cfd 2004-3 attorney opinion

8/12/2019 Cfd 2004-3 Attorney Opinion

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E. KURT YEAGERDIRECT DIAL 545) 725-4160AVEAGE R3SYCR 001 1

STRADLrNG YOCCA CARLSON RAUTHA PROFESSIONAL CORPORATION

ATTORNEYS AT LAW660 NEWPORT CENTER DRIVE, SUITE 1600

NEWPORT BEACH, CA 92660-6422TELEPHONE 949)725-4000FACSIMILE 510)725-4W

January 11, 2010

ORANGE COUNTY949) 725-4000SAN DIEGO558) 926-3000

SAN FRANCISCO415) 283-2240SANTA BARBARA

505) 730.6300SACRAMENTO516)40-2350

Mr. Jim L. SmithDirector of Public WorksCity of Indio100 Civic Center MallIndio CA 92201

Re: ED 2004.3 U se oLProceeds

Dear Mr. Smith:You have asked us to review the bond documents related to Community Facilities District

No. 2004--3 (the District ) with respect to the use of the remaining proceeds of the Bonds on depositin the Acquisition and Construction Fund (the Acquisition Fund ). Subject to the rights of IndioLand Ventures, LLC (the Developer ) under the Funding, Construction and Acquisition Agreementbetween the City and the Developer dated as of September 1, 2005 (the Funding Agreement ), theCity may apply the proceeds to the construction of other eligible public improvements. The Citymay also apply unspent proceeds to the payment of debt service on the Bonds or the early redemptionof Bonds, possibly including the payment of current debt service on the Bonds, but any applicationwould reduce Special Taxes only in accordance with the Rate and Method of Apportionment ofSpecial Taxes (the RMA ), and the owners of undeveloped property may be disproportionatelybenefited under the applicable formula. You may consider certain amendments to the RMA withoutviolating bond covenants or the law, but such changes would require an extensive public process andan election.

In any case, any application of the proceeds of the Bonds to construct public improvementsor to pay Bonds may be in violation of the Developer's rights under the Funding Agreement, and anysuch use should he carefully reviewed for its impact under that agreement. We recommend the Citycarefully document the Developer's current status under the Funding Agreement before applyingunspent funds in this fashion.

We address these issues further below.Background. The District was formed pursuant to a Resolution of Formation adopted by the

City in 2005 and bonds were issued in the principal amount of 526,330,000 (the Bonds'') for thepurpose of financing certain development fees payable to the City and others, and to thrther pay thecost of public facilities required as a condition of development of the Terra Lago project.Application of the proceeds of the Bonds is governed by a Fiscal Agent Agreement dated as ofSeptember 1, 2005 (the Fiscal Agent Agreement ) between the District and its Fiscal Agent. The

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Mr. Jim L. SmithJanuary 11, 2010age Two

City concurrently entered into the Funding Agreement with the Developer. It also addresses the useof Bond proceeds deposited in the Acquisition Fund established under the Fiscal Agent Agreement.Any application of Bond proceeds must be considered in light of the District's obligations

under the Fiscal Agent Agreement related to the Bonds, state law related to the use of proceeds of theDistrict Bonds, and the City's obligations under the Funding Agreement.

Fiscal Agent Agreement Requirements. Under the Fiscal Agent Agreement, an originaldeposit of $19,497,000 was made to the Acquisition Fund. Aside from the payment for the costs ofissuance of Bonds, monies in the Acquisition Fund are to be applied exclusively to pay ProjectCosts . Project Costs are defined as those public facilities and/or capital fees described in theResolution of Formation... The Resolution of Formation, in turn, authorizes the District to pay thecost of Facilities which are defined generally as public infrastructure facilities and othergovernmental facilities which the District is authorized to construct or finance and that are necessaryto meet increased demands generated by the Terra Lago project. (Supporting documentation maydefine these facilities in more detail), The District requisitions monies from the Acquisition Funddirectly, pursuant to a simple requisition. Thus, taken alone, the Fiscal Agent Agreement authorizesthe District to expend Bond Proceeds on any eligible Project Costs; however, the public facilitiesmust be eligible under the proceedings related to the formation of the District and, furthermore, thisright is constrained by the Funding Agreement, as discussed below. .

Once the District determines that any amount remaining in the Acquisition Fund is nolonger needed to pay Project Costs , remaining amounts are deposited to the Special Tax Fund or tothe Surplus Fund created under the Fiscal Agent Agreement. Transfer to the Surplus Fund is subjectto a further requirement that bond counsel deliver an opinion that such transfer will not affect thefederal tax exempt status of the Bonds. Monies transferred to the Special Tax Fund are applied underSection 3.2 of the Fiscal Agent Agreement to fund interest, then principal of the Bonds, among otherthings. Amounts deposited in the Surplus Fund are applied to debt service on the Bonds as needed,or to other District expenses, or for any other lawful purpose of the District (see Section 3.8).Where the amounts in the Surplus Fund are applied to debt service, Section 3.8 requires that theproceeds be yield-restricted until they are so applied.

