Developers of a nearly 700-housing unit project almost 20 years in the making came before the Hollister City Council Jan. 29 as Award Homes requested assistance in creating a Community Facilities District (CFD) and bond analysis for its project on Fairview Road. The goal of the developer is to have homeowners pay a monthly fee for project infrastructure over a 30-year period.
The item was part of a study session and no action was taken and the council was not very supportive of the developer passing certain costs along to home purchasers.
Bryan Swanson, the city’s development services director, explained to the council that the project consisted of 118 acres, comprised of 677 residential lots, a 4.5-acre park, open space and recreational areas.
“The project is owned and controlled by Award Homes and the CFD is anticipated to include 577 single-family, detached homes and 100 multi-family units,” he said, explaining the reason for the request for the CFD to “…finance the construction and/or acquisition of public infrastructure facilities within the project area. The CFD funding stream will be a combination of bonded indebtedness and pay-as-you-go funding. Both secured by the levy of special taxes upon property within the boundaries of the CFD.”
Swanson further explained the district would be structured over 30 years to help meet the challenge of high-cost infrastructure and facilities.
“This will provide the necessary funding for infrastructure improvements that the developer has already agreed to in the development agreement with the City of Hollister,” he said.
Mike Whipple, president of Development & Financial Advisory (DFA), a Roseville, Calif.-based financial consulting service company, was hired by Award Homes to help it establish funding for its project. He told the council that he had been working with city staff to come up with a financing plan for the project. He said Award Homes anticipated forming the CFD boundary around the parcels and they would be the only ones subject to the resulting tax.
“We are looking to finance backbone public improvements, many of which fall within the city’s transportation master plan, so we’re talking about regional, citywide public improvements that the developer has been conditioned to build and they are looking to utilize the CFD mechanism,” he said. “The CFD mechanism is something the city council approved several years ago.”
Because of the size of the project, Whipple said the developer wants to use the CFD financing plan to move forward. He said the tax rates the developer is looking at range from $800 to $900 a year up to to $2,400 a year, depending on whether the home is entry-level or executive level. He said everyone within the project would have the same “tax burden” as a percentage of the home price. This tax would be in addition to normal property taxes related to public services as long as the city provides them.
He explained CFDs are typically used by large projects in order to help qualify for other financing venues.
“It’s a great proposition for the developer and home builder, and ultimately benefits the property owner,” Whipple said. “All taxes are fully disclosed to the homebuyer as part of the approval process. They have to sign disclosure documents that they fully understand that they are purchasing the home with these additional taxes.”
The developer, he said, is looking at major improvements along Fairview, Union and Mimosa roads, including landscaping. They also want to finance a 4.5-acre park adjacent to Valley View Park, referred by residents as the Whale Park, to increase its overall size to five acres. There are also storm drain improvements and a detention basin included in the proposal.
Whipple said that after discussions with city staff everyone seemed comfortable with the concept of the facilities district proposal and that it was consistent with standard procedures.
Mayor Ignacio Velazquez asked if he understood correctly that what Award Homes wanted was to finance the improvements and have homebuyers pay for them over time. Whipple said he was correct.
Velazquez then asked if the homes would be sold at a lower cost because of the cost associated with the CFD. Whipple told him that homes would be sold at price points that meet market demand. Without CFD financing, the price points, he said, would have to be substantially higher, which could price the entire project out of the market. He said the average price might have to be $600,000.
“This significantly increases the amount of the down payment and makes a lot of people unable to qualify for and purchase their homes,” Whipple said. “And, ultimately, your mortgage payments are significantly higher.”
Councilman Raymond Friend asked how the city would be involved. Whipple said the involvement would be minor and described it as a “zero-cost proposition” because any cost in forming the CFD would be covered by the builder. Any costs associated with issuing the bonds is also covered by the builder, he claimed, and that “there would be no out-of-pocket costs that the city would bear.”
Whipple went on to say what would be expected from the city was to inspect the improvements to make sure they were constructed consistent with city policies. He said that at the time of reimbursement of bond issuance, the city would review the improvements and sign off on the reimbursement request form that the builder submitted to the trustee.
Friend said the council recently went through extensive training about road improvements and they know for certain that if Union Road is extended to Fairview and all improvements are made, within five years the city would have to re-pave it.
“All of a sudden we have maintenance costs that’s not covered,” he said.
Whipple told Friend that typically the project would annex into the CFD and cash flow would begin prior to the city taking over maintenance of some of the improvements. City Manager Bill Avera added that the city would have both an existing community facilities district to cover ongoing maintenance and a newly created CFD to cover the so-called West of Fairview project. The mayor reiterated that Award Homes was proposing the CFD to pay for improvements and that homeowners would be paying an annual fee rather than for it to be built into the price of the home. Whipple said he was correct.
