By Robb Davis
When I ran for office I promised myself and the community that I would do my best to explain the rationale for decisions I was to make as a City Council member. I have found that it is important to do so for many issues, but especially the more complex ones that require a more detailed description of factors that lead to a particular decision.
In that spirit, I want to provide some understanding of my thinking on the CFD (Community Facilities District) at the Cannery project and what led to my opposition to it. Most of what I am writing here I addressed in my comments on Tuesday evening. However, I wanted to summarize my thoughts and hopefully clarify a few points.
First of all, I do not at all question New Homes’ (TNHC) right to request a CFD. The option was clearly provided for in the Development Agreement (DA) and I would never suggest that this right be limited in any way. Both they and the City have, to date, followed through on the commitments in the DA and their request is fully consistent with it.
My concerns about the request are based on other issues and summarized in questions that, to date, have not been responded to to my satisfaction. They are also based on some assumptions I make about the Davis new homes housing market.
First, my question to the New Homes representative about what would happen if we did not approve a CFD was met with a two part response (as I understood it): 1) Mr Feeney stated that TNHC had always wanted a CFD and had expected it; and 2) he stated that without it TNHC would not be able to bring forward in time certain infrastructure and that TNHC was interested in providing the best quality for certain amenities and would not be able to do so without the CFD.
It is important to point out the the City was not requesting TNHC to bring any infrastructure forward nor was it requesting any change in the quality of improvements agreed to in the DA. In my periodic conversations with staff they have seemed quite satisfied with the pace of implementation. I feel that Mr Feeney’s responses did not provide a clear description of any negative consequences for the City (or for TNHC) if the CFD were not granted. In other words, there is no clear rationale for concern because TNHC has agreed to a timeframe for all critical infrastructure in the DA and Mr Feeney did not suggest that a lack of CFD would cause them to have to renege on any commitments. I think this is very important to our decision making process: there is nothing to suggest any harm to the City if the CFD does not go forward.
And this brings me to a second key issue that, to date, has not been addressed to my satisfaction. TNHC is a well-known and respected, publicly traded, company. In the development agreement they agreed to construct all the critical infrastructure in question without recourse to a CFD. Up until now I simply do not understand why they would have taken the risk of not being able to raise enough money through the sale of the homes to cover the costs of their commitments. I have had the occasion to negotiate many (much smaller) contracts in my professional career and I must say that I have never agreed to terms that I was not certain I could meet within my costs. If TNHC was relying on the CFD to meet their commitments then I must ask why they did not negotiate it as part of the DA? Why leave to chance (especially with looming and unpredictable changes to the City Council composition) what is critical to a successful project?
These issues are troubling but they do not stand alone. They must be analyzed in light of the reality of the Davis housing market. I feel it is important to put on the table the assumptions I am making about this market because they are germane to the discussion in ways that I hope will become clear. Fundamentally, I do not believe the Davis new home housing market can be characterized as competitive.
If it were there would be a large supply of, largely undifferentiated, new houses available for purchase from a variety of suppliers. Home buyers would (by definition) be rational and have full information about prices. The demand function for houses would be downward sloping and fairly elastic through a broad range of prices. In such a market the addition of a CFD by one seller would force that seller to reduce prices by an amount equal to the net present value of the CFD (with adjustments for the interest rate of the bond rate versus the mortgage rate as Mark Northcross made clear on Tuesday). In such a market all buyers would pay the full price of their home and a proportionate share of the infrastructure around it either through the price of the home or through the CFD.
The Davis new home market is not competitive. Indeed, I believe a very good argument can be made that pricing in the market is characterized by monopolistic or highly concentrated oligopolistic pricing (probably, at this point, a duopoly). This is a result of several factors including decisions we have made as a community to limit growth on the periphery. I am not criticizing these decisions but we must acknowledge that they do have the consequence of offering developers we do entitle clear pricing advantages.
Beyond this, I would argue that there are no close substitutes to new Davis homes in surrounding communities. This is true because of what we might call the “Davis premium,” which is a function of schools, low crime, proximity to the University and great public amenities. The result of this is a highly constrained supply. Davis is also a desired location for many people outside town (including the Bay area) and new homes in Davis are in high demand among current residents in older homes.
The result of all of this is a highly inelastic demand function. These factors mean that TNHC is essentially a price setter in this market. Monopolistic pricing does not mean they can ask any price the want but it does give them latitude to set prices. In such a market they very well may be able to set a home price and not have to reduce it if a CFD is included. In other words, unlike in a competitive market, they will not have to reduce the price by the full amount of the CFD. Indeed, if you consider that a certain number of purchasers will not act rationally—in the sense that they will not seek to bid down prices (even if they could)—TNHC may not have to reduce prices with a CFD at all. (Recent experiences in the region suggest that many buyers do not account for CFDs but rely on the “sticker” price and, thus, act non-rationally in an economic sense.)
