By Brett Lee
Recently, the Davis City Council voted to approve a Community Facilities District, or Mello-Roos District, request made by developers of The Cannery. It was approved on a split vote, 3-2.
I voted against granting a CFD to The Cannery. I did not and do not see either a clear benefit to the residents of Davis or a clear public policy advantage in supporting the creation of a special taxing district where the residents not only would pay their normal property taxes and assessments, but also would be required to pay substantial additional special taxes.
In conversations with my neighbors, I have realized that some are not familiar with the timeline leading up to this vote. In addition, many seem to be unclear about the mechanics of a CFD. I thought I would take a moment to provide some background information that may prove helpful in understanding what the City Council voted on.
In the fall of 2013, The Cannery development proposal was before the City Council. The land owned by The Cannery developers was zoned for industrial use. The project applicant (The Cannery) asked the city to rezone the land for residential use so it could build about 500 homes. The proposal went through the normal planning process, which included an environmental impact report that assessed what impacts there would be to the community if the project was to be built.
The EIR identified substantial negative impacts to the surrounding roadways in terms of congestion and delays.
In the negotiations between the city and The Cannery, a development agreement was worked out that both parties signed. In it, The Cannery agreed to provide approximately $12 million in fees and contributions to the city to mitigate the negative impacts of the project (money for improved roads, additional bike paths, etc.).
In addition, The Cannery agreed to include certain amenities in the development for the future Cannery residents such as parks, open space, an urban farm, etc. The development agreement is binding on both parties. In it, the possibility of a CFD was mentioned. Specifically, it stated the following:
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.
From the above paragraph, it is clear that we (the city) could agree to form a CFD, but the size (dollar amount) and scope (what it covered) was wide open to negotiation.
Fees proposed
Fast-forward to February 2015, and The Cannery is before the City Council asking that the city create a CFD to help defray the cost of the infrastructure that The Cannery had already agreed to in the development agreement.
The request of The Cannery was basically this: The city would assess each household a yearly fee of $904 for homes of less than 1,674 square feet, $1,434 for homes between 1,675 and 2,124 square feet, $2,268 for homes between 2,125 and 2,574 square feet, $2,725 for homes between 2,575 and 3,024 square feet and $3,223 for homes larger than 3,025 square feet.
This additional fee would last for the next 40 years. In addition, there would be an inflation provision that could increase the fee by up to 2 percent each year.
So, assuming the inflation escalator happened in two out of three years, by year 24 the fee for a 2,400-square-foot home would increase from $2,268 per year to $3,113 per year. Unlike a typical fixed-rate mortgage, the inflation clause means that the amount of the CFD fee rises over time.
With the creation of a CFD, it is the city’s responsibility for the collection of the fees. Typically with the creation of a CFD, a city issues bonds and uses the bond proceeds to reimburse the developer for the developer’s up-front infrastructure costs. The city becomes financially liable to the bond holders and it is the city that must repay the bond holders.
Why a CFD?
So, two questions could be asked: Why would a city wish to create a CFD and how could a CFD be structured?
A city may wish to form a CFD to entice a developer to invest in its community. In many places throughout California, communities struggle to attract high-quality developments. As an incentive to choose its locale in which to develop, a community may offer to cover some or all of the infrastructure costs.
In addition, the CFD can be used to cover costs not directly associated with the development. For example a CFD could be used to cover police or fire services, or an infrastructure improvement in a different neighborhood. The CFD serves as a mechanism to defray developer costs and also can provide the community funds for other areas.
An interesting aspect of a CFD is that it must be approved by the voters of the area affected. But as is typically the case, the land being considered to have a CFD placed upon it does not have any residents, and thus no “voters.” In this case, it is the landowner or landowners who get to decide if they want a CFD placed on the development. So in the example of The Cannery, there is one voter — The Cannery owner. It is an election with one vote.
How structured?
So how could a CFD be structured? All terms are up for negotiation between the developer and the city. The yearly assessment, the term of the assessment (number of years) and what the CFD is allowed to fund.
So a CFD could be for five years or 40 years. It could be $500 a year or $5,000 a year. It could cover all of the proposed infrastructure improvements or just 10 percent. It could include improvements directly in or adjacent to the development or it could include general community improvements farther afield. It really is a flexible tool.
Of course, there is no free lunch. The future residents of the development are the ones who bear the burden of the assessment.
Personally, I have to wonder why the city is being asked to be inserted into this transaction, which I believe fundamentally is a transaction between two private parties. If The Cannery developers needs to charge a premium for the homes they build due to the amenities and infrastructure they have agreed to provide in the development agreement, so be it. Let the purchase price of the home reflect and fund these items.