Velasquez said it would be difficult to explain to homeowners that they are paying more fees because of the way the developer financed the homes.
“It starts off fine, but 10 years down the road you have angry homeowners wondering why they’re paying $1,500 more a year for the infrastructure in the neighborhood rather than have it included in the original price,” Velazquez said.
Whipple said that if homeowners want to know what they’re paying for that there are tangible items to show them, such as the parks, landscaping and road improvements. He said homebuyers will also have the option to partially or fully pre-pay those taxes, whereas CFDs don’t cover ongoing city services.
“In California, the CFD is the No. 1 tool for financing public improvements,” Whipple said. “Most overall tax burdens range anywhere from 1.8 to 2 percent in California. Our proposal is to go just a little over 1.8 percent. We’re right in the sweet spot where homebuyers are used to paying.”
The mayor continued to question the choice of financing infrastructure rather than adding it to the cost of the home up front and that succeeding homebuyers would have a problem accepting it. Whipple responded that it is difficult to know how future buyers would react. He said, all things considered, it basically comes down to negotiations between future sellers and buyers. He said the developer’s calculations have determined that before you “flush the first toilet” it will take a $20 to $24 million investment. A few minutes later, Jim Sullivan, a consultant for Award Homes, substantially lowered that estimate.
“Without access to capital, which the CFD provides at the front end of the project, certain projects start to become infeasible and difficult to develop,” Whipple said.
Friend described the process being proposed as a slippery slope because most buyers would purchase up to the maximum amount they could qualify for. He said they think they can afford the payment and then are surprised when a tax bill is added onto the mortgage payment. Whipple countered with the argument that the homeowner has to qualify for the home’s selling price, plus associated taxes.
Sullivan said he was brought onto the project because the land was once considered a habitat and permits had to be acquired from both state and federal governments. He said the final permit had been acquired last December.
“When this project was envisioned, it was segmented into six or seven phases,” he said, adding that the first phase has 99 lots and part of going forward involves extending sewers throughout the entire 118 acres and not just the first phase, thus the need for the upfront funding through CFD financing. He told the mayor that what the developer was asking for up front was just a fraction of the entire project. “The build-out of all the units is well over $100 million. It’s not as a developer we are saying we don’t want to spend any money. We feel this will make this first phase a financially feasible way to do it.”
Sullivan said work has been done over the last four months in an attempt to figure out the cost per unit. He said it will be roughly between $20,000 and $30,000 per unit and that it was important to make sure the homeowners paid the cost upfront in order for the developer to maintain flexibility. He said if the market determines it’s too much of a burden for homeowners to pay the cost, the developer then needs to figure out an alternative method that is not a burden to the homeowners.
One difference within the project if the CFD is not an option and if instead it should be a homeowner association (HOA)-type project is that the streets would be considered private rather than public and they might be narrower in order to give the builder more developmental land, Sullivan explained. He said the HOA model could be almost as expensive on a monthly fee basis.
“We feel this (CFD) is a viable alternative and would love to have your support to retain this option,” Sullivan said, and reminded the council, “When we sell a house to a first-time buyer, we’re required by the state to have disclosures so they know what they’re doing. I’m not sure how that works when the homebuyer who buys from us turns around sells it two years later. I’m not sure we can do this, but to basically throw something in there that upon resale that (CFD) is paid off, which would ensure that the second purchaser would not be taken advantage of.”
He told Councilman Roy Sims, who was concerned about the price levels of the homes, that every for-profit developer would be selling at whatever price the market would bear, be it $500,000 or $1 million.
“It’s just the free economy and capitalistic society that we live in,” Sullivan said. “At the same point in time, in the 2008 and 2012 crunch that we all went through, if there’s no buyers, there’s no buyers. We’re forced to lower our price or we’re sitting on inventory, which no builder wants to do. So we will sell for whatever the market will bear. And if there’s a $25,000 obligation on a specific unit, the market will bear $25,000 less than if there were no obligation.”
The bottom line for every buyer, Sullivan contended, was, “What can I afford? What do I want my monthly mortgage to be?”
After the meeting, Avera told BenitoLink that since the meeting was a study session, the council did not have to make a decision, but from his “reading between the lines” at what members said and the lack of any instructions for staff, he thought it was highly unlikely Award Homes would get the CFD it wanted.
“I got the impression the council wasn’t interested in working with Award Homes to create a special district for advancing the infrastructure,” Avera said. “It doesn’t do anything to the project as a whole. They’ll develop it as they originally intended and as they get closer, they’ll just go to the bank to get their construction loans together as they’ve done in the past.”