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HomeMy WebLinkAboutAgenda Statement 1988/07/19 Item 26a COUNCIL AGENDA STATEMENT Item 2t)A Meeting Date 7/19/88 ITEM TITLE: Report on Me110-Roos/1911 Act/1915 Act Assessment Districts SUBMITTED BY: Director of Public Works Jtl;f1:/~ l' II REVIEWED BY: City Manager~ 0 (4/5ths Vote: Yes___No~l The City of Chula Vista and the two school districts serving Chula Vista have used public financing mechanisms (Mello-Roos tax districts and 1913/1915 Assessment Districts) to provide public facilities such as schools, major streets, sewers and water. City Council held a hearing on May 3, 1988, discussing the financing of these facilities primarily with the people of EastLake. Several questions and assi gnments came out of that meeti ng and the purpose of thi s report is to address those. RECOMMENDATION: Accept the report and direct staff to 1) consider the use of assessment di stri cts for provi di ng certain pub 1 i c faci 1 iti es when appropriate; 2) not provide any City funding to payoff assessments in the _ EastLake area; 3) di rect staff to prepare the necessary ordi nances and forms to require that new home buyers have the choice of paying the assessments off at the time they purchase their house. BOARDS/COMMISSIONS RECOMMENDATION: Not applicable. DISCUSSION: At the meeting of May 3, 1988, Council made the following assignments: 1. Staff was directed to prepare appropriate data as to the interest on typical single family dwell ings at EastLake as pertains to special assessments districts 85-2 and 86-1 vs. interest on the fair share of the affected public facilities - water, sewer service, and associated street improvements - if it was added to the cost of the dwell ing unit at mortgage interest rate. 2. Staff to inform the Council of the status for the implementation of other Me 11 o-Roos di stri cts outsi de of the corporate boundari es of Chula Vista but within the boundaries of the Sweetwater District and the Chula Vista Elementary District. 3. Councilman Nader requested that eight issues be looked at, related to notice for Mello-Roos Districts and mitigating the impacts of their costs. , I ~ " Page 2, Item 26A Meeting Date~ All the questions asked by Council would lead to a policy decision whether or not the City of Chu1a Vista should allow assessment district financing; and if it is allowed, what safeguards need to be installed in order to protect the interest of the home buyer. Before looking at the advantages and disadvantages of using assessment district financing, the perspective needs to be reviewed on the effect of assessment district financing. Much of the testimony at the pub1 ic hearing on May 3 centered around the fact that the people in EastLake are paying twice as much taxes as everybody else in the City of Chu1a Vista. That was because of the special taxes and assessments being collected on the tax bill. City staff views the situation from a somewhat different perspecti ve. Certa i n pub 1 i c faci 1 i ti es such as streets, sewers and schools that are normally included in the price of the house are now being funded by public financing methods so that, in effect, the mortgage on the house or the price of the house is being reduced. Therefore, while there are additional taxes, assessment districts are reducing the mortgage on the house. However unless there is proper noticing to the buyers that there are special taxes (Mello-Roos) and assessments on the house, the buyers may make an economically poor judgment when comparing the price of an EastLake home with other houses in the area. Therefore, it is appropriate that proper disclosure mechanisms be established so that it is very clear to the buyer what his total - and ongoing costs will be. Exhibit A gives an example of a sales agreement that caul d be used at the time of the purchase of the house to make it absol ute1y cl ear to the owner that the assessment di stri ct is reduci ng the price of the house. Exhibit B gives a typical situation showing the total interest paid for each case and the monthly payments. It can be seen by Exhibit B that over the 1 ife of the loan it is cheaper to use assessment district financing. In the overall perspective the difference is not significant, only $1 or $2 a month. However, as far as the property owner is concerned, it should be remembered that points do not have to be paid on the assessment district portion of the loan. What are the advantage and disadvantages of using assessment district financing. Advantages of Assessment District Financing 1. It appears that the only way that school s are going to be bui1 t to serve new areas when they are needed, is by using the Mello-Roos taxing districts. The square footage fee allowed by the school di s tri cts wi 11 not generate enough money to provi de schools in the first place; and secondly, the money is generated over a several year period which is not timely for construction financing purposes. 2. In Chu1a Vista development is occurring in large, planned unit communities providing major public works facilities. There are heavy costs up front which are a burden to the developers. Assessment district financing allows the developers an alternate method of financing in order to generate large sums of money up front to finance costly public improvements.. r:- Page 3, Item~ Meeting Date 7/19/88 3. Assessment district financing also, by law, creates an equitable basis for spreading the cost of these backbone facilities. 