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.
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.
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.