of the bond? Does he go out of business?

The developer must make the payments on the bonds until the lots are sold.  Thereafter, the new owner makes the payments.  If the developer goes out of business, his successor in interest on the individual lots will be obligated to make his payments.  An appraisal will accompany the bond sales to ensure there is sufficient value to cover the indebtedness in the event of a default, and at this time there appears to be more than enough value, even in a falling bad real estate market, to ensure the bondholders will be made whole in the event of a default.

8.  Who becomes responsible to service the bond? 

Payments of interest and principle are the responsibility of the developer until the lots are sold.  Thereafter, the lot owners are responsible.

9.  Can this have an effect on the City of Dana Point's credit rating? 

In the event of a default, it is theoretically possible that there could be an impact on the City’s credit rating, however there has never been an impact on a city’s credit rating in connection with those instances in which there have been defaults in the past on financings like this one.

10.  How much will this cost the City? 

All City costs are covered by the CFD.

11.  Does the city become responsible for the cost of the public amenities until a new developer is acquired? ($250,000 per year) 

No, the public amenities will be paid for by the surety bonds for the project in the event the developer does not construct them.

12.  If the developer goes bankrupt what is the process to hire a new developer. How long will this take? Will it cost the City or the Headlands property owners?

There is no such process.  In the event of a Bankruptcy the developer’s debts would be paid from his assets, and if he has any left (such as the property) they remain his.  Assets such as the property might be sold in Bankruptcy to a new party that would be bound by the existing obligations.  The likely scenario in the event of a Bankruptcy would be an ultimate foreclosure on the property to pay the bondholders.  Note that new property owners in the Headlands would not be at risk for anything so long as they continue to pay their own taxes.

13.  Can the owners of the property sue the City if they feel the CFD tax is overbearing or unfair based on the Comps. in Orange County?   ($15,000.00 per year versus $27,000.00 in the Headlands)

Anyone can sue for anything, but in the event of a suit they would not be successful.

14.  Why must the developer take out an additional line of Credit (LOC)?  Is it because he doesn't want to take the time to do the Absorption Study? 

The Letter of Credit (LOC) is not required, it was offered by the developer to make the deal more attractive to investors.  The practical impact is that an absorption study will not be needed if the LOC is used.  

15.  In the FAQ’s on the City website, it states the deed of trust beneficiary would pay the amount of the tax delinquency, add it to the balance of the unpaid balance of the loan and foreclose itself on the mortgagor homeowner.  So who is the deed of trust beneficiary: The Bank? The City? What happens to the developer if foreclosure happens to the unsold lots?

The lots are secured by the land.  The homeowner’s bank would hold a deed of trust.  In the event of a foreclosure on either the developer or homeowners, the land would go to the highest bidder at the foreclosure sale.

16.  Does the unpaid balance pass on the new buyer? What happens to the unpaid balance if the lots are not sold?

If the lots aren't sold, Headlands Reserve LLC is still the owner of the lots and needs to make the payments. Anyone who buys the lots is responsible to pay all debt service, including that outstanding from a prior seller, or else foreclosure could occur.

17.  Just thought this appropriate to send to you before you grant that great big loan to the Headlands. It seems we are the “rich uncle” in that scenario, not a city government! I still don’t know how it benefits Dana Point to roll out a financing package of this nature for that funicular.  It’s amazing how this got so far off field! 

This is a misconception.  The City agreed as part of the benefits it got in the Development Agreement (i.e., open space, beach access, public amenities, etc.) to allow the developer to finance the public improvements through a CFD.  The CFD is not being formed because of the funicular. 

18.  How long are the owners at the new Headlands going to actually vote to pay for the maintenance of that potentially dangerous vehicle?  It probably should be set up as a “Deed restriction” so the promised maintenance clause and liability clause can’t be deleted in the future!

The homeowners must either pay the maintenance tax, pay for the funicular through homeowner assessments, or remove the gates at the property.  This is all spelled out in the project’s conditions of approval, which are recorded and have the same effect as a deed restriction.

19.  Headlands didn’t even get us the veteran’s memorial, art’s society building, and other promised amenities. They negotiated their own deal to their own benefit and now we are the “joint venture partners” without the capital benefit.