I am uncomfortable having the city create a vastly unequal taxation patchwork where some residents are paying in excess of $2,000 more in taxes/fees a year than their nearby neighbors with homes with the same assessed values.
In addition, I am not comfortable with the city issuing nearly $12 million in bonds and becoming financially liable for the repayment of them.
Thank you Brett for this explanation. Do you have a sense of next step possibilities? I wish the majority vote makers would explain their thinking and address some of your points.
I just wish one of the three would move reconsideration and end the process. I don’t need to know why they voted for an ill-conceived notion.
they don’t need to move for reconsideration, they only need to vote it down when it comes back to them.
Ok… in the meantime staff hours, including attorneys’ hours are being charged. You OK with the City and/or developer incurring those costs? Nice. Always good to rack up those billable hours for attorneys (and other staff).
i’m not okay with it, but we are where we are
No, DP, a CC member who vote in favor of reconsideration could end those costs now.
But, if you favor the CFD, what better way to ‘seal the deal’ by giving the developer ‘ammunition’ with the “swing voter” (which I believe it will come down to), by saying something like “this isn’t fair! We were led to believe this was a ‘done deal’ and have expended money on that ‘assurance'”. Nice.
But at least the attorneys will get in their billable hours, right?
Echo SODA’s thanks, Brett. Just hope you and Robb (both with double consonants at the end their first names… ) ‘keep the faith’, and vote your conscience on behalf of the existing and future citizens of Davis.
David,
I thought someone (Matt?) was going to ask our mayor some questions on his position last Friday? If the developer three will not explain their rationale for voting for the CFD then maybe we should ask the grand jury to investigate. Particularly were there any implied or actual promises made to the developer by any of the three or city staff that the CFD would be approved even though it was not mandatory in the development agreement. I do not see how the city benefits from the CFD as it looks like a gift of $12 million by the city to the developer.
Good point – I don’t know what came of that.
zaqzaq, I submitted the questions quoted below to Dan at Morning with the Mayor at Common Grounds on Friday. He had a full complement of citizens there with their own questions, and as I noted in the original thread since I was acting as a proxy for those who could not be there (or chose to not be there), I would wait until all the first-hand questions were answered. As a result Dan only had time to accept the questions and take them under advisement for later answering, either in a future Mayors Corner article in the Enterprise and Vanguard, or by the Council as a whole (since some of the submitted questions really were for the whole Council, not just the mayor as an individual).
Bottom-line, it is a work in process.
As I commented recently, I’m interested in returning to Davis and this development appealed to me for several reasons. But I’m not comfortable with Mello-Roos fees after seeing what happened in Mace Ranch. According to my research, these fees are not considered “taxes” by the State, and therefore the FTB does not allow them to be deducted as such. I would certainly be willing to pay an upfront additional cost to a home I purchase to defray the infrastructure costs – just as I did on the last home I purchased in Davis. It’s only fair that as a user of new infrastructure I bear the burden of its expense. But a possible 40-year commitment, with a 2% annual increase and the accompanying impact on resale prices will kill this option for me.
Mr Lee missed an important part of the “inequity” issue. The homes designated as “affordable” will be exempt from assessments. Over time, those will be sold as “market-rate” and will still be exempt. Meanwhile, the other properties will be paying for their improvements AND those of the “affordable” units. Nice. Investment advice… find someone eligible for the affordable units, strike a deal as a “silent partner”, buy the unit, and ‘flip’ it (when you can) at market rates, and split the proceeds. All legal. And, unethical, but by approving the CFD, the CC is an ‘enabler’.
Of course, that assumes the initial purchase price is discounted due to the CFD. Still unconvinced that will be reality.
“Over time, those will be sold as “market-rate” and will still be exempt. ”
why is that?
Are you familiar with the City’s history of monitoring the “affordable housing” program? Apparently not.
Particularly in regard to SFR (multi-family has had some modicum of success).
Oh, maybe you meant on the “assessment” side. OK, fair question… the way the tax rolls are set up, a property is “in or out”, and moving a property one way or the other will not be captured on the assessment rolls. And that assumes that the City will even be able to effectively monitor the sales price.
I don’t believe this development will have any single family affordables. All of the affordable units will be in the low income apartments and accessory dwelling units — which in my mind is a far more logical way to provide affordable housing.
