The City Council is being asked to initiate proceedings to form Community Facilities District No. 2 (Downtown Parking Facilities) (CFD No. 2). CFD No. 2 will issue Mello-Roos bonds that will be purchased by the City and American Mall Properties (AMP) to provide supplemental funds for the construction of two parking facilities at the Sunnyvale Town Center. Council is being asked to approve two resolutions, thereby initiating the proceedings. The resolutions are: A) Intention to Establish a Community Facilities District and B) Intention to Incur Bonded Indebtedness (Attachments A and B). Assuming Council approves the resolutions, the next step will be to hold a public hearing.

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.

Initially, the issuance of $25 million of Mello-Roos Bonds (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.

To help meet the construction funding shortfall, at its meeting on February 29, 2000, the City Council approved in concept the issuance of a second series of Mello-Roos bonds (CFD No. 2 Bonds) secured in a manner similar to the debt to be issued by CFD No. 1, but with rights and remedies that can only be exercised if doing so does not impair the full and timely receipt of debt service by owners of debt issued by CFD No. 1. Furthermore, the Council agreed to purchase approximately $2.5 million of the CFD No. 2 Bonds and established, as a condition to the issuance of the $25 million of CFD No. 1 Notes, that AMP have executed an agreement with the City to receive approximately $1.25 million of CFD No. 2 Bonds in lieu of receiving a construction management fee for the construction of the two garages.

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.

Jones Hall, the City’s bond counsel, believes that creating a separate CFD is the simplest way to accommodate a City investment. Several steps must be taken to form CFD No. 2, levy the tax and issue bonds:

Initiation of Proceedings

Notice and Public Hearing

Resolution of Formation

Election Procedure

To initiate the proceedings, the City Council is asked to approve a series of documents, as follows:

This resolution starts the process of formation of CFD No. 2. The resolution defines the facilities to be financed, sets the physical boundaries of CFD No. 2, and sets forth the details of the special tax. It defines the facilities to be financed as the parking facilities required to be built to meet the parking requirements of the Sunnyvale Town Center remodel. It sets the same boundaries as CFD No. 1 which include only the properties owned by AMP or the Redevelopment Agency in the area bounded by Mathilda, Washington, Sunnyvale and Iowa Avenues. The special tax is defined in Exhibit B of this resolution.

The special tax is levied as an amount of money per square foot of land area. However, the collection and payment of the tax will be subordinate to payment of the special tax for CFD No. 1. In addition, in the event of default by the property owner in paying the special tax for CFD No. 1, any foreclosure proceeds will be used first to pay off the special tax obligation for CFD No. 1. As with CFD No. 1, the tax is not levied on any property owned by a governmental body. Thus, the Redevelopment Agency will not be required to pay the special tax. The resolution establishes a maximum tax rate. Each year that the tax is to be levied, the City Council will set a tax rate for that year at or below the maximum rate.

Resolution of Intention to Incur Bonded Indebtedness.

This resolution states the expectation that CFD No. 2 will issue debt to build the parking facilities. It sets a maximum amount of debt of $5 million and certain other parameters. The detailed documents authorizing the issuance of bonds will be brought for City Council approval at a later date.

Assuming Council approves the above resolutions, the next steps will be taken in April and May. After approval of the Resolution of Intention, Council must hold a hearing to consider creation of the CFD. That hearing must be scheduled and noticed for a period of at least thirty days following the March 21 adoption of the Resolution of Intention. That hearing will be scheduled for April 25. Upon conclusion of the hearing, Council will be asked to approve a Resolution of Formation to create the District. Immediately upon formation of the District, AMP, as the sole property owner in the CFD responsible for paying the special tax, will vote its approval of the levying of the special tax and the issuance of debt. Council will then be asked to adopt an ordinance imposing the tax. Assuming approval on April 25, Council will be asked to approve the second reading of the ordinance in early May.

The debt to be issued (probably in May) will be CFD No. 2 Bonds. At its February 29, 2000 meeting, the Council stipulated that a written agreement be executed between AMP and the City, prior to the sale of the CFD No. 1 Notes, describing, among other things, the terms of the CFD No. 2 Bonds. That agreement, the Additional Funding Agreement, establishes that approximately $2.5 million of the CFD No. 2 Bonds will be purchased by the City with proceeds from the land swap and funds released from the COP debt service reserve fund. The COP debt service reserve fund provides security for owners of the City’s outstanding issue of Certificates of Participation (COPs) that financed the existing parking facility. The funds that are released from the reserve fund will be replaced by a surety policy. In addition, approximately $1.25 million of the CFD No. 2 Bonds will be given to AMP in lieu of AMP receiving a construction management fee for the construction of the garages.

The CFD No. 2 Bonds will mature August 1, 2012, which is ten years beyond the maturity of the Notes being issued by CFD No. 1. Interest will not be paid on the CFD No. 2 Bonds through August 1, 2002. Instead, interest during that period will accrue and be added to principal. The portion of the CFD No. 2 Bonds owned by the City will accrue interest at 12% and that owned by AMP will bear interest at the rate of interest borne by the CFD No. 1 2000 Series A Notes. If the CFD No. 2 Bonds remain outstanding after August 1, 2002, they will bear interest at the same rate as the CFD No. 1 Bonds issued to redeem the CFD No. 1 Notes. If there is insufficient revenue to pay the debt service on all the CFD No. 2 Bonds, revenue will be used first to pay the debt service on the City-owned CFD No. 2 Bonds.

At such time as the mall value increases sufficiently to permit the issuance of additional CFD No. 1 Bonds, the City will issue such bonds to refinance the CFD No. 2 Bonds. The CFD No. 1 Bonds will be issued with at least a 2.5:1 value-to-debt ratio, the minimum threshold authorized by the Council at its February 29, 2000 meeting. If an increase in the mall value only permits a partial refinancing of the CFD No. 2 Bonds, the City-owned CFD No. 2 Bonds will be taken out first.

All costs of establishing CFD No. 2 and issuing CFD No. 2 Bonds, as well as debt service payments on the CFD No. 2 Bonds, will be paid by the affected property owner, AMP.

$2.5 million in City funds, already invested in the mall, will be reallocated to purchase CFD No. 2 Bonds. The City-owned CFD No. 2 Bonds will provide a rate of return to the City equal to approximately 7.00%. If the City chose not to purchase the CFD No. 2 Bonds, the rate of return on the City’s funds would be approximately 5.80%, the current average return on the City’s investment portfolio. Therefore, the City will not be earning less interest by investing the funds in the CFD No. 2 Bonds than it would otherwise earn in its own investment portfolio. The present value of the increased cash flow the City will receive is approximately $300,000.

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 initiate proceedings to form CFD No. 2 by adopting the resolutions as set forth in Attachments A and B:

Resolution of Intention to Establish a Community Facilities District

Resolution of Intention to Incur Bonded Indebtedness