Obviously, I am not privy to the cost or pricing information that TNHC is using and I acknowledged this on Tuesday when I lamented the challenge of making decisions of this nature in the face of asymmetric information. I have written about the problem of asymmetric information in the past and argued that its effect is a much more conservative and cautious decision making process concerning land use issues.
Given the foregoing, I believe that home buyers moving into the Cannery face the risk of overpaying for the infrastructure there. Whether they will pay for it twice is not the issue. I feel there is evidence to suggest that they will pay more than they should and that the TNHC will reap a windfall from the CFD as a result. Of course stating such a conclusion might strike some as impolitic but it is my conclusion after much careful consideration. In addition, there are risks associated with a implementing a CFD, as was noted on Tuesday night and previously in presentations by Mr Northcross and staff. We have experienced these risks in Davis.
I want to conclude these thoughts with a response to the issue of whether I, or others, are trying to extract certain extra benefits from the TNHC by “negotiating” with them over the CFD. I will note two things in this regard. First on Tuesday night, after I ascertained that my colleagues would vote to move the CFD forward (though no final decision has, as yet, been made), I proposed an amendment to the motion to split the CFD benefits 50/50 between TNHC and the City. I did this under the assumption that TNHC does NOT need the CFD to cover its costs (for reasons laid out above). 2) In retrospect, I feel that my proposed amendment (which was not accepted) was misguided and I regret it. If I oppose the CFD, and at this point I do, then I should simply try to work to deny it. Or, following the words of a wise man: I should simply let my “yes” be yes and my “no” be no.
I hope this helps, in some way, lay out my concerns about the CFD and the rationale for my vote. As always I am very happy to have any of these points challenged and alternatives provided. I am not hardened in my position but, as a whole, the points I raise here lead me to doubt the wisdom of allowing the CFD to go forward.
Thx Robb!
2 questions:
-What is status of bike access/Cranbrook? I could not ascertain that from Tuesday’s discussion. It appeared to be linked to the CFD but apparently not?
-Now that I understand more about the CFD process in that there will be at least one more vote, do you have any hope of it being opened for reconsideration ?
Robb
I truly appreciate your clarifying your thought process on this issue and would encourage other CC members to do the same. For me, this would go a long way to restoring trust in the decision making of the majority which I feel will be critical in moving forward with other important future decision such as the innovation parks and Nishi.
It does not cost a home builder any more to build a house in Davis than it costs to build the same house in Winters. Supply and demand generate higher selling prices for housing in Davis. Higher prices produce more profit for the seller. Unless City Council wants the power to control the selling price of Davis real estate then it should not concern itself with the risk a home buyer undertakes when agreeing to pay that higher price. The CFD offers the home buyer an opportunity to pay public infrastructure costs up front for a lesser amount or over time at higher cost. The city can not control the selling price of a new house by allowing or refusing a CFD. The selling price is determined by market forces. The cost of public infrastructure will be paid by the home buyer CFD or not. In addition the home buyer will pay a premium over and beyond to buy a house in Davis. Purchasing a house in Davis involves risk just like purchasing a house anywhere else. It should not be the business of City Council to control that price or to limit purchasing options available to the buyer. City Council should let the CFD stand.
DanH is absolutely correct. The CC needs to let the CFD go forward.
Bingo! Thanks DanH for putting it so well!
Dan, Wes and Anon,
All the points that Dan has made are correct as far as they go, but they miss the mark when it comes to the TNHC request to add a CFD to their already negotiated, completed and signed Agreement.
If you or I (or TNHC for that matter) walk into a Toyota dealer and select an automobile or truck to purchase, we are presented with the base price of the vehicle and a long list of optional features and feature packages to choose from in order to provide us (the buyer) with the ability to closely match the value received to the value paid. In the process we weigh each option and some end up being “fence sitters” . . . to name just a few, a roof rack, or a painted accent stripe or magnesium wheels or an extended warranty. In the end, we decide that we don’t “need” any of those four items and the automobile dealer finalizes the price, the agreements are drawn up, we all sign the agreements and we drive out of the lot proud owners of our newly “entitled in our own name” vehicle. Just before we leave the lot, the dealer says, Any time you decide to change you mind about any of those four items from “may want it” to “do want it, just come back to see us. We can amend the agreement to include any of those items.”
Some time later, we are talking to our financial adviser and he/she gives us the very clear advice that we should have signed up for the extended warranty, so we head back to the Toyota dealer to amend the contract and add the extended warranty. Do we get that agreement amendment for free? No. We provide the Toyota dealer with value (money) in exchange for the added value of the extended warranty.
