Working Draft of May 14, 2004 Working Draft of August 11, 2004 Working Draft of September 8, 2004 CITY AND COUNTY OF HONOLULU DEPARTMENT OF BUDGET & FISCAL SERVICES ADMINISTRATIVE GUIDELINES FOR COMMUNITY FACILITIES DISTRICTS City and County of Honolulu 530 S. King Street Honolulu, HI 96813 (808) 527-5673 September 2004
Table of Contents CITY AND COUNTY OF HONOLULU Department of Budget & Fiscal Services ADMINISTRATIVE GUIDELINES FOR COMMUNITY FACILITIES DISTRICTS Page I. INTRODUCTION...1 II. CFD REVIEW COMMITTEE...1 III. PRIORITIES FOR CFD FINANCING...4 IV. CREDIT QUALITY FOR CFD BOND ISSUES...4 V DISCLOSURE FOR PROSPECTIVE PROPERTY PURCHASERS...5 VI. EQUITY OF SPECIAL TAX FORMULAS AND MAXIMUM SPECIAL TAXES...6 VII. APPRAISAL CRITERIA...6 VIII. DEPOSITS...8 IX. GUIDELINES; WAIVER AND AMENDMENT...8
CITY AND COUNTY OF HONOLULU DEPARTMENT OF BUDGET & FISCAL SERVICES ADMINISTRATIVE GUIDELINES FOR COMMUNITY FACILITIES DISTRICTS I. Introduction The administrative staff of the City and County of Honolulu Department of Budget and Fiscal Services ( Department ) has determined that prior to initiating proceedings to establish a Community Facilities District ("CFD") it shall first consider administrative guidelines and parameters in processing and administering CFDs related to Chapter 34 of the Revised Ordinances of Honolulu ( Ordinances ). The Department has determined that these guidelines include the following: 1. A statement concerning the priority that various kinds of public facilities will have for financing through a CFD. 2. A statement concerning the credit quality for CFD bond issues. This statement includes criteria for evaluating credit quality. 3. A statement concerning the steps to be taken to ensure that prospective property purchasers are fully informed about the special taxes imposed on property within any CFD. 4. A statement concerning the criteria to be used for evaluating the equity of tax allocation formulas (i.e., special taxes allocated to different land use categories). This statement includes the desirable special tax levels to be levied against any CFD properties. 5. A statement concerning the criteria for preparing appraisals, including definitions, standards, and assumptions to be used in appraisals. II. CFD Review Committee As a part of these guidelines, a Community Facilities District Review Committee ( Committee ) shall be created for the City and County of Honolulu ( City and County ). The Committee shall be chaired by a representative of the City and County Office of Managing Director. Other members participating in the Committee shall include but not be limited to, representatives from the City and County s Department of Corporation Counsel, Department of Budget and Fiscal Services, Department of Planning and Permitting, and the City Chief Engineer. The Committee shall review each proposed CFD at least once prior to consideration by the Council of the Resolution of Intention ( ROI ) to form the CFD and prior to the Council s consideration of each issuance of debt. At its sole discretion, the Committee may review a matter more than once and request the advice of the City and County s consultants engaged for the proposed CFD to assist it in its review. The cost of any such consultants is to be borne by the proponent of the CFD. The Committee shall require submittal of documentation by the City and County s consultants engaged for the proposed CFD as may be necessary for it to conduct an informed review. Specifically, the Committee shall review and comment on all land-secured financings involving the formation of a CFD and the issuance of CFD special tax bonds. Macintosh HD:Users:katieanderson:Documents:OneDrive:ULI Hawaii:Infrastructure Coalition:City County Honolulu Draft CFD Rules_September 2004.doc 1
The following are specific recommendations for the Committee to consider in its review with regard to proposed CFD formation and financings: 1. Prior to the Council s consideration of a ROI to establish a CFD, the Committee: a) is to determine that all land use approvals required for the proposed project development are being obtained and conform to the Oahu General Plan, Land Use Ordinance ( LUO ) and the relevant Sustainable Communities Plan or Community Development Plan; and b) shall review the rate and method of apportionment ( RMA ) of the special tax and have the City and County s consultants engaged for the proposed CFD verify that the proposed RMA of the special tax conforms with the Revised Ordinances of Honolulu and is consistent with the project development plan. 2. Prior to the Council s consideration of any ordinance authorizing the sale and issuance of bonds, the Committee is to have the City and County s consultants engaged for the proposed CFD verify that: a) A current appraisal and any related absorption study have been prepared consistent with the Revised Ordinances of Honolulu and that satisfactory land value-to-lien ratios exist. b) Any credit enhancement required by the Revised Ordinances will be provided. If a variance is