Assuming that the unexpended amount of the proceeds is less than 5% of the originalapplicable proceeds of the issue (determined in accordance with tax principles) we believe theDistrict may apply the unspent proceeds to current debt service on the Bonds, with the resultingreduction in the Special Tax Levy related to the Bonds. If such proceeds are greater than this amountwe recommend further consultation, but it may be necessary to apply the proceeds to the early callfor redemption of bonds in 2015 on a pro rata or similar basis.

Under the RMA, if proceeds arc applied to reduce debt service, such amounts reduce SpecialTaxes only in the manner described in the RMA, which basically levies first against DevelopedProperty, (up to the Assigned Special Tax) and then against Undeveloped Property, beforeimplementing the Backup Special Tax against Developed Property. This may have the effect ofdisproportionately crediting Undeveloped Property with the benefit of any debt service reduction. It

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Mr. Jim L. SmithJanuary 11, 2010Page Three

may be that use of the unspent proceeds to defease bonds to the first call date will be more beneficialto address the situation of current homeowners, especially to the extent the property develops in thenear to mid term You would want to discuss this impact with the fiscal consultant before decidingon a course of action.

Under the Fiscal Agent Agreement, the City agrees to levy the Special Tax annually insufficient amounts to pay the Bonds, and in Section 5.7 the District agrees that it will not reduce theSpecial Taxes in a way that causes the maximum Special Taxes to be levied at a rate below a levelwhich provides certain Bond coverage. It may he that the RMA may be amended to provide for adifferent order of determination of special tax levy, one that would not credit the UndevelopedProperty before Developed Properties are credited with unspent proceeds, but this would at aminimum require amendment proceedings and an election, property owner protest right, and may besubject to litigation and other risks. Please let us know if you wish to pursue this further.

Although the District may apply unspent proceeds to a redemption of bonds or to thepayment of any eligible Project Costs, either application may run afoul of the Funding Agreementwith the Developer. We discuss this in more detail below.

Funding Agreement. The City makes certain promises to the Developer in the FundingAgreement that require careful scrutiny. The City should make every effort to clearly establish theDeveloper's existing status under the agreement before applying proceeds in a manner that isinconsistent with the Funding Agreement.

First, the Funding Agreement provides that monies deposited in the Acquisition Fund(referred to in the Funding Agreement as the Improvement Fund ) shall be deposited and disbursedin accordance with the Fiscal Agent Agreement and the Funding Agreement. The City agrees inSection 4.2 of the Funding Agreement to purchase from the Developer the Public Facilitiesconstructed by the Developer. Article IV sets forth the requirements for a payment request, includinga requirement that the facilities be publicly owned.

Article III of the Funding Agreement provides that the Developer will cause plans to beprepared for Public Facilities to be sold to the District, hut arguably does not require the Developerto construct any Public Facilities except those which it chooses to construct. See Sections 3.2 and3.3.

Section 3.6 allows the Developer and the City to mutually elect to cause any of the PublicFacilities to be constructed by the City.

Section 8.1 of the Funding Agreement provides that the agreement may be terminated bymutual written consent and monies in the Acquisition Fund may be used to pay for Public Facilitiesoutside of the agreement. The agreement does not otherwise contemplate independent constructionof the Public Facilities by the City although in the event of a breach by the Developer of itsobligations under the Funding Agreement, the City may argue it is free to do so under the FiscalAgent Agreement.

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Mr Jim L SmithJanuary 11, 2010Page Four

Thus, the current status of the Funding Agreement is a critical item in determining whetherthe City is free to apply unspent proceeds of the Acquisition Fund to the completion of other PublicFacilities, or for application to debt service on the Bonds. If the Funding Agreement is still in force,either use may violate the City's obligation to apply such monies to purchase Public Facilitiesconstructed by the Developer.

The City may argue that the Developer has abandoned the Funding Agreement, in that ithas transferred its interest in the properties to third parties and is no longer actively pursuing anyclaims relative to payment for Public Facilities constructed by it. However, you have indicated thatthe City has declined to pay for certain improvements previously requisitioned by the Developer, andthat the Developer has stopped responding to City claims that it has previously received payment forstreet improvements which do not constitute Public Facilities for which payment is authorized, buthas not formally withdrawn any claims. bsent a specific indication by the Developer'srepresentatives, to the contrary the Developer may argue that it has not relinquished its claims, or thatit has assigned them to a new owner or otherwise continue to assert a right to payment under theFunding Agreement. We recommend that the City generate detailed evidence regarding theDeveloper's abandonment of payment requests and failure to cooperate, or otherwise complete itsperformance. There is otherwise a risk that the City would be held liable to the Developer forapplication of amounts in the Acquisition Fund in a manner contrary to the Funding Agreement. Wenote in this regard that the agreement provides for the payment of attorney's fees to the successfulparty in any litigation. Sec Section 8.4.