TNHC has come back to Davis in order to convert one of their “may wants” into a “do want.” And just like the Toyota dealer, the City of Davis is asking for comparable value in exchange for the value of the CFD . . . which can be objectively quantified as the $12 million net bond proceeds.
It is as simple as that.
Matt, one of your better analogies 😉
Purchasing a house in Davis involves risk just like purchasing a house anywhere else.
I disagree. Homes in Davis are an excellent investment. I guess some folks who bought prior to the bubble bursting lost in the short term, but will probably recover if they are in a position to be patient.
People who purchased homes in Davis between the summer of 2005 and the summer of 2007 are probably still under water. Go to Zillow and see how many foreclosed homes are on the Davis market. Davis real estate has rebounded faster than most markets but not as quickly as others (like the Bay Area).
1. Who is the CC representing in this proposed CFD matter? The developer or the community?
2. What benefit accrues to the community from the proposed CFD? This is not clear to me from the staff report or the developer’s comments.
3. Regarding the developer needing the proposed CFD to cover costs, how much will housing prices have increased when The Cannery homes come on line since New Homes acquired an option from ConAgra? 20% ? 25%? 30? Food for thought: $250,000,000 x 20% = $50,000,000.
4. If the CC chooses to approve the proposed CFD, why would they not split the financial benefit from the action? Whether the financial benefit to New Homes is $12,000,000 or some lesser amount, why would the CC simply allow New Homes to sweep the entire amount off the table? Is the community so cash rich now that we have no use for this money? If the CC has no interest in negotiating on behalf of the community, who then?
5. What portion of the $12,000,000 will be reinvested in the community if the CC simply allows New Homes to walk off with this financial windfall?
-Michael
This question prompted me to think of another one. For sake of argument let’s say the housing market takes off and New Homes is able to cover the cost of the infrastructure from home sales . What happens to the 12,000,000? Does that go back to the city? Or does the developer get to keep it? Basically whose bank account does that 12,000,000 go into?
they cover the cost in homesales anyway. this is a racket.
If the developer knew that they were going to need a CFD to cover the costs of the infrastructure they promised to provide in the developer agreement then why didn’t they make that stipulation in the developer agreement? Robb asks it better:
“If the developer knew that they were going to need a CFD to cover the costs of the infrastructure they promised to provide in the developer agreement then why didn’t they make that stipulation in the developer agreement? ”
because someone convinced them to wait until the dust settled
I attended the city council meeting when the Cannery was approved. I remember the discussion about the CFD. The council discussed our history with Mace Ranch, their CFD and the sentiment of those involved that we never wanted to be in that position again. TNHC stated they did not need the CFD at this point and did not anticipate needing it, they simply wanted the option to be available, just in case. I believe they downplayed their intentions to ask for a CFD because to ask for it up front might have tipped the scales resulting in a 3-2 vote against. The company outright lied either Tuesday night or when the project was approved. Since they were also at the meeting when the project was approved, they knew full well approval of a CFD would not be a five minute discussion–another lie.
The city council should have insisted the CFD either be approved or rejected before the project was approved. TNHC played their hand deftly.
Rob, one of my concerns is the city staff has to administer the CFD. We were told the staff time will be paid for by the CFD. Does this include all benefits and retirement costs and the inflation of those costs over forty years? I have no idea how much staff time is involved but I wouldn’t like to see those hours simply added to a plate that is already overflowing. How many hours are we looking at annually?
I will mention again, the problem of voting for more taxes in the future. It is true neighbors pay very different taxes since Prop 13 but now you are going to have a block of voters who pay a couple of thousand more than the rest of the city. We know from experience those voters will be much less inclined to vote for an even higher tax bill.
I was told the break even point for this project was ten years. The city will have positive revenue until year ten. After year ten, the costs to service the development exceeds the revenue. Is it any wonder that cities that continue to allow peripheral growth become more and more cash strapped? Generally their (non) solution is to continue to grow in order to increase that early revenue and those who approve the projects are no longer in office when the short fall hits. These houses should last maybe 100 years so each one will adds to the city deficit for ninety years. Does that make sense to anyone?
For those who believe this is a state of the art development, I would point out it is being built for how we live today. We know we have limited resources, that drought and climate change are in our future. We know we have an aging electric grid and the future will be a distributed electric grid. This project is built for today, not for tomorrow. For those who say there is no demand for dwelling of the future, think of village homes.
I was also told the schools had the option of taking a one time payment from the developers but sensibly opted for ongoing payments from the taxpayers.
If what DavisBurns relates is true which is verifiable via the CC tape I want to know why the CC majority voted the way they did.
What has changed from New Homes statement of not needing the CFD.?
Can we expect that the CC would have approved the DA with this CFD back last Fall?
Robb’s comment regarding the timing and quality of the infrastructure that TNHC has committed to in the November 2013 Development Agreement is consistent with the understanding I have included in my comments on Wednesday and Thursday.
