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On Point: In a TIF

Submitted by on 1, June 12, 2009 – 6:00 am22 Comments
alameda-point-jet

Sick of this photo yet?

A few weeks ago I did a post on all the debt the city carries, which led to a comment about redevelopment debt and how it works. I asked for more information, because a lot of questions have been raised about how redevelopment debt incurred for the proposed Alameda Point development could impact the city, and frankly, it bothered me that I couldn’t offer good answers.

City officials have said they could go to the market for up to $184 million in bonds to help cover some costs of the development – money that would be paid back with property taxes generated by the Point development. But SunCal’s less-that-perfect track record of completing developments in recent years has some folks concerned that the city will get stuck with tens of millions of bond payments and a half-finished development. They’re also worried that the financing scheme could have a real, material impact on the city’s finances.

Over the past few weeks, I’ve been asking around about this to get a clearer picture of how it all works. And it sounds like the answers to those two questions are “probably not” and “maybe.”

Here’s what I got:

The state’s redevelopment law does not specify a limit on the amount of debt that can be incurred for any given redevelopment area formed after 1994 (like Alameda Point). That’s actually governed by the bond market, which has a set of underwriting criteria it uses to decide whether it will issue bonds in the amount the redevelopment agency wants.

Among other things, the market folks basically want to see that the agency can more than pay its debt before bonds are issued. And that means the redevelopment area has to be generating property tax revenues to pay off the debt before bonds can be issued.

So how does that happen? The developer fronts the money for water and sewer pipes, roads and all the other things the bond money could be used for, and the redevelopment agency uses the bond money to reimburse the developer after work is done – and after tax money starts coming in.

The city’s base reuse manager, Debbie Potter, told me in an earlier conversation about redevelopment that the city’s redevelopment agency, the Community Improvement Commission, probably wouldn’t go to the market for bonds until they are six or seven years into Point development.

Typically (and in our case, historically), the bonds are secured only against new property tax revenues generated by the redevelopment. So if the development doesn’t generate the kind of tax revenue that was expected, bond holders can’t go after, say, the city’s general fund for repayment.

In a January letter to Development Services Director Leslie Little, the city’s bond counsel, Paul Thimmig, explained the impact a redevelopment bond default would have on the city’s finances. Per Thimmig:

Based on a careful review of the Bond Documents for each of the CIC’s public debt obligations, it is clear that each respective debt issue is not a general obligation of the CIC, but a limited obligation payable solely from the respective Tax Revenues pledged to the specific debt obligation and amounts held in the specific funds created for the respective debt obligation. The City of Alameda is in no way contractually obligated to pay any of the CIC’s public debt obligations, and all of the Official Statements (for the agency’s current bond issues) explicitly so state.

As to the amount of debt the CIC can carry on the Point development, as I said earlier, they can only get what they are able to prove they can repay. That said, city staff can only estimate how much that will be (and they’ve said their estimates are conservative). In a report summarizing the potential impacts of the proposed Alameda Point plan, city staff say the project could require more debt than planned.

Then there’s the question of whether the debt could affect the city’s finances in general. The city technically doesn’t carry the debt; the CIC is a separate entity. The city doesn’t draw from its general fund to pay redevelopment debt off. And city leaders have maintained that the development project has to be “fiscally neutral,” meaning that it doesn’t cost the city money out of its general fund to build or maintain it.

That said, the bulk of the tax money generated by the redevelopment efforts – about 60 percent – could be used for a period of several decades to administer the agency and debt service, on development costs that some feel should be covered by private money instead of future tax dollars. (Others argue that those future tax dollars wouldn’t exist if the money wasn’t invested in development efforts; Alameda Point, for example, isn’t even on the tax rolls yet.)

About 11 percent of Alameda’s property taxes are collected in redevelopment areas, according to the Fiscal Sustainability Committee’s just-released long-range financial forecast, which also says the CIC is holding $66 million in debt in those areas (apparently they can hold up to $210 million per the redevelopment plans, and can take up to $691 million in taxes).

Per the report:

While (redevelopment debt) doesn’t affect current tax collections, it prevents the city from realizing future ad valorem increases. Tax increments flow to bondholders and are unavailable for public services.

By the time the bonds are paid off, the two redevelopment areas they were pulled for will have been in existence for 50 years.

I’ll have more on this as the process evolves. In the meantime, feel free to drop your questions below.

22 Comments »

  • Jayne Smythe says:

    Thank you, Michele. That answers a few of the questions I had, particularly about the limit that I thought there might be on the bonding. But you also confirm what has been said a lot of folks and refuted by many, many more: the tax increment goes to paying the bonds and not to services.