The Single Family affordable program is a joke — since you only have to be below moderate income at the time of purchase. I have a number of faculty friends who purchased homes early in their career track — and now get to continue to benefit from a home they purchased at far below market value.
With apartments, you are income tested every year to make sure that you qualify for the program. I’m a firm believe that the single family home affordable program should be scrapped. First time homebuyers can decide to buy a smaller home or go to Spring Lake. Low Income Renters don’t have those options.
There was all this outrage that Cannery got partial credit for 2nd units for affordability…in reality those units have a much better chance of remaining affordable than single family affordables.
Very disappointing that our Council flip flopped post Cannery due to pressure from the affordable housing community and got rid of the second unit affordability credit. Those units are far cheaper to build than affordable apartments –but the affordable apartment community didn’t like the competition. They should have been scrapping the single family units instead.
Mistake number one was to include in the agreement the potential to create a CFD.
Mistake number two was the three CC members that voted yes to pursue the staff recommendation to approve the CFD.
Is there an opportunity for these two previous mistakes to be corrected with a final vote from the CC? As I understand the CC only voted to move forward with the staff recommendation. However, it would seem that a final and formal vote would be required to adopt changes to the agreement. That being the case, I would hope Rochelle would reconsider.
Looking at this from a pure business sense, on one hand I don’t have too big of a problem passing on these costs to the future residents… because the future residents can make their own price-value determination. And with respect to the concern of existing Davis homeowners over property value impacts from new development… the Mello Roos add on helps provide some premium for that “new home smell” that tends to lower the market value of competing older homes for sale.
But also on the business side of consideration is the fact that we had an agreement and that agreement was essentially broken. The developer wanted another $12 million in return for the project and saw a way to get it done. I don’t blame the developer for pursuing his own interests. He has investors with a stake in this and they will be made more happy with a larger return. That is business. The broken part of the business aspect is the city being a snowflake and melting with the first sign of renegotiating heat.
And this city melting tendency is the other reason that the CC should have never accepted this change. Future residents of the Cannery are going to eventually whine and complain about the unfairness of their Mello Roos and demand that the city absorb these costs. And the CC will likely melt again at some point. And then all of us will have to pay for that $12 million that the developer pocketed.
The reason that this “possible CFD” clause was included in the agreement was city greed and negotiation risk-aversion. The greed part is the city wanting a mechanism to exploit if there are subsequent demands for amenities previously not conceived of or vetted. The risk aversion part is simply cover for not having done a good enough job vetting all the possible amenities.
One last point. I think if Steve Pinkerton was still the CM, we might have had a different outcome. The new CM is a known friend of Dan and Lucas. And Dan and Lucas clearly sided with the CFD for reasons that have to include enhancing their resume to be used for their future political pursuits. And in consideration of this… the CFD decision should not be that big of a surprise. Davis politics are consistent in this tendency to kick the fiscal can down the road transferring more and more of the bill to the existing and future residents.
i thought pinkerton always expected them to do a cfd – isn’t that what the vanguard reported previously?
Another potential reason that Mr Pinkerton should not be given “sainthood”, as some seem to want. He was nowhere near our best City Manager.
I feel the need to comment after reading what I wrote. I do NOT know why Dan and Lucas and Rochelle voted from the CFD. I am just theorizing. I submit that their very well might be reasons that I am not aware of. Maybe one or more of them can write a VG piece explaining their thinking like Brett has done here.
You can add this action to the list of reasons why you don’t hire “nice guy” cronies as your City Manager. A real CM would fight this action — or at least make sure you have properly extorted lots of money out of the developer if he has the three votes in his pocket. This action is a slap in the face to the community — and a real threat to any future parcel tax– as we’ve just created the biggest block of “no” votes in the community.
It isn’t unusual for a Council to get politically manipulated – which is why the public should always insist on an independent chief executive — and not one controlled by the Mayor’s political cabinet.
1. Councilmember Lee seems to have changed his position, since the last City Council meeting. Before he appeared to be asking for more concessions from the developer, and/or consider tightening or changing the terms of the CFD structure, but I assume his position has “evolved” and he now is opposed to a CFD altogether.
2. The Cannery has been a good partner w the city thus far, in so far as I am aware. CFD’s are a common way to finance the cost of infrastructure, and was granted to Mace Ranch. Instead of working with the Cannery to ensure there is no repeat of the mistakes made with the Mace Ranch CFD, commenters here seem to be assuming the worst motives to the Cannery developer, and want to punish the Cannery developer for the sins of Mace Ranch.