It would be very interesting to hear from TNHC about what changes in timing and quality of the infrastructure that they believe is changed as a result of moving forward with the amendment to the Development Agreement to include the CFD.
To Robb Davis: I found many contradictory statements in your article, but I don’t want to nitpick your article to death. But let me ask you a simple question, to help me better understand your position. If you feel somehow that homebuyers will be “double-taxed”, how do you propose to change the structure of the CFD so they won’t be? And I refer you to DanH’s point:
“It does not cost a home builder any more to build a house in Davis than it costs to build the same house in Winters. Supply and demand generate higher selling prices for housing in Davis. Higher prices produce more profit for the seller. Unless City Council wants the power to control the selling price of Davis real estate then it should not concern itself with the risk a home buyer undertakes when agreeing to pay that higher price. The CFD offers the home buyer an opportunity to pay public infrastructure costs up front for a lesser amount or over time at higher cost. The city can not control the selling price of a new house by allowing or refusing a CFD. The selling price is determined by market forces. The cost of public infrastructure will be paid by the home buyer CFD or not. In addition the home buyer will pay a premium over and beyond to buy a house in Davis. Purchasing a house in Davis involves risk just like purchasing a house anywhere else. It should not be the business of City Council to control that price or to limit purchasing options available to the buyer. City Council should let the CFD stand.“
except that because it doesn’t cost the home builder more, they make more profit in davis. i don’t see what that has anything to do with whether or not we should have a cfd.
As you pointed out, this has nothing to do with CFD or no CFD. This has to do with the city trying to get a piece of the action!
This is too weird. Who’s team are you playing on, Anon/CC? Are you playing for Team Community or Team Developer? The CC is contemplating “borrowing” $12 million, to be repaid by future homeowners. No additional infrastructure or amenities is being constructed with the $12 million. And you (and the CC) are actually advocating for transferring the $12 million to Team Developer’s bank account? What could possibly be your motivation? Again, who’s team are you playing on?
PS: And please don’t trot out the “this was already agreed to” red herring.
-Michael
Anon
What you see as a “piece of the action”, I see as rightful compensation to the community for the “downsides” of this development which you yourself say that you changed your opinion of based on the number of “goodies” that special interest groups within the community were able to extract for the benefit only of those groups.
What I see is a developer able to count to three and be strategic in the application of this mathematical model. Despite your expertise in the law, and my lack thereof, I remain unconvinced that “may” equals “will” and that this represents a lack of transparency on the part of the developer, and possibly on the part of some CC members who by their own statements “knew that “may” always meant “will”.
My understanding is that it is the role of the CC to represent all the members of the community, not just those who favor, or can be induced with enough concessions to favor a given development. That does not appear to be what is occurring here.
Changing the structure of the CFD will not solve the problem, which isn’t so much a “double taxation” problem as a “double payment” problem that was illustrated with crystal clarity in Table 1 of the Staff Report on Tuesday (see below). They are paying for the “CFD infrastructure” once in the $637,000 sale price and a second time in the 40 years of $2,224 annual payments.
MB: “If the CC chooses to approve the proposed CFD, why would they not split the financial benefit from the action?”
What business is it of the city to determine how much profit the developer makes, and why should the city be able to insist on getting a piece of the action, figuratively speaking?
i don’t think you’re looking at this the “right” way here. it’s not that the city has a business in determining what the developer makes. instead, the city council’s job is to maximize the benefit from the city. the developer is asking for a favor – they are asking for the city to implement a policy that will generate somewhere around $12 million in extra profits. so why should the city not gain some of that benefit? now you can agree or disagree with that, but that is the issue here.
I don’t think you are looking at it the “right” way. LOL It is none of the city’s business how much the developer makes on the house. It is not the City Council’s job to try and get a piece of the action! To do so would be renegotiating an already signed contract. Basic contract law.
Hello? Creation of the CFD IS a re-negotiation of the existing contract (DA). It changes the words “may consider the formation”, to “has formed”.
bingo
To hpierce: Nope!
To Anon: Evidence?!?
Huh? Anon, with your logic, why even bother with a development agreement, impact fees, extractions, etc. Why not just gift the developer the rezoning of the land? Municipalities and developers ALWAYS tussle over the value created by land use decisions. Why would that be any different with the CFD? The City is creating $12 million or so in value with this decision. Why is the CC gifting it to the developer instead of pocketing the money itself?
PS: Keep in mind, the developer is not creating any ADDITIONAL value for the community with the $12 million. The city is the one creating the $12 million with its action. The only action the developer is taking is depositing the $12 million straight into its bank account. I want some of that action! Where does the line form for these handouts?
-Michael
It has to do with when the developer agreement was signed and its terms.