    Gotta ask ourselves, where would the money come from for the services? If it is mello-roos, then that jacks the price up on the properties? Might that limit people’s economic opportunity to invest in property there? Sure don’t solve our city income and budget problems if 50 years goes by before any income goes to the city from properties in those districts. (Correct me if I am wrong about that…)

    • Hey Jayne,

      The split on where the tax money goes averages about 60 percent for the redevelopment agency/debt, 20 percent for affordable housing and 20 percent to traditional tax-receiving sources like the school district, city, county, etc.

      As to the Mello Roos, the development agreement slated for the ballot does talk about a tax rate of up to 2 percent, when our base rate is I guess a little over 1 percent. And there is a list of things they would pay for with that additional tax money. The exec summary of the Point initiative says that losses to the general fund, for example, could be mitigated with money from a community facilities district that would collect those extra tax dollars.

  • Barbara Thomas says:

    Yep that’s about it, 50 years of no money to the rest of the City of Alameda for all the services, traffic mitigation (and potential loss of federal/state funds due to exceeding traffic levels at key intersections.

    We get to pay for all the teachers, staff, police, fire, etc. on our existing dwindling budgets for bot the City and School, and any other special district’s budgets affected. We know what that means. Just for 50 years. And the current state of the law on pass throughs in redevelopment Districts is still eveolving. Existing residents get to pay for every thing, while the developer runs home with its profits.

    Their renowned planner doesn’t even have enough real klife experience or sense to not put sand valleyball courts, baseball fields etc. in the windchannel created by estuary. The feral cats can barely wait for their new sandboxes!

  • Jill says:

    Thanks very much for this information.

    I second Jayne’s question, and add one: If Alameda is not getting any taxes from the development for the first 50 years, what’s the advantage to the City during that period? I think I must be missing something.

    Also, can you confirm that no government entity will lose money if the project fails? You have addressed the potential effects on the city, but I am concerned about the state. The state and federal financial situation affects us all as well.

    • Hi Jill,

      In terms of the state, county etc losing funds, I think there are probably two schools of thought. Some folks will say the tax revenues are locked up in the redevelopment, so they are not going to those traditional sources in the amount they would if the money wasn’t being used to help pay for the development. Others would maintain that the development would not exist in the first place if that investment wasn’t made, so those tax dollars wouldn’t exist.

  • dave says:

    Others would maintain that the development would not exist in the first place if that investment wasn’t made, so those tax dollars wouldn’t exist.

    =================================

    Private capital would yield 2 birds/stone: fund the development of a brownfield AND generate property tax revenues for the General Fund.

  • Jill says:

    What if the actual tax revenues do not cover the debt? Will the shortfall be paid by taxpayers or by the developer?

  • Barbara Thomas says:

    When the military left, it provided the best, most valuable, remaining underdeveloped land in the SFBAY area to SF and Alameda in terms of the Presidio, Treasure Island, and Alameda Point.

    If a developer cannot develop these lands profitably without burdening the existing communities, it should not be in the building/construction business. Taxpayers should not have to provide a competent developer with a BAIL FORWARD.

    SUNCAL is simply selling the approval packaging business, providing no guarantee as to what is ultimately, if ever, going to be built and at what cost.

    With friends like SUNCAL Alameda doesn’t need enemies. Why can’t the city just develop the base itself? Rather than lay off staff, why not let them run this project, and keep the profits for Alameda’s general fund? The City sold the land for a dollar to the Navy. Surely the Navy can sell it back to the City on the same terms. Was the check even cashed for the $1.00? I remember Mayor Corica had it framed and hanging on the walls of his office.

  • helen Sause says:

    Hey Michele! Good on you for expaining the TIF financing mechanism so clearly…and your writers asked and answered questions about Mello-Roos. Actually Mello-Roos was designed to do many of the same things as the TIF financing when the need for improvements is not in a redevelopment area. the Source of your information is a respected and informed group who can answer more detailed question (or the City since they have been using TIF financing for ages.) there are also a number of highly qualified attorneys who could be good sources, Joe Coomes in Sacramento practically wrote the law and David Madway in Oakland is heavily engaged in TIF financing deals. Nearly 300 California cities have happily used TIF, of course including our own.