3. Be careful what you wish for, because you may not like what you get. Just saying’…
“3. Be careful what you wish for, because you may not like what you get. Just saying’…”
by that logic we could never change out of fear of unintended consequences.
Not necessarily – just have to be very careful, and think about all the upsides and downsides.
My cynic side: the CC members’ “minds are made up. We should not confuse them with facts.”
I was at the council meeting and never heard Council Member Lee, or Mayor Pro-tem Davis, ever imply that they wanted to re-open the developer agreement to request more concessions. I believe this is supposition on your part.
Go back and listen to the CC meeting.
Okay I did. Council Member Lee never suggested that the terms of the development agreement be altered or opened back up for discussion.
He did point out the that development agreement allowed for negotiations to occur regarding the terms of the CFD (amount, length of time, etc.), and how how the money from the CFD was spent, and suggested that council partake in these negations with the best interest of the community in mind.
I don’t see anyone saying that the reason they are not supporting the CFD is to punish the developer. The are not supporting it because of the negative impacts a CFD has on this community in general and future cannery homeowners.
I do not blame the developer for requesting to form a CFD, if I were them I would do the same thing, it’s an awesome deal. It defrays their costs and makes the city, not them, responsible for collection of the fees and liable to bond holders.
But here is the thing, our council members job is to make decisions based on what is in the best interest of the community, not the developer. (that doesn’t mean we are punishing them every time we don’t give them what they ask for, and again I don’t blame them for asking for what ever they want).
As Council Member Lee pointed out in his piece there are some communities that benefit from the formation of a CFD. Davis is not one them.
The question I still have not heard an answer to is how, in Davis, in this housing market, is the formation of a CFD beneficial to any party involved except the developer?
Michelle, when you last asked that question, I answered it and you responded to my answer with clarifying points. So your question has been answered. Here is that answer again …
Since I posted that reply two weeks ago, I have completed further analysis, and validated my calculations with Mike Webb at the City, as well as the Yolo County Tax Collector/Auditor’s Office. Those analysis calculations indicate that the 50/50 split of the $12 million is still a loser for the community (the City and the School District), and that the split of the $12 million needs to be no less than 75%/25% in order for the community to “be whole.”
Hi Matt
what were Dan’s responses to the CFD questions you posed from DV readers?
Matt a 50/50 deal WAS NOT PART of the agreement council voted on. For this reason I do not see how it is a relevant part of this conversation.
Michelle, the Council directed Staff to “prepare the papers.” What those “papers” may end up being is still undetermined. If you want to live in a Manechean reality, that is your choice. In that Manechean reality the chances that one of the three “yes” votes will change to a “no” are somewhere between slim and none, and slim has left the building.
To Michelle: Councilmember Robb Davis claims if the CFD is approved, the Cannery developer will be collecting taxes twice! There has also been talk of not wanting to repeat the mistakes made in the Mace Ranch development agreement.
That’s kind of a gross simplification of his view which is that if the CFD were implemented, the demand for housing would not automatically enable home buyers to bargain down home prices. So in effect, they would pay the same rate for their purchase price plus be saddled with the tax, hence the double-dipping.
In a monopoly market like Davis is, Robb Davis’ argument is very solid.
With that said, the bonding consultant Susan made the point that Davis residents are smart enough to run the numbers, and use those numbers to request (from New Home Company) a reduction of $50,000 in the sales price of the hypothetical residential unit from Figure 1 of the Staff Report.
Susan’s point begs two questions. First … it is one thing to request a discount, it is another to receive the discount. Second … if the $50,000 sales price reduction is granted, then the Ad Valorem Taxes for that residential unit will be reduced each year by the Ad Valorem Tax Rate (currently 1.0715%) times the $50,000 discount.
Please show me where I said that the Cannery Developer will collecting taxes twice.
You didn’t. Someone misunderstood, or used wrong words.
“Taxes” have little to do with it, for the homeowner. ‘Purchase price’ and ‘assessments’ are the real terms. The assessments are collected with the property tax bill, but are not, really, taxes. The City nor the County can’t do anything with those assessments other than paying off the bonds issued. City, County, (and via the State, schools) will collect less taxes with a CFD than with it.
It’s the developer who “wins” with a CFD… not ‘the City’, and certainly not those who buy property within the Cannery Project.
Robb, I know you know this, am posting for others to understand.
My understanding of Robb’s comment was that because housing in Davis is in such demand, the additional fees that homeowners pay resulting from the formation of a CFD, will not lower, as the developer and some council members claim, the price people are willing to pay for a house, which may be the case in communities where the housing market is weaker.