Anon, I thought you said the development agreement stipulated that the city and the developer “may” discuss creating a CFD. Is that incorrect? Were the terms of the CFD stipulated in the development agreement? If so, why is CC action even required if the deal terms have already been agreed to?
-Michael
It would lead to a more productive community conversation if Anon or any of the other pro CFD posters would take a crack at responding to questions 1-5 posted further above. Many thanks in advance!
-Michael
A few mid-day responses. I will check in later.
SODA said/asked: “What is status of bike access/Cranbrook? I could not ascertain that from Tuesday’s discussion. It appeared to be linked to the CFD but apparently not?”
To date the owners of Cranbrook have not signaled a willingness to grant the easement. The only link between this and the CFD discussion is that TNHC offered, as part of the CFD agreement, to create a “targeted” amendment to the DA to allow them and the City to explore, more flexibly, other grade separated crossing options to the west/southwest.
DanH said: “Unless City Council wants the power to control the selling price of Davis real estate then it should not concern itself with the risk a home buyer undertakes when agreeing to pay that higher price. The CFD offers the home buyer an opportunity to pay public infrastructure costs up front for a lesser amount or over time at higher cost. The city can not control the selling price of a new house by allowing or refusing a CFD. The selling price is determined by market forces.”
The City Council should not seek to control the selling price of Davis real estate. The easiest way to stay out of it is to not interpose the City in a CFD process which requires us to engage ourselves in an unnecessary way in the negotiation. We can merely keep out of it by allowing the DA to stand, as is, because the DA already has all the guarantees we need to assure that residents have the infrastructure they need at that site. I also, obviously, disagree that “the selling price is determined by market forces.” This is not a competitive market situation.
Anon said/asked: ” I found many contradictory statements in your article, but I don’t want to nitpick your article to death. But let me ask you a simple question, to help me better understand your position. If you feel somehow that homebuyers will be “double-taxed”, how do you propose to change the structure of the CFD so they won’t be?”
Anon, I would prefer that you point out, in as much detail as you care to, the logical errors in what I wrote. That is the only way I can correct myself. Please do so if you have the time. I don’t think anything is nitpicky if it helps me correct errors. To answer your question, if I understand it, I am not suggesting ANY change to the structure of the CFD. I am simply saying that I do not want to agree to it. Without a CFD the City is staying completely out of the transaction. We take on no risks because TNHC has already committed to put in all the infrastructure we require in the DA. We need nothing more from them and I am arguing they NEED nothing more from us since they already agreed to our demands and ran the numbers to assure that they could cover their costs. Without the CFD, homeowners will pay for all the infrastructure via the home price. Why allow a CFD? I simply do not see a need for this assessment.
DavisBurns wrote/asked: “Rob, one of my concerns is the city staff has to administer the CFD. We were told the staff time will be paid for by the CFD. Does this include all benefits and retirement costs and the inflation of those costs over forty years?”
If the CFD goes forward staff time should be charged at a fully loaded rate. Period.
“I was told the break even point for this project was ten years.”
Based on the fiscal model it is probably more than that (15-20 years) but will depend on increases in city service costs (which are largely determined by total staff compensation).
“costs” of City staff time are not an issue, unless someone has done a “stupid”. Yes the salaries, normal costs of benefits, internal overhead (office space, utilities, admin the support the staff hours) are in the “charge out rates”, and will be applied to the CFD. However, the big concern is whether staff resources are sufficient to fully administer the CFD. In Mace Ranch, they were not, and an outside consultant was hired to “do the heavy lifting”, to minimize the oversight by City staff.
Hm, radio silence from the CFD supporters and CC. No responses at all to the 5 questions. This is a straightforward financial transaction. The developer is proposing:
1) The city borrow $12 million in exchange for a $750,000 fee.
2) The $12 million proceeds are transferred to the developer’s account with zero consideration other than the $750k fee.
3) Future Cannery home owners service the $12 million debt.
There is no other consideration whatsoever being proposed here. What part of this transaction is attractive from the community’s perspective? I look forward to the CC’s explanation of the seeming inexplicable.
-Michael
Your challenge here assumes that the developer is financially and legally obligated to pay for the infrastucture that the CFD would otherwise fund. Until that question is resolved, your challenge is irrelevant. If the deveoper is financially and legally obligated by terms of the agreement, your challenge is relevant.
I don’t think you are a contract attorney, and I don’t think Robb Davis is.
What is the legal opinion of the developer’s financial and legal obligations as per the terms of the DA?
That is the first question that needs to be answered.
Frankly, the November 2013 Development Agreement spells out the timing, the quantity, and the quality of the building infrastructure. Robb’s words sum up that situation.
Frankly,
The DA states that the developer “may” request the CFD. The may is permissive and not mandatory like such terms as “will” or shall”. The fact that the developer expected to use a CFD is irrelevant. If they wanted it in the DA as mandatory the DA should have negotiated with the city to have the DA state that the developer “shall” use a CFD to fund this infrastructure. A good contract attorney would have included this language in the DA of that was what was negotiated. In this case it wasn’t..
