The City Council is being asked to hold a public hearing to consider increasing the annual appropriations limit and maximum amount of bonded indebtedness, and altering the Rate and Method of Apportionment of Special Taxes for Community Facilities District No. 1 (Downtown Parking Facilities). At the conclusion of the hearing, Council will be asked to adopt a resolution that certifies these changes.

Community Facilities District No. 1 (CFD No. 1) was formed to provide a financing mechanism for the construction of two parking facilities required by the remodel of the Sunnyvale Town Center. At the time of formation, City Council established the maximum amount of debt for CFD No. 1 at $25 million.

At its meeting on June 15, 1999, the City Council authorized the issuance of the Bond Anticipation Notes (CFD No. 1 Notes) and approved the execution of a number of agreements necessary to complete the issuance. In so doing, it authorized the issuance of no more than $24 million of CFD No. 1 Notes and set the maximum interest rate on the CFD No. 1 Notes at 6.00%. At its meeting on January 11, 2000, the City Council authorized increasing the CFD No. 1 Note issuance to $25 million to account for the higher cost of constructing the two garages and reset the maximum interest rate to 8.00% due to rising interest rates.

In addition, at its meeting on June 15, 1999, the City Council also authorized the future issuance of Mello-Roos Bonds (CFD No. 1 Bonds) that will pay off the CFD No. 1 Notes and approved the execution of a number of agreements necessary to complete the issuance. In so doing, it authorized the issuance of no more than $25 million of CFD No. 1 Bonds and set the maximum interest rate on the CFD No. 1 Bonds at 7.00%. American Mall Properties (AMP), the mall owner, will pay all costs associated with issuing the CFD No. 1 Bonds, as well as debt service payment on the CFD No. 1 Notes and Bonds.

State law requires that the value of the property paying the special tax used for debt service be at least three times the amount of bonds issued. As outlined by the City’s Goals and Polices, an appraisal was commissioned by the City to determine the value of the mall. However, state law allows bonds to be issued at less than a 3:1 ratio if the City Council by a vote of four-fifths of its members determines there are public policy reasons to proceed. At its meeting on February 29, 2000, the City Council made findings that there are public policy reasons to authorize the issuance of bonds with a minimum 2.5:1 ratio.

The Goals and Policies adopted by Council outline how projects eligible for Community Facilities District (CFD) financing will be evaluated. These policies are generally designed to ensure that the CFDs created are made for the public good. They define credit requirements for projects under consideration that protect bondholders from default and set forth disclosure requirements that notify prospective property purchasers of the lien associated with the properties they seek to buy.

Initially, the issuance of $25 million of CFD No. 1 Bonds was expected to be sufficient to finance the construction of the parking facilities. However, higher construction costs and increasing interest rates now require a larger amount of debt to fully fund construction.

In February 2000, the appraisal estimated the value of the mall upon completion in 2002 would be $71.6 million. This would allow the City to issue approximately $28.6 million of CFD No. 1 Bonds (after the CFD No. 1 debt limit is raised) which could finance $22.5 million of construction costs. However, construction costs are now estimated to be $26.2 million. This leaves a shortfall of approximately $3.7 million.

To help meet this shortfall, at its meeting on February 29, 2000 the City Council also approved in concept the City’s investment in the project by purchasing approximately $2.5 million of subordinate Mello-Roos bonds (CFD No. 2 Bonds). The balance of the shortfall would be met by having AMP purchase approximately $1.25 million of CFD No. 2 Bonds. All costs associated with issuing the CFD No. 2 Bonds, as well as debt service payments on these bonds will be paid by AMP. Upon sufficient growth in mall value to meet the 2.5:1 value test, the City will issue additional CFD No. 1 Bonds to refinance the CFD No. 2 Bonds.

Therefore, to fully fund construction and refinance the CFD No. 2 Bonds, assuming the mall’s value increases such that the 2.5:1 ratio is maintained, requires issuance of approximately $33 million of CFD No. 1 Bonds at today’s interest rates. To provide for the possibility that interest rates rise to the 12% maximum interest rate permitted by law, it is prudent to increase the debt limit to $36 million.

As a result of the proposed increase in the debt limit, it is also prudent to raise the maximum special tax rate from $3.20 to $6.50 per square foot. This rate will permit repayment of the bonds even if they are issued at the 12% maximum interest rate allowed by law. Although staff does not believe the actual interest rate will be this high, it allows room for the uncertainty of future increases and provides investors with a stronger degree of comfort. The actual tax rate levied in each year will not exceed that which is necessary to pay debt service as determined by the actual size and interest rates on the CFD No. 1 Bonds.

After approval of the resolution set forth in Attachment A, Council must hold a hearing to consider increasing the annual appropriations limit and maximum amount of bonded indebtedness, and altering the Rate and Method of Apportionment of Special Taxes for CFD No. 1. That hearing must be scheduled and noticed for a period of at least thirty days following today’s meeting. That hearing will be scheduled for April 25. Upon conclusion of the hearing, the Council will act on a resolution to approve these changes. Assuming approval by the Council, an election of all landowners will be held to approve the changes to the maximum bonded indebtedness and maximum tax rate. Upon approval by AMP, the sole landowner, the Council will be asked to certify these changes.

Before approval of these changes, only $25 million of CFD No. 1 Notes will be issued in conformance with the current $25 million debt limit. However, after approval of these changes, a new series of CFD No. 1 Notes will be issued to raise, together with the proceeds of the CFD No. 2 Bonds, the full amount of funds needed to provide for the construction of the two garages. This second CFD No.1 Note issuance is expected to be less than $2 million.

All costs of issuing the CFD No. 1 Notes and Bonds, as well as debt service payments on the CFD No. 1 Notes and Bonds, will be paid by AMP.

Public contact has been accomplished through publication and posting of the Council agenda. Reports to Council are also available in the Library and on the City’s web page.

Staff recommends that the City Council increase the appropriations limit and maximum amount of bonded indebtedness, and to alter the Rate and Method of Apportionment of Special Taxes for CFD No. 1 by adopting the resolution set forth in Attachment A:

Resolution of Consideration to Increase the Annual Appropriations Limit and Maximum Amount of Bonded Indebtedness, and to Alter the Rate and Method of Apportionment of Special Taxes