    BUT the point I would like to add in response to those asking why should we divert tax revenues from city services for XX years when we need the money now. The answer to that question is a 2 parter…first unless the city invests this money it is not possible to develop the Point so it will produce any taxes…it is great that the current tax base is zero because every bit of property taxes generated can be used to support the enormous costs of the infrastructure development (unless there is some new group that has $700 million in their account and just hasn’t come forward). Secondly the development will have homes and businesses that are spending money in Alameda, are providing places for us to live, work and 145 acres of recreational space for the Island to play. I think that is pretty important to our future – so please try to avoid the fallacy that Alameda Point doesn’t affect you, its development affects every single one of us.

    Michele – please keep up your “factural” reporting – you have become my favorite “newspaper”. Helen

  • Keith Nealy says:

    I heard the Navy has grown impatient and will sell Alameda Point piecemeal if we don’t do something soon. The last developer bowed out. How long before we could get another one? Would we start another multi-year evaluation project just to get to our present position? Would the Navy wait? Do we want the Navy to sell it to whoever they want?

    Just some thoughts.

  • Jayne Smythe says:

    You know, lots o’ folks have been wondering that, Keith. Frankly, I think NAS is not in the land deal business. They’ve got enough on their plate. The city could pony up money for the land. NAS wants to do some Fed-to-Fed transfers of parcels, and I think that is a smart idea, because it keeps federal money in the area. Why not? I think the VA Hospital idea was one of the best ones to come down the pike, if they clean the place up enough… What I am suggesting is that the city can get the land without having to deal with a developer.

    The impression has certainly been given that we have to have a developer before we can get title to the land. –But wait! The initiative doesn’t say anything about the city getting title to the land. It talks about the developer having it, and all the control, AND ALL THE PROFITS for, what did Michele say? 50 years.

    There is no reason why, if the City gave the land to the Navy for $1.00, it couldn’t make a deal to get it back for that…

    Anyone out there say different? We’re listening…

  • David Howard says:

    yes, Keith, you have heard the rumor about the big bad navy selling the land off piece-meal – the rumor that SunCal and the City and the other local proponents of this project want you to hear.

    but y’know what? In the context of redevelopment, selling it off piece-meal would be the best thing – because the Navy would transfer title of the land to real property owners who would have to pay property taxes. The land would then go own the property tax rolls, and start providing money to our general fund, and to the state (and to our schools.)

    The reason Alameda Point is NOT on the tax rolls now is because title is held in the name of the federal government. Sell it off piece by piece – perhaps to the many businesses out there that are operating now – the Bladium, Area 51, etc. etc. and it will transfer from the feds to private property owners, who would start owing property tax right away.

    A piece-meal sell-off would be the best thing for property taxes.

  • DL Morrison says:

    Thanks to Michele for covering this topic — it’s really helpful to have an impartial and thorough source of information available on this topic.

    And thanks to Barbara Thomas her excellent commentary in the Journal today and for the following: “SUNCAL is simply selling the approval packaging business, providing no guarantee as to what is ultimately, if ever, going to be built and at what cost.”

    True.

  • Santa Claritan says:

    I enjoyed reading Michele’s commentary about the redevelopment bonds, because they reaffirmed what I had already learned from practical experience. I offer two comments to add for throught.

    First, there is a July 2008 California Supreme Court case called SILICON VALLEY TAXPAYERS’ ASSOCIATION, INC. v. SANTA CLARA COUNTY OPEN SPACE AUTHORITY which is causing much consternation in Southern California sewer, water and sanitation districts, and in local city halls. It says, in essence, that under Proposition 218, real property cannot be specially assessed for general services or improvements to benefit a whole community. Given the fact that Proposition 218 was enacted by the voters, as a Constitutional amendment, AFTER the Mello Roos legislation had been around for a long time, and given the fact that Proposition 218 has no “carve out” that I can see for a Mello Roos District, in light of the Silicon Valley Taxpapers Association case mentioned above, I begin to wonder if there will be someone who will take a case to the Supreme Court, seeking to invalidate a Mello Roos District’s assessments under Proposition 218. As a result, assuming all tax increment dollars from the Point’s development go to pay for infrastructure for 50 years, if I were a taxpayer I wouldn’t exactly count on a Mello Roos District as a long term means of taxing future residents of the Point from police, fire, street maintenance and other municipal services.