requested, the request is to be noted and a recommendation made to the Council with regard thereto. c) The RMA of the special tax is in compliance with the Ordinance of Formation establishing the CFD and the Revised Ordinances of Honolulu. d) The structure of the proposed financing is consistent with the Ordinance of Formation establishing the CFD and the Revised Ordinances of Honolulu. III. Priorities for CFD Financing The priority for CFD financing by the City and County will generally be as follows: (a) facilities needed to serve residential, business, industrial, resort and/or agricultural development which is zoned and/or designated for development pursuant to the City and County s Development Plans or Sustainable Communities Plan and which is deficient in infrastructure or other public facilities needed to develop the area as planned; (b) facilities needed to serve areas in which existing infrastructure or other public facilities are inadequate to serve such area; (c) other facilities for which there is a clearly demonstrated public benefit; and (d) other facilities permitted by the Ordinances. The City has created the following criteria governing the formation of CFDs. These criteria have been established for the purpose of providing direction to all interested parties as to the City s approach on this method of debt financing. It has been determined that prior to initiating proceedings to establish a CFD, the public needs and benefits associated with the creation of the CFD shall be considered by the Department. It is the Department s intention to support development projects which either address a public need and/or provide a public benefit.* Examples of projects that provide public need and/or public benefit that meet these criteria include: (a) Facilities with significant public benefit where significant is defined as a 2
benefit directly or indirectly responding to an existing or emerging public need in the community or region at large and having a benefit to the properties within the proposed CFD, including but not limited to: (1) Streets, bikeways, sidewalks, bridges, highways and highway interchange improvements; (2) public parking facilities; (3) lighting systems, including traffic signals, for any public right-of-way; (4) local parks, recreation, child care, parkway and open-space facilities; (5) libraries, schools, museums and other cultural facilities; (6) public utility facilities and undergrounding of utility lines; (7) water source development, storage and transmission facilities; (8) police, criminal justice, fire suppression and paramedic facilities; (9) wastewater, storm drainage, sewage removal or treatment, solid waste disposal and recycling or resource recovery systems or facilities; (10) transit or transportation systems; (11) telecommunications systems; and (12) any other public facilities the City and County is authorized by law to include in a CFD. (b) Public facilities with a useful life equal to or greater than the term of the bonds related to those facilities. Projects that do not meet these criteria include: (a) Projects which do not address a public need* are those facilities which fail to directly or indirectly respond to an existing or emerging public need in the community within or in near proximity to the boundaries of the CFD. (b) Projects with limited lifespan are those facilities which have an estimated useful life less than the term of the related bonds, e.g. police cars, fire trucks, ambulances, office equipment (computers, furniture), etc. *The scope of the project s public benefit or the project s ability to meet a public need will be ultimately determined by the Council. 3
IV. Credit Quality Requirements for CFD Bond Issues CFD bonds to be issued by the City and County shall satisfy certain credit quality requirements. Satisfaction of these requirements will not compel the City and County to issue bonds. The City and County may disregard certain of the criteria or may apply other credit criteria in determining whether to issue bonds if it is determined that such action would not imperil the security of the bonds or that the issuance of the bonds would accomplish a specified public policy goal. A. Value to Debt Ratio In order to minimize the likelihood of a CFD defaulting on its payment to bond owners, all CFD bond issues shall require at least a three-to-one property value to public lien ratio. Pursuant to Section 34-7.3 of the Ordinances, the principal amount of the bonds to be issued shall not exceed one-third of the value of the real property upon which a special tax is levied for payment of the debt service on the bonds. The value of the real property shall be the fair market value of the land and special improvements, within the meaning of the Ordinances, to be constructed within the CFD, as shown upon an appraisal of the subject property made by an MAI appraiser. The appraisal shall be based on criteria as described below under Section VII of these guidelines. The appraisal must be dated within six months of the