Section 8.7 of the agreement provides that it is binding upon the successors and/or assigns ofthe parties. The Developer may assign its rights to a subsequent purchaser of the property, and itmay also assign to such a party responsibility for the construction or completion of any PublicFacilities which remain to be constructed, and the right to receive payment. In any case the City isentitled to receive reasonable proof that the assignee is the purchaser of property and that it hasentered into an appropriate assignment and assumption agreement. You have indicated that theDeveloper has sold the property and you have received no evidence from the Developer of anassignment to a subsequent property owner.

You have also indicated that the City may have processed and approved payments to theDeveloper for facilities which do not constitute Public Facilities under the Funding Agreement orProject Costs under the Fiscal Agent Agreement. It appears clear to us that payment may only be

requested for facilities to be owned by the City or another public agency, even if the facilities areotherwise listed in Exhibit A of the Funding Agreement. The Funding Agreement defines PublicFacilities to mean one or more of the Public Facilities described in Exhibit A which are eligible tobe financed out of the Improvement Fund. As noted above, the Fiscal Agent Agreement authorizesmonies in the Acquisition Fund to be expended only for costs of the Public Facilities described in theResolution of Formation, which clearly refers to publicly owned facilities. This is consistent with therequirements of the law relative to formation of community facilities districts. Moreover, theDeveloper is clearly obliged to deliver to the City Acceptable Title to any public facilities inconnection with its receipt of payment for that public facility. See for example Section 5.1. Werecommend that the City continue to vigorously pursue correction of this issue.

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Mr. Jim L. SmithJanuary 11, 2010Page ive

The Funding Agreement does not specify remedies in the event of a default by a party. TheCity may argue that it is no longer obliged to pay for any Public Facilities constructed by the ownerbased on the Developer's nonperformance or abandonment of the agreement or that it may offsetprior improper payment against any amounts owed. However, the City may prefer to furtherestablish its rights under the agreement by court action or otherwise rather than being exposed toliability to the Developer or its successors in interest. This may apply both to the use of proceeds forthe completion of improvements or for the application of unspent proceeds to debt service followingthe City's determination that funds are no longer needed.

Other Possible Uses. Under the law related to the formation of community facilitiesdistricts, the City may seek to change the permissible use of the Bond proceeds to include otherpublic facilities. This will, however, require an election and a possible landowner protest. We wouldbe pleased to explore this further with you at your request.

We do not believe it would be permissible for the City to simply apply unspent proceeds toreduce the tax burden of particular property owners at the expense of other property owners, such asthe owners of raw land in the District, in a manner that is inconsistent with the RMA. While moniesin the Surplus Fund may be applied to any lawful purpose of the District, we do not believe it islikely that a court would conclude that reduction of the Special Taxes of a particular property ownerwith the proceeds of Bonds paid for by all taxpayers would be a lawful purpose. Rather we believeBond proceeds are to be expended for District purposes in accordance with the Resolution ofFormation, RMA and bond documents. If the City is interested in pursuing this further, we wouldrecommend significant additional research. The better approach would be to seek a limitedamendment of the RMA, as described above.

Summary. In summary, we recommend that the City document the Developer's existingstatus under the Funding Agreement before applying proceeds in a manner contrary to it. In thisconnection you may wish to consider a specific letter to the Developer or its representatives, or courtaction. We would be pleased to assist you in this effort. Second, we recommend that the theeligibility of public improvements for funding under the Resolution of Formation be documentedbefore applying Bond proceeds to specific improvements to be constructed by the City. Lastly, werecommend that the City work with the Fiscal Consultant to develop the most desirable means ofapplying unspent Bond proceeds to Bond payments. Our tax lawyer will be happy to work with youto be sure tax laws are complied with, and we would offer our assistance to be sure that bondcovenants are complied with, especially if you wish to consider certain amendments to the RMA inconnection with any Bond prepayment, You may already have much of the documentation werecommend you complete. We think some specific interaction with the Developer's representativesmay be desirable.

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E. Kurt Yeager

Mr. Jim L. SmithJanuary 11, 2010Page Six

Please feel Ike to call with any questions, comments or concerns regarding the items in thisletter.Very truly yours,STRADLING YOCCA CARLSON RAUTFI

EKY;rn

cc: dward Kotkin, Esq.

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