Bottom line the CC is selling out the residents of this city by allowing the developer to use a CFD for infrastructure mandated in the DA. There is no logical reason to do so. Did the CC members who voted for the CFD receive campaign contributions from the developer or other interested parties? Let the cost of the infrastructure at issue be covered in the sale price for the homes. It is bad policy to allow the developer to use a CFD. If the CC does approve the CFD outraged citizens should seek to put it on the ballot for reversal before any homes are sold. The Mello Roos taxes in Mace Ranch increased the profit margin of the developers at the cost of the citizens of this city.
Individuals who have to pay this additional tax are less likely to support other parcel taxes that are necessary to fund our schools and repair our roads. It is bad policy to have a CFD.
Weird. Neither the developer, city staff or the CC has questioned the developer’s contractual obligation to pay for the infrastructure (with or without the CFD). You are even more hostile to the financial interests of the community than the CC. I pose the question again. Frankly, who’s team are you on? Team Developer? Or Team Community?
-Michael
Frankly, (and I know you are), the developer IS OBLIGATED [financially and legally] to do all what they agreed to in the DA. The question is “who pays” and what happens if the developer “flakes out” or goes bankrupt. I worry more about the the current residents who choose to move there, or the new “newbies” who move in. (frankly, I met a guy at CVS who moved to Davis a year before I was born, so, with forty plus years in Davis, I am a “newbie”).
I’ll disclose that I am not an attorney, but have a strong familiarity with CFD’s, DA’s, and legal documents related to development/property law.
Frankly, (although I’m not), the opinions given by the City Attorney (same one we have now) in regards to Mace Ranch were that failure to approve a developer’s CFD did not change the developer’s obligation under the DA.
Michael, your summary is spot on. I would add the following two items:
4) The city bill and account for the annual CFD payments for the 40-year life of the CFD, which at a conservative $20,000 per year ammounts to an $800,000 incremental expense for the City.
5) The city will be responsible for the 2%-3% (according to the City’s bond consultant) up front bond placement costs, which total $240,000 to $360,000 for the $12 million bond.
It is argued that those additional expenses in 4) and 5) will be paid out of the bond proceeds, but that just means that they are being passed on to the Cannery residents … who last time I checked would be City of Davis residents. Bottom-line, the developer avoids those costs and hands them to City residents.
Don’t disagree, Matt, with the substance of your post.
Nuance is that many of the buyers in ‘the Cannery’ will be current citizens of Davis, who want to “move up” or “downsize”. Mace Ranch is a good example of long-time residents doing that.. So is Covell Park Northstar, Aspen, Evergreen, Wildhorse, etc. Those will be people who “paid their dues” , for years, both to the City and DJUSD, but if some get their way, with an expanded CFD, the properties they vacate will get all of the benefits, and little of the costs, if the CC goes for more “community benefit”.
I oppose the proposed CFD, on principles. But, I’m only a “newbie”, who has only lived in, and loved this community since 1972 (yeah, there was a two year period when I didn’t live here… makes me more of a ‘newbie).
For those who support the CFD and getting a pound (or more) of flesh, why not include ALL of our obligations (roads, post-retirement benefits, pools, etc.) into the bond issue to ensure that existing folk, and new folk erase those ‘liabilities”?
Frankly said: “I don’t think you are a contract attorney, and I don’t think Robb Davis is.”
You are correct. But fortunately, I can ask staff and the City Attorney about such matters. Indeed, like all CC members I turn to them for information on every technical and legal matter I am asked to decide on. I did the same thing in this case. The staff report states:
and
Your statements, Robb, are correct and, IMHO, should be noted.
Noted. Stand corrected. Thanks.
Sorry, not being difficult, I just require the opinion of legal experts on contract law. I have been bitten before using business, common and liguistic sense.
So, if the borrower is legally obligated to pay for this backbone infrastructure, make it so.
I won’t belabor the fact that we allowed the “may require a CDF” language in the agreement (bad idea in my mind). If it is an enforceable legal contractual obligation, then demand that the developer comply. I am with Robb and Brett on this with legal support.
I’m a little surprised that the Enterprise did not report on the CFD vote in the piece they published today on the Cannery.
http://www.davisenterprise.com/local-news/barn-farm-house-rise-at-the-cannery/
just another puff piece. an advertisement masquerading as news.
Just like All the articles promoting innovation parks both here and in the Enterprise.
Hm, still no response to questions 1-5 or a response to the question, “What part of this transaction is attractive from the community’s perspective?” How goddamn hard can it possibly be to receive straightforward responses to fundamental questions? Pretty hard apparently.