This result is a win-win for the developer, they get to pass on the costs of the infrastructure they are legally responsible for providing to the homeowner, and they still get to charge market value for the houses they are selling, while the homeowner still pay market value, and also then have to cover the developer costs.
It baffles me that 3 council member would vote to approve this.
Anon, you wrote: “Councilmember Robb Davis claims if the CFD is approved, the Cannery developer will be collecting taxes twice!”
This is incorrect. I have engaged you on this issue in this space several times and there is no evidence here I ever said what you have attributed to me and I did not say it during the City Council discussion on this matter. Here is what I said in my article and in responses to the article:
And…
I do not understand your purpose in mischaracterizing my position on this (in any case the “Developer” does not collect taxes so I would never state that) but I find it troubling. I have tried my utmost to make my position on the issue clear. I am troubled by your comment.
At the CC meeting I thought I heard you use the term “double-dipping” but I may have conflated the use of that term with Matt’s comments, don’t know. Nevertheless, the statements “I believe that home buyers moving into the Cannery face the risk of overpaying for the infrastructure there” and “TNHC will reap a windfall from the CFD” and “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” indicate some sort of wrongdoing on the part of the Cannery developer, especially in light of your statement “AND the City would have been party to the transaction”.
Anon, “wrongdoing” far too accusatory a word. You and I agree on that. My personal perspective is that what we have is the capitalist economic system doing its thing. One party to a transaction has asked to amend the contract with therms that have the potential … but not a guarantee … that that party will reap additional profit from the aggregate transaction. With that “ask” on the table from the one party, the other party has the right (and ability) to say “yes,” “no,” or “let’s talk some more, what you propose has possibilities, but as is, it is inadequate.” That is, as I know you know, how capitalism works.
Anon… just made another post on this… see above.
Anon you wrote: …indicate some sort of wrongdoing on the part of the Cannery developer, especially in light of your statement ‘AND the City would have been party to the transaction.'”
I did not intend to suggest any wrongdoing on the part of TNHC and have repeatedly said that they are fully within their rights (and I even said responsibility) to request the CFD. My statement about the City being party is based on the conviction that we should not be part of the homeowner/seller transaction.
I apologize to you and TNHC if my comments have caused harm. That was not my intent. TNHC is playing fully within the rules on this, I just happen to think we should not be party to this transaction.
I never used the word “double-dipping” and even said in my comments at the CC that I merely believed that market conditions were such that purchases would not be able to bid prices down to the full cost of the (NPV) CFD.
I want city leadership to start demonstrating more business sense. We tend to waffle back and forth between hostility toward business and bending over to accept unnecessary concessions for developers. Good business is fair but firm. That should become our motto with respect to our city agreements with outside parties… fair but firm. It is not fair to demand too much from developers, but it is also a mistake to fail to expect a developer to stick to his commitments.
The other thing about this waffling tendency is that it injects uncertainty and mistrust into the voters for the next project. If the city will allow the developer to slide on his commitments, then there will be more risk aversion for some voters and more difficulty getting the yes votes to approve the development.
And when we melt like a snowflake it sets a precedent for the next developer that he can come back demanding concessions after commitments have been made.
Can the citizens of Davis require a vote on the CFD by placing it on the ballot much like the way the citizens overturned the water rates? I suspect if put to a vote the CFD would lose by a landslide.
No.
To amplify, the CFD WILL be put to a vote… the developer has all the voting power, as the owner of the property proposed to be assessed. To have the City vote as a whole, that would be “representation without assessments”. And, is obvious between the confusion between ‘taxes’ and ‘assessments, I’d never recommend that approach.
“I want city leadership to start demonstrating more business sense. We tend to waffle back and forth between hostility toward business and bending over to accept unnecessary concessions for developers.”
This is actually a very good point. I feel as if the Cannery developer is being shown a lot of hostility based on what happened with the Mace Ranch developers. Or it is assumed the Cannery developer is trying to “put one over” on the city and homebuyers by asking for a CFD. The worst possible motives are being attributed to a developer who has bent over backwards to accommodate the city. What sort of a message is that going to send to the innovation park developers? Don’t bend over backwards, because ultimately you will be asked for more and more and more? Or to build in Davis is just not worth the effort?
Don’t get me wrong, I am not necessarily pro-development or pro-developer. I voted in favor of Measure J/R. I was absolutely opposed to the Mace Ranch development and Covell Village. I was in favor of Target coming to town. I try to judge each project on its own merits.