The Coastal Commission took various amenities away from the project after the City and developer agreed to them.  The City was faced with either starting over from scratch or accepting the Coastal Commission’s decision.  The Council voted, very reluctantly, to accept the project as amended by the Coastal Commission.

20.  What happens if the CFD is not formed?

The City and Headlands Reserve LLC entered into a Development Agreement in 2002 that states that both parties will cooperate in establishing a Community Facilities District for the purpose of financing the Headlands’ obligations to construct public facilities and public park and open space facilities in conjunction with the Headlands Development. Failure by the City to form the CFD will more than likely result in litigation initiated by the Headlands.

21.  How much are the facilities going to cost the citizens of Dana Point?

None.  The costs to construct the facilities are borne entirely by the owners of the property within the CFD through the imposition of a special tax.

22.  When will the public benefit from the new facilities – before the homes are built or afterwards?

The City will not issue a Certificate of Occupancy for any new homes in the CFD until all of the public facilities are completed to the satisfaction of the City. 

23.  I would like a guarantee that all of the taxpayers and the residents of Dana Point not residing on the Headlands have no financial obligation if something were to happen.

The law provides such a guarantee as the costs to form the CFD and issue bonds are borne solely by the property owners of the Headlands property, and secured solely by that property.   The law does not allow the City’s general funds or properties outside of the CFD to be utilized as security.

24.  What happens if there is a landslide at the Headlands within the CFD?

Although the geology of the Headlands has nothing to do with the formation of the CFD, the Headlands site has already passed geological studies as a condition of development. 

The Development Agreement between the City and the Headlands requires the developer to carry insurance that indemnifies and holds the City harmless prior to the issuance of a grading permit and for any property damage or claim resulting from a geologic failure.  The Development Agreement also requires the developer to include in each property deed of a residential lot that the buyer will also hold the City harmless for any property damage resulting from geological failure.

25.  Who bears the costs of insurance and maintenance of the facilities?

The CFD, and in the absence of the CFD (or its failure to do so) the owners of the property within the CFD.

26.  I understand that the engineering firm is AMEC.  Have they previously done large ocean-front development projects?  Are they experienced with the requirements of ocean front developments that are directly on the sand? Has the City Council carefully reviewed all of the Engineering plans, and would the engineering firm stake their reputation on the integrity of the plans?

A: AMEC is a large well respected geotechnical firm with considerable experience on similar projects. The City has independently hired a third party geotechnical engineer firm, Zeiser Kling, which works directly for the City and provides oversight review of the project as well. All plans will be reviewed and all work inspected as required by law. All works of improvement will require surety, performance and labor and material bonds required of capital improvement projects in case of default.

27.  Will the City of Dana Point carefully protect their financial interest throughout this development project?  What are the assets of the development company in case the lots do not sell?  Does the City of Dana Point have a list of assets?  In the event of default, who would pay for the construction costs thus far?  And if future homeowners object to the pedestrian gate, and file future complaints or lawsuits against the city, who is responsible for those legal costs?  

A: There is no risk to the City’s finances.  The only security is the land itself, not the City’s General Fund. The developer must make the payments on the bonds until the lots are sold.  Thereafter, the new owner makes the payments.  If the developer goes out of business, his successor in interest on the individual lots will be obligated to make his payments.  An appraisal will accompany the bond sales to ensure there is sufficient value to cover the indebtedness in the event of a default, and at this time there appears to be more than enough value, even in a falling bad real estate market, to ensure the bondholders will be made whole in the event of a default.

The Coastal Commission approved the Headlands development to be gated subject to the requirement that the funicular be built to provide public access to Strands Beach. The homeowners association is responsible for the gate as well as any related complaints or lawsuits and associated legal costs. Under the Revetment and Funicular Maintenance Agreement between the City and the developer, if the funicular is closed or made inoperable indefinitely for any sustained time period (i.e. for maintenance or repair), the gate shall be opened to provide public access to the beach during that time period.

28.  Q:  In the event the bond monies are forthcoming, will the $45M dollars be released all at once?  Or would the City of Dana Point place the monies into escrow, and release the $45M as progress milestones were met on a time schedule basis.  And if so, has the City of Dana Point identified what those milestones should be and by what timeframe they should be met, such as:  a park, recycling sprinkler water in the community, park benches and upgraded paths, access for emergency vehicles, lifeguards, etc.  If these improvements are not made on a timely or expected-quality basis, would the money still be released?