date the bonds are issued. B. Reserve Fund There shall be a bond reserve fund for fixed interest rate bond issues equal to the lesser of (i) ten percent of the original proceeds of the bond issue, (ii) the maximum annual debt service on all outstanding bonds, or (iii) 125 percent of the average annual debt service on all outstanding bonds shall be required for all bond issues in CFDs where less than 90 percent of the buildable acreage has been developed. Notwithstanding the foregoing, a smaller reserve fund may be permitted by the City and County for bond issues in CFDs where a significant portion of the buildable acreage has been developed and the value to debt ratio for undeveloped property is in excess of the ratio required in IV.A above. The reserve fund may be funded with cash or an acceptable reserve surety or other credit facility. 4
C. Property Tax Delinquency Rates There shall be no delinquent real property taxes on the undeveloped parcels included in a CFD on the date on which bonds are issued for that CFD. (NOTE: Generally, the City does not allow any subdivision or other changes to a parcel with delinquent taxes.) D. Development Feasibility Bond issues may require a current (dated within six months) CFD absorption study prepared by a consultant if the CFD Review Committee determines that such objective data are necessary to analyze the feasibility of the project. To the extent that the appraisal reflects an absorption analysis, this may be used to fulfill the purpose of this section. E. Exceptions The CFD Review Committee may consider exceptions to the above guidelines for bond issues that do not represent an unusual credit risk, either due to credit enhancement or other reasons specified by the City and County. Variable interest rate bond issues which the City and County determines have unique credit support features will also be reviewed and evaluated on a case by case basis. Refunding bonds shall meet the requirements of Section 34-7.8 of the Ordinances. Furthermore, the City and County may consider exceptions to these guidelines for projects which meet public policy goals relating to affordable housing and creation of employment opportunities or increased housing supply. V. Disclosure for Prospective Property Purchasers A. Disclosure for Builders and Developers In order to ensure that prospective property purchasers are fully informed about the taxpaying obligations imposed under the Ordinances, the City and County will require disclosure to prospective property purchasers. The form of disclosure shall be required to be submitted to the CFD Review Committee for approval. B. Disclosure for the Resale of Homes or Lots The City and County s administrator or designee (i.e. special tax consultant) who is designated to determine the special tax liability each year shall also be designated to provide a notice of special taxes to sellers of property (other than builders or developers). The notice shall be provided by the City and County as soon as practical after receiving a request for the notice. A reasonable fee may be charged by the City and County for providing the notice. The City and County s administrator or designee (i.e. special tax consultant) who is designated to determine the special tax liability each year shall also establish procedures to promptly respond to inquiries concerning current and future special tax liability. A reasonable fee may be charged and included in the CFD annual special tax levy for these 5
services. VI. Equity of Special Tax Formulas and Maximum Special Taxes Special tax formulas shall provide for special tax levels which satisfy the following: 110 percent gross debt service coverage for all bonded indebtedness, and Funding for the reasonable and necessary administrative expenses of the CFD Additionally, the special tax formula may provide for the following: Lease payments for existing or future facilities The costs of remarketing, credit enhancement and liquidity facility fees The cost of acquisition, construction, furnishing or equipping of facilities The accumulation of funds reasonably required for future debt service Any amounts required to establish or replenish any reserve fund established in association with the indebtedness of the CFD Amounts equal to projected delinquencies of special tax payments Any other costs or payments permitted by law Costs associated with the release of funds from an escrow account The special tax formula shall be reasonable and equitable in allocating public facilities costs to parcels within the CFD. Exemptions from the special tax may be given to parcels which are publicly owned, are held by a property owners association, are used for a public purpose such as open space, are affected by easements making impractical their utilization for other than the purposes set forth in the easements, or have insufficient value to support bonded indebtedness or as otherwise determined by the CFD Review Committee. When made a part of the CFD plan, exemptions, in whole or in part, from any special tax may be given to land use classes such as business and industrial or to sub-classifications such as affordable housing. VII. Appraisal Criteria A. Definition of Appraisal An appraisal is a written self contained report independently and impartially prepared by an MAI or an equally qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information. B. Standards of Appraisal 6