Let’s try a different approach. The city borrows TWELVE MILLION DOLLARS, gifting the proceeds to the developer, while retaining ONLY a $750,000 fee. The ONLY action the developer takes is depositing the TWELVE MILLION DOLLARS in their bank account. A 3rd party, The Cannery homeowners, services the TWELVE MILLION DOLLAR debt. This transaction is in the best interest of the community….how?
I look forward to the next CC meeting to listen to the tortured reasoning. Beer? Check! Popcorn? Check!
-Michael
Potential headlines:
1) DAVIS CITY EMPLOYEES TAKE $12 MILLION HAIRCUT TO SAVE STRUGGLING DEVELOPER
2) DAVIS CONSUMERS INCREASE SALES TAX TO SAVE STRUGGLING DEVELOPER
3) DAVIS SCHOOLS INCREASE CLASSROOM SIZE TO SAVE STRUGGLING DEVELOPER
4) DAVIS VOTERS DEFER STREET MAINTANANCE TO SAVE STRUGGLING DEVELOPER
5) DAVIS SWIMMERS GIVE UP POOLS TO SAVE STRUGGLING DEVELOPER
6) $12 MILLION CITY OF DAVIS DONATION TO STRUGGLING DEVELOPER FUND
I’ve no doubt Jon Stewart will come up with a better headline. Wait, wait. I’ve a better idea. How about a $100 Davis Vanguard contest for best goofy headline?
-Michael
It appears to me that there is plenty of room left for negotiation of CFD details. The City recommends the Council meeting of April 7 for adopting a resolution of intention, which is next in the five step process culminating with the issuance of bonds.
Five step process? Why can’t the city simply wire the TWELVE MILLION DOLLARS to the developer’s bank account and then check the donation box on the city’s tax return?
-Michael
To Council member Robb Davis:
Thanks Robb, now at least I think I understand where you are coming from – no CFD. But that seems to be a bit at odds with your words in the article, and I think that is why I have come away confused about what you said on the dais and what you are saying here on the Vanguard. For instance, you state:
“First of all, I do not at all question New Homes’ (TNHC) right to request a CFD. The option was clearly provided for in the Development Agreement (DA) and I would never suggest that this right be limited in any way. Both they and the City have, to date, followed through on the commitments in the DA and their request is fully consistent with it.”
So you have no problem with the Cannery developer asking for a CFD nor seem to have any philosophical problem with CFDs per se. But further down in the article you state:
“Given the foregoing, I believe that home buyers moving into the Cannery face the risk of overpaying for the infrastructure there. Whether they will pay for it twice is not the issue. I feel there is evidence to suggest that they will pay more than they should and that the TNHC will reap a windfall from the CFD as a result. Of course stating such a conclusion might strike some as impolitic but it is my conclusion after much careful consideration. ”
You seem to object to the Cannery asking “too much” for the homes if a CFD is approved, then seem to indicate you have no intention of having the city control the price of Cannery homes, but don’t mention anything about not wanting a CFD at all. Instead you offered a friendly amendment to “split the profits from the CFD 50-50”.
Trust me, I realize that often City Council members opinions can “evolve” after much thought and discussion. Nevertheless I have found your positions to be internally inconsistent on this particular issue. I assume now you have reached the conclusion that the city should not grant the CFD?
Anon – Let me try to clarify my position.
1. I voted against the CFD on Tuesday night. I concluded at that time that the City should not grant the CFD. I said that, via my vote, on Tuesday. I have not changed my position. I tried to use this article to explain why I opposed, and still oppose, the CFD. Fundamentally, I oppose the CFD because TNHC agreed to all infrastructure at the Cannery without recourse to a CFD to pay for it. TNHC has given me no reason to conclude that the CFD is needed to pay for the infrastructure the previously committed to provide. We did not ask them to renegotiate the DA (that is, to add or change the infrastructure) and we have received everything we need in the DA.
2. Even though there is no demonstrable need for the CFD I accept the fact that the DA allows either party to request the formation of a CFD. I do not question TNHC’s right to request it. The DA does not obligate me to say “yes” if they do request it. As the staff report says, the CC decision to grant the applicant’s request is discretionary. The DA does not force me to say “yes” if/when TNHC requests a CFD and so I am saying “no.”
3. TNHC agreed to pay for ALL infrastructure committed to in the DA when they signed it. How they pay for the infrastructure is not my concern UNLESS they ask me to “tax” residents to help pay for it. Since they agreed to provide the infrastructure without the CFD, I see no reason to “tax” residents at this point. I cannot accept that a sophisticated company would have agreed to terms of a contract without having the financial means to cover the costs of their commitment. TNHC already agreed to the terms of the contract without recourse to a CFD.