It seems that if the money is released, the City should be in a first lien position on the land (meaning they would get the land back if the developer defaults or does not perform up to standards expected).  Also, has the developer posted a performance bond with the City of Dana Point, and is this amount equal to the Mello-Roos amount, or how was this calculated?  Perhaps as lots are sold the bond requirement could be lowered pro rata by the percentage of lots that are actually sold.  This is an extraordinary amount of money.  Is it common for the city to put up such a large percentage of the construction costs?

A:  If bonds are sold to raise funding for public improvements, it has not been determined if all the bonds will be sold at one time or sold in phases or series.  It has also not been determined the total amount of bonds to be sold except that no more than $45 million of bonds in total can be sold.  At such time as bonds are sold, bond proceeds will be deposited with the Fiscal Agent (a third party financial institution/bank) into various trust funds.  A separate construction fund will be established in which a large portion of the bond proceeds will be deposited.   Depending on the structure of the bond issue and the amount and form of credit enhancement (if any), some of the bond proceeds, instead of being placed in the construction fund, may be segregated into an escrow fund, to be released and transferred to the construction fund in the future upon the occurrence of certain events (not determined at this point but possibly based on amount of development work such as grading, lot sales to third parties, etc.) for reimbursement to the developer for approved costs incurred associated with authorized facilities.  Notwithstanding the foregoing, all reimbursements/payments for authorized facilities will be made pursuant to the City Council approved Acquisition Agreement from non-escrowed funds. 

The community facilities district annual special tax obligation, the source of repayment of the bonds is a lien against the property, having a parity with property tax payments and a senior lien priority over private mortgages and secured loans.   

29.  Why is the City responsible for the tram and the revetment?  It seems these are the two most difficult and potentially litigation-ridden areas of the project..... Why is the City responsible for these as opposed to the developer?

A: The Development Agreement between the Headlands Reserve LLC and the City contains provisions which state that both parties shall cooperate in establishing a Community Facilities District (a CFD or Financing District) for the purpose of financing the developer’s obligations to construct and maintain public facilities, and public park and open space facilities in conjunction with the Headlands development.  A CFD is a method of financing and funding facilities and certain services by imposing special taxes against real property located in a limited geographic area --- in this case the Headlands development area.  The funicular is one of many public improvements and or services that are eligible to be financed through the CFD.  Other improvements include streets, sewer, water, park, landscaping and utilities improvements.  These facilities could not be privately owned to do this since it would be a gift of public funds to maintain a non-governmental facility.  A CFD allows the City to transfer the costs of development to the new lot owners in the Headlands, not existing residents outside the Headlands development.  This special tax is disclosed to the new property owner at the time they purchase property within the CFD.  An annual special tax would be imposed on the parcels in the CFD and is levied and usually collected on the property tax bill.  Again, only the property owners residing within the CFD would be obligated to pay the special tax….not all Dana Point residents. 

In addition, the Revetment and Funicular Maintenance Agreement between the City and the Headlands Reserve LLC requires the developer to procure and maintain at all times during the terms of the Agreement comprehensive general liability insurance on a per occurrence basis naming the City and its agents, officials, officers, representatives and employees as additional insureds.  Proof of this insurance requirement has been provided to the City in the form of an insurance certificate.  This agreement also indemnifies, defends and holds the City and its officials, employees and agents harmless from and against any and all claims, liabilities, losses, damages, costs and expenses, including legal fees sing from or in any way connected with the Developer’s non-performance of the agreement (the construction and maintenance of the funicular).

Further, the City is currently a member of the California Joint Insurance Powers Authority (CJPIA) and budgets funds annually for our insurance premiums.  The current Memorandum of Coverage (MOC) provided to members of the CJPIA provides substantial insurance coverage for general liability, personal injury, bodily injury, property damage, and subsidence (earthquake, landslides, etc.).  Under the MOC, the City of Dana Point is provided $10 million per occurrence in coverage; plus up to an additional $50 million per occurrence in “excess” coverage, if necessary.

The funicular would be covered under the City’s current MOC to protect the City in the case of potential claims or lawsuits.