4. Some of the amenities in the master plan developments, such as EastLake's lake and tennis club, would not be as extensive without assessment districts because the money the that developer would have to provi de for the backbone faci 1 i ti es caul d not be used to enhance the developments. Disadvantages of Assessment District Financing 1. More staff and consultant time is required to set up these mechanisms. 2. I f not done properly, the home buyers get an opi ni on that they are being treated unfairly. This creates conflicts between the public and the governmental bodies of the City and school districts. The remainder of this report addresses the questions discussed above and will help develop responses to whether or not the City should enter into the use of special assessment districts. Question 1 What is the difference in interest paid by a homeowner using assessment district financing vs. conventional financing? Exhibit B shows an example of a single family home using both methods of financing. The assessment district financing is lower cost in the long term, however, it is close to a wash. The advantage to the homeowner of assessment district financing in this case may be that the loan points would be lower and also the down payment would be lower. For purposes of the example, a down payment on $30,000 was used in each case although in a real situation a larger down payment in the amount of $800 would be required in case 2. Question 2 What are the Sweetwater Union High School District and the Chula Vista City School District doing to finance schools in new areas outside of the City limits of Chula Vista? Both the Sweetwater School District and the Chula Vista School District require the Mello-Roos districts, especially in new developing areas. Both school districts are working on two proposed Mello-Roos districts in the Otay Mesa/San Ysidro area. The next series of questions were in response to Councilman Nader's eight issues that he asked staff to consider. 1. Ordinance specifying the form of notice to be given a resident buying into an area where there is, or p~posed, a Mello-Roos or assessment district. rj ("./. .i Page 4, Item 26A Meeting Date~ An Ordinance and/or Resolution could always be prepared setting forth the specific forms or types of notice to be given to first-time buyers in any special district. There have not been problems with special assessment, inasmuch as the statutory notice requirements are quite exacting, where they require the specific listing in a title report of the exact dollar amount of any confirmed assessment. As to the Mello-Roos, the format of notices that the developers have been utilizing should be continued, i.e., simplified forms of notice that specifically state the purpose of the proceedings and the mount of the special tax. In the context of the EastLake Development Program, notice is given in the following form: a. Disclosure in the form of a display panel mounted in the EastLake Information Center. b. Disclosure brochures available from information trays within the EastLake Information Center and each of the Model Homes Sales Complexes. c. California Department of Real Estate approved disclosure form incorporated within the Public Report required as an element of all sales escrow documentation. d. Special disclosure wording, in the form of an exception, incorporated directly within the Preliminary Title Report for each property. e. A definitive Notice of Special Taxes and Assessments acknowledgment form identifying maximum possible taxes/assessments for the term of the debt and requi ri ng si gned acknowl edgment by the home buyer as a condition of close of escrow on a property. The McMillen Company has a similar disclosure notice for Bonita Long Canyon. 2. Si n a statement in bi red letters which says II ou are hereb ut on notlce that you wi be paYlng an assessment 0 X The buyer's signature could obviously be coordinated in and made a part of any specific notice proceedings. The places where there are difficulties and problems are not always just with the first buyer, but with the subsequent buyers, i. e., it is very diffi cul t for the City to impose limitations and rules on the subsequent sales, purchases, transfers, etc. The idea is consistent with the current disclosure format in EastLake and Boni ta Long Canyon. Both developers have i ndi cated that the use of IIbi g red lettersll or some other form of attention grabber may be an appropriate modification to the current disclosure format. Page 5, Itern~A____ Meeting Date 7/19/88 3. Assessment bonds and Sped a 1 Tax bonds are secured by the 1 and whi ch benefi ts from the improvements for whi ch the bonds are sol d. The bond underwri ters look to the assessments or taxes to payoff the bonds, but the security is the land which is being assessed or taxed. We are not aware of any program which would also have the developer responsible throughout the term of the bonds. 