A detailed complete appraisal shall be prepared and reflect nationally recognized appraisal standards including, the Uniform Standards of Professional Appraisal Practice (USPAP) of the Appraisal Foundation, and of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. Appraisals undertaken to establish value-to-lien ratios in CFD s should value the real property subject to special tax liens. The estimate of Market Value should be refined to reflect the Retail Value of fully improved and occupied properties and the Bulk Sale Value of all vacant properties, including both unimproved properties and improved or partially improved but unoccupied properties including the fair market value of the special improvements. An appraisal must contain sufficient documentation including valuation data and the appraiser s analysis of the data to support his or her opinion of value. At a minimum, the appraisal shall contain the following items: a. The purpose and/or function of the appraisal, a definition of the property being appraised, the intended use, the identity of the current and intended uses, and a statement of the assumptions and limiting conditions affecting the appraisal. b. An adequate description of the physical characteristics of the property being appraised, location, zoning, present use, and an analysis of the highest and best use. c. Relevant and reliable approaches to value consistent with commonly accepted professional appraisal practices. If a discounted cash flow analysis is used, it should be supported with at least one other valuation method, such as a market approach using sales that are at the same stage of land development (i.e. recognizing the fair market value of the land and special improvements). If more than one approach is utilized, there shall be an analysis and reconciliation of approaches to value that are sufficient to support the appraiser s opinion of value. d. A description of comparable sales, including a description of all relevant physical, legal and economic factors such as parties to the transaction, source and method of financing, and verification by a party involved in the transaction. e. A statement of the value of real property. f. The effective date of valuation, date of appraisal, signature and certification of the appraiser. C. Conflict of Interest/Business Relationship No appraiser or review appraiser shall have any interest direct or indirect in the real property being appraised that would in any way conflict with the preparation or review of the appraisal. If the CFD appraiser is chosen by the Developer or has an existing business relationship with the Developer, an impartial review appraiser familiar with CFD appraisals shall be retained to review, comment on and provide an opinion as to the reasonableness of the CFD appraisal. 7
D. Refunding and Restructuring In the context of a workout or bond restructuring, including a refunding, the requirement, if any for an appraisal shall be based on findings of the City Council in light of the particular bond structure and the nature of the bondowners of the new restructured obligations. VIII. Deposits All costs of the City and County and/or its consultants retained during the pre-formation process, the formation process, and prior to the sale of any Bonds, shall be paid by the proponents/petitioners of the CFD. Any monies advanced to the City and County shall be held in the trust account and are to be applied to pay the City and County and its staff in reviewing and processing the CFD request as well as the costs of the bond counsel, financial advisor, special tax consultant, absorption consultant, appraiser, all publication expenses, and any other costs determined by the City and County to be reasonable and necessary to establish the CFD. After formation of a CFD and issuance of CFD bonds, the petitioners may be reimbursed from bond proceeds for costs paid by the petitioners, however, reimbursement will be limited to the cost of CFD related consultants and staff costs approved by the City and County. IX. Guidelines; Waiver and Amendment The parameters set forth herein reflect the administrative guidelines under which the City will consider the implementation of the Ordinances. The CFD Review Committee may, in its reasonable discretion, require additional or different measures and procedures, including enhanced security and higher standards in particular cases. The CFD Review Committee may, to the extent permitted by law, in its discretion, waive any of the guidelines set forth herein in particular cases. The administrative guidelines set forth herein may be amended at any time and from time to time by the City. 8