    The second point I want to make is a story which will unfold over the next few years. In Henderson, Nevada, the City contributed something like $33 Million for the construction of a deluxe area called “Lake Las Vegas”, which is literally a man made lake surrounded by million dollar homes, three golf courses, two hotels, a casino, and a replica of an Italian hill town. In addition, the city authorized the creation of a very complex set of assessment districts to build infrastruction. Now that the real estate market has crashed the developer has filed bankruptcy, the infrastructure is not complete, the bankrupt developer has no cash to “front” the money to complete the infrastructure, the hotels are both being foreclosed, the casino is failing in terms of foot traffic, foot traffic in the faux hill town is way down, one golf course has closed and is in foreclosure, home construction has stopped, and existing homeowners find themselves unable to sell their homes, even at bargain prices. The assessment system to build the infrastructure is in chaos, in large part because no “tax increments” are being created. The City of Henderson keeps saying “We are not liable on the bonds issued to finance the infrastructure”. The city is spending a ton of staff time and attorney time to stay on top of the problem. Eventually, if there are actual, serious defaults on the bonds, all that municipal bond buyers and municipal bond brokers will remember are the three words “Henderson stiffed bondholders”. I think that over the long run, Henderson’s borrowing costs for bonded indebtedness will increase because of the “black eye effect” of a major infrastructure bond default in their community.

    A cautionary tale for Alameda?

    So

  • Barbara Thomas says:

    Thanks Santa Claritan. Great tool. Seems like our Homie wrote the opinion too.

  • David Howard says:

    It would be helpful if Michele would compare the redevelopment bonds to the case of the lawsuit by Nuveeen Investments against the City of Alameda and AP&T. Nuveen bought bounds issued by AP&T – an arm of the City – and when AP&T couldn’t pay them back, Nuveen sued the City of Alameda AND AP&T (and another Alameda agency.) So, even though the City’s general fund wasn’t contractually obligated to re-pay the funds, the City is named in a lawsuit when the bonds default.

    The CIC is run by Alameda City Council – it stands to reason that if the bonds default, the bondholders will come after the City of Alameda in court, despite any contractual obligations or non-obligations.

    And there’s also the question of the bonds being secured by the tax revenues of the property – the tax revenues ultimtely come from the property itself – so if the redevelopment bonds default, can the bondholders go after the underlying property that is supposed to generate the tax revenues?

    There are more questions to be answered.

    • Hi David,

      Regarding the AP&T stuff, I think you just answered your own question. AP&T, as you said, is an arm of the city. Under state law, the redevelopment agency is not.

      Here’s the applicable section of the state’s redevelopment law:


      33644. The bonds and other obligations of any agency are not a debt of the community, the State, or any of its political subdivisions and neither the community, the State, nor any of its political subdivisions is liable on them, nor in any event shall the bonds or obligations be payable out of any funds or properties other than those of the agency; and such bonds and other obligations shall so state on their face. The bonds do not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction.

      As far as your question about bond defaults and whether bondholders can go after the property goes, it’s my understanding, based on the recent memo I cited from the redevelopment agency’s bond counsel, that they would not (thought that said, I’d be interested to see if there is any applicable case law). Here’s a quote from a section of the memo, which talks about the consequences of a bond default:


      Given that each of the CIC”s public debt obligations is payable from a specific revenue stream, if the CIC is not able to timely pay the principal and interest due on one of its debt obligations (resulting in a payment default by the CIC) due to insufficient Tax Revenues arising from the applicable redevelopment project area, the holders of the debt obligation not paid when due will not have recourse to any assets of the CIC beyond amounts in the funds and accounts created under the applicable bond document that are pledged to the repayment of the specific debt obligation. The debt holders will only have a claim on the Tax Revenues as they arise, once any amounts held under the applicable Bond Document have been exhausted.

      Per the memo, the agency would face exposure to suits if the CIC didn’t disclose material facts in its Official Statement for a debt issue or if it grossly mismanaged its affairs to the point that the agency violated material covenants in the bond documents. Under that scenario, the holders of the defaulted debt issue could make claims against other, unencumbered CIC money.

      Hope that answers your questions!

  • David Howard says:

    Er… someone else referred to the CIC as the City’s “redevelopment arm” :

    Michele Ellson says:
    1, June 13, 2009 at 6:49 am

    It’s the Community Improvement Commission, which is Alameda’s redevelopment arm.

    And anyway, the state redevelopment statute does not answer the question of whether or not CIC bond bondholders would sue the City of Alameda (I expect they would) and how they would fare in court in such a suit. (Rhetorical, lacking any case law to cite.) Would like to see the Nuveen case decided by a judge/jury, but in likelihood it will be settled.

    On the last point – encumbering unrelated CIC tax revenues – I interpret that to mean that a CIC bond default might cause a domino effect – one bond defaults, and the bondholders go after other revenue that might be needed to pay back other bondholders…

  • David Howard says:

    I take that last part back about a domino effect – I mis-read your excerpt from the memo. Sorry.

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