4. ~rices for first time home buyer -- with and without the Mello-Roos or assessment. Signature that one or tne-otner was elected. This policy was originally initiated following Proposition 13 and did appear to be successful in certain cases, i.e., property owners were offered 2 choi ces, 1 bei ng the opti on to assume a home loan and speci a 1 assessment versus the 2nd option, the special assessment being discharged and rolled into the home loan. This program could be encouraged and does appear to have the elements of fairness and equity in its coverage. The EastLake and Bonita Long Canyon developers have indicated that this idea waul d appear to have a 1 at of merit and worthy of further research. Aside from the disclosure benefits, this would help the home buyer understand the true cost of the house and, in effect, facilitate viewing Mello-Roos/Assessment Districts as simply alternative financing tools rather than taxes. Note: Exhibit A. 5. Put the assessment or Me 11 o-Roos in an escrow to be drawn out only when it I s time to pay for the improvements that the assessments are bei n levled or. Special taxes and/or assessments collected prior to the sale of bonds are put into special accounts within the City or School District collecting the funds. There is no comingling of funds and monies collected can only be used for the purpose of the special tax or assessment for the construction of specific improvements. In the case of a Me110-Roos for school financing, a school may be constructed outsi de of the immedi ate nei ghborhood but wi thi n the School District. This could free up a seat in an existing school near the taxpayers home. The formation and levy of a special tax assures the homeowner that a seat in a school will be available when needed for their children. 6. City or school district enter into a contract with the buyer which ~ecifies the use for the funds. The specifi c use of funds collected by speci a 1 tax or assessments is spelled out in the proceedings held by the respective legislative body. In the case of Mello-Roos, the IISpecial Tax Reportll and in Assessment Districts the "Engineers Report" each specify the specific use for which funds can be expended. Any change requires a noticed public hearing. / ... . 0.'.. Page 6, Item 26.A Meeting Date~ 7. ~uire an impound account to incorporate the assessments into the monthly payments. A great majori ty of the 1 enders presently requi re impound accounts, but this probably should strictly be a private matter between the lenders and purchases, etc. There doesn I t appear to be any reason for the pub 1 i c agencies to enter into the private aspects of the financing. In any case, the use of an impound account is probably available to any home buyer if they desire to use that form of payment. 8. Assessment Districts and Me110-Roos Community Facilities Districts provide tools that allow both the public and private sectors to meet public facilities needs in the current post Proposition 13 era. Assessment Districts and Mel1o-Roos Community Facility Districts (CFD) help to advance the timing of needed public facilities and infrastructure to the benefi t of the enti re Ci ty and importantly they also provi de a methodology to equitably spread the cost of the improvements. At this time, the Mello-Roos CFD is the only practical way of providing schools when they are needed to educate our children. The thresholds are needed for the growth management strategy to assure the levels of service and facilities desired in the City, but we also need Assessment Districts and Me1lo-Roos Community Facility districts to provide the financing to make the growth management strategies achievable. In the final analysis it is always a City policy and Council determination as to whether to allow and consider special assessment districts and/or Mello-Roos Community Facilities Districts. CONCLUSION: It appears that Me110-Roos taxing districts are the only mechanism that can be used at thi s time to ensure that school s wi 11 be provi ded when needed. As discussed in the report, assessment district financing used by the City provides ways to 1) install the needed public facilities ahead of schedule; 2) equitably spread the cost between different developments; and 3) free up certain funds that developers can use to provide other amenities in their development. Staff believes that use of assessment district financing can be very beneficial to the development and to the City overall; however, as discussed -in the body of the report, safeguards and disclosures needs to be absolutely 'ollowed so that the new home buyer is not mislead. Page 7, Item 26A Meeting Date-,yT9lBff The Council requested the staff consider during the budget process whether the City should help in paying some of the assessments or buying down some of the assessments in the EastLake area. Since staff believes that City1s assessments districts are merely a method to reduce the amount of the mortgage rather than additional taxes, staff believes it would inappropriate for the City to buy down the assessment district. If this were done, other assessment districts in Chula Vista, such as Las Flores Assessment District, Walnut Drive Assessment District, and the block acts being used all over town create an undo burden on the General Fund in order to pay them off. FISCAL IMPACT: None. WPC 3855E by th,e Ity Council of Chula Vista, California Dated ~tf by tr..e City Counc' of Chula Vista, Cali omia Dated ~ ,'" )