I am not worried about them asking “too much.” I am concerned that because we have a very tight market that TNHC will not reduce the pricing by the amount (of the NPV) of the CFD and, in that way, buyers will pay more than they would need to AND the City would have been party to the transaction. It is best for the City to simply stay out of it. We can do that by not agreeing to the CFD.
The terms of the DA are fully in force. Residents will get the infrastructure they need and we need do NOTHING more to assure that that happens.
Okay, got it. Thanks a million for the clarification. It does help me understand where you are now coming from.
DT Businessman: “Anon, I thought you said the development agreement stipulated that the city and the developer “may” discuss creating a CFD. Is that incorrect? Were the terms of the CFD stipulated in the development agreement? If so, why is CC action even required if the deal terms have already been agreed to?”
One has to look to all terms in the contract as they relate to each other, not just cherry pick what one wants to see. The DA was already signed, and the city needs to abide by ALL the terms of the contract.
Frankly (no relation to commenter Frankly!), the larger issue is CFD or no CFD. I can understand philosophical reasons for being opposed to CFDs in general. However, if one is opposed to CFDs, then the developer will merely tack the cost of the infrastructure onto the sale price of each house. That takes away from a prospective homeowner the option to finance infrastructure costs over a period of years. Personally, I have mixed feelings about CFDs.
“The DA was already signed, and the city needs to abide by ALL the terms of the contract.”
But the contract only required them to consider a CFD.
Anon: “That takes away from a prospective homeowner the option to finance infrastructure costs over a period of years.” No it does not. As Mark Northcross said on Tuesday. Given current mortgage rates versus current bond rates, it is less costly for a buyer to pay for the infrastructure via their mortgage than via the CFD. Some fuss was made about “prepaying” the CFD. Most mortgages also allow prepayment. There is no justification for the CFD.
The City is abiding by EVERY term of the contract–including in relation to the CFD. Here is the full article concerning the CFD from the DA:
ARTICLE 11. Special District Formation.
A. [Sec. 11001 Community Facilities District for Public Facilities and/or Services. Developers and City may form a Community Facilities District or Districts (or other public finance district under State law, as appropriate) for the purpose of financing the construction and/or acquisition of public infrastructure and facilities within the Project area or for the provision of services (“Project CFD(s)”). If requested by Developers, City may determine whether to form one or more Project CFD(s) for the purpose of providing services or financing the acquisition or construction of some or all of the improvements and facilities eligible for CFD financing within and associated with the Project, including those improvements which will mitigate impacts of the Project upon areas inside and outside of the Project with a useful life of 5 years or longer, and will be owned, operated or maintained by the City or another public agency as authorized under Government Code 53311 et seq. and City policy.
There is simply nothing here that requires us to form a CFD. Nothing.
If requested “City may determine whether to form one or more Project CFD(s)…”
“right arm”! Thank you for the documentation of what I ‘thought I knew’.
Rob, Awesome explanations, thank you so very much! I have been trying to make sure I understand before spouting off and I think I do now for sure and agree with you and others who see the logic of NO CFD 100%.
Robb Davis: “Some fuss was made about “prepaying” the CFD. Most mortgages also allow prepayment. There is no justification for the CFD. ”
The justification for the CFD is that it allows a prospective homeowner the option to finance the costs of their share of the infrastructure over a period of years. If the city does not grant the CFD, that option for the homeowner is taken off the table.
Ok, Anon… assuming, as I’ve said at least a couple of times, IF the buyout value of the CFD “works” in the formula Purchase price (w/o CFD) = Purchase price (w/CFD) + Buyout from CFD, the CFD enables a buyer to finance the “improvements” differential at a higher interest rate [and, a longer term, with more total interest] than if there was no CFD. Mighty noble of you to want to protect that option. But even then, I’m not convinced that the equation is correct.
I think the market value/sales price will be pretty close to each other, CFD or not. I guess I shouldn’t care, as I will not be buying there.
Oh, and guess what… if you bought property in the Cannery, in an early phase, and later parts were never built out, under the laws (read the contract, as you like to say), either the City, the then property owners are still fully responsible for the investment. If the property of the undeveloped property walks (declares bankruptcy?) walks, then the home/property owners and/or the City pick up the tab. Nice.
Am thinking that the only ones supporting the CFD are those who will profit from buyers not ‘doing the math’ and buying property they think they can afford (when they really can’t), those who would profit from the higher interest rates, or those who want to see the required improvements ‘fast-tracked’. But I’d be open to another reason why the City should put out bonds, that might affect (negatively) City’s bonding capacity/risk, and screw the potential buyers while improving the developer’s profit margin. Perhaps you could explain your reason for supporting the proposed developer’s CFD. I think the “option” argument is pretty much debunked, at this point.
Disagree Anon. If the home price includes the cost of infrastructure, which it most definitely will, then a mortgage spreads the cost of that infrastructure over a period of years b