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LAND-SECURED FINANCING CURRENT TOPICS AND PRACTICES
SESSION THREE: REAL ESTATE MARKET AND CFDs
THE GREAT RECESSION AND LAND-SECURED FINANCING
DISTRICTS IN CALIFORNIA
HOW DID THEY DO AND WHAT HAS CHANGED?
MAY 1, 2015 CONCORD, CA
-350,000
300,000
250,000
200,000
150,000
100,000
50,000
0 1960 1965 1970 1975 1980
• Multifamily
• Single Family
1985 1990 1995 2000 2005
ALIFORM A
DEBT AND
INVESTMENT
AD 0 RV
COMMISSION
2010
Impacts of the “Great Recession”: New Construction Permits in California 1960-2010
-ALIFORM A
DEBT AND
INVESTMENT
AD 0 RV
Impacts of the Great Recession: Foreclosures in the U.S. 2000-2013
Fore
clos
ures
Mill
ions
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
Mello-Roos Bonds Outstanding
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
Billi
ons
Total Outstanding Principal (FY 2012-13) = $12 Billion
County
CFD Issuers by Type of Agency
City School District County Special District JPA Community Serv. District Other
43%
34%
6%
7%
6%
2% 2%
CFDs During the Great Recession: How Did They Do?
Generally, it was an impressive performance Different ways of measuring performance How should we define “default”: Missing a debt service payment? Drawing from the reserve fund? Bondholders do not get paid full principal investment?
Very few Mello-Roos bonds truly defaulted during recession; only 0.49% of outstanding bond principal remains unpaid
Policies, procedures and guidelines turned out to be effective
National Land Secured Bond Defaults
National Land Secured Market Bonds Issued 2000-2014 and Still Outstanding (as of 12/31/14)
2,398 issues, $26.9 billion
California and Florida dominate
Market Share Default Rate1Billions By Year of Issue and State
California 45% 0.49% $6
$5
$4
$3
$2
$1
$
All Others
Total
1 – Defaulted par as % of outstanding par
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Florida 28% 17.77% 27% 8.83%
100% 7.55%
CA FL NY Other States
Source: Bloomberg. Special Tax and Special Assessment Bonds; data may be incomplete; as of 12/31/2014 7
California Land Secured Bond Defaults
Expectations for stress:
Hardest hit regions
Central Valley, Inland Empire
Projects with bankrupt developers
SunCal/Lehman
Reynen & Bardis, Dunmore Homes
Empire Land, Kimball Hill Homes
Others. . .
Late cycle projects
2006 and 2007 bond sales
=> Actual impact on outstanding bonds has been more muted
. .
Actual Payment Defaults:
Borrego Water CFD: $6.9 million
Lathrop CFD: $49.3 million
Reserve Fund Draws:
Merced (Bellevue Ranch, Moraga)
Northstar CFD
West Patterson CFD
Western Hills (Diablo Grande)
Several CSCDA pooled issues
Several timing or delinquency-related draws that were quickly replenished
Others:
Palmdale (Ritter Ranch) - again
Nevada County (Wildwood Estates) -still
Ione - still
What Changed in Latest Cycle?
Leverage: Lending practices
Project phasing
Use of proceeds to enhance value, acquire completed facilities
Local policies requiring developer-posted LOCs
Value-to-lien and quality of appraisals
Governance: Statutory and regulatory framework
SEC crackdown on fraudulent underwriting practices
Issuers required to adopt local goals & policies for CFD
Roving JPAs outlawed in response to ‘90s abuses
Quality of initial disclosure improved, requirement for continuing disclosure
CDIAC policy guidance on appraisal and disclosure standards
Ongoing CDIAC education and training of issuer community
Active District administration
Engaged bond-related professionals: issuers, underwriters, consultants, appraisers
Delinquency Management: A Key Component in Effective Administration
Demand letters should be sent immediately after missed payments (December and April installments)
For homes in foreclosure, send demand letters to bank Mello-Roos lien is senior to mortgage lien
Accelerated foreclosure provision is quite an effective motivator
Even in Teeter Plan counties: don’t wait to act Cumulative delinquencies are harder to remedy
Land-secured districts can be removed from Teeter at any time
Strip Mello-Roos taxes if homeowner cannot pay full bill
Inform Tax Collector that payment plans won’t work for special taxes and assessments
ALIFORM A
DEBT AND
INVESTMENT
AD 0 RV
Sample of Five CFDs in Northern California Delinquency Rates Through Recession
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% 2006-07 2007-08 2008-09
Woodland CFD No. 2004-1 Modesto CFD No. 2003-1 Lammersville CFD No. 2002
2009-10 2010-11 2011-12 2012-13 West Patterson CFD No. 2001-1 Rancho Cordova CFD No. 2003-1
2013-14
Managing Special Tax Delinquencies: Sample Central Valley CFDs
18.0%
16.0%
14.0% 13.22%
15.05%
17.80%
1.83%
4.32% 3.80%
2.23%
1.05% 1.05%
4.58%
6.94%
0.26%
2.36%
0.26%
1.44% 0.39%
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Before Demand Letters After Demand Letters
Del
inqu
ency
Rat
e 12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Insights from California Market
Difficult development environment CEQA and other standards create tortuous, time-consuming and expensive process
=> Effectively winnows viable projects
Changing market landscape Ascendance of national builders, demise of many regional builders
=> More staying power through downturn
Location, location, location Geographic features limit supply of entitled land in key areas bolstering value
=> Problems occurred in fringe areas
Over-leverage Extended from developers to homeowners
=> Market stress affected built out districts, not just raw land projects => But residential delinquencies have been fairly “digestible” by lenders
Foreclosure and bankruptcy of developer can be more problematic Larger developer delinquencies can cause reserve draw and halted construction
=> Toxic combination was developer and lender stress
California Land Secured Market Today
Annual California Land-Secured Issuance Since 2000 By $ Amount Issued
Par I
ssue
d ($
in B
illio
ns)
Num
ber o
f Iss
ues
$3.5 $3.0 $2.5 $2.0 $1.5
$0.8 $1.3
$1.6 $1.6 $2.0
$2.9 $2.4
$1.8
$0.4 $0.3 $0.4 $0.9
$1.6 $1.7 $1.6
$0.8
New Money Refunding
$1.0 $0.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Annual California Land-Secured Issuance Since 2000 By Number of Issues
188200 169
146150 New Money Refunding 131 108 108 106 99100 78 74
52 72
4450 35 25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
28
Issuance Volume by Region
69% of issues and 68% of par issued by Southern California issuers since 2000 California Land-Secured Bonds by County of Issuer
From 2000 - 2015 YTD*
Par I
ssue
d ($
in B
illio
ns) Top 5 Southern California Counties 5.5 Top 5 Northern California Counties
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Or ang e Rive rside San Los San All O ther Sacrame nt o Pla cer San San Yolo All Other Die go Ang eles Be rnard ino Jo aq uin Fr ancisco
Source: SDC. As of 3/31/2015.
Low General Interest Rate Environment
Long Term Revenue Bond Index (RBI) and Short-Term SIFMA Index
8.0%
Since Inception Average RBI = 6.70% 7.0%
6.0% Current RBI = 4.18%
5.0%
4.0%
3.0%
2.0% Since Inception Average SIFMA = 2.41%
1.0% Current SIFMA = 0.04%
0.0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Thomson Financial. As of 4/16/15.
Municipal Bond Supply and Demand
Municipal interest rates are influenced by macro-economic conditions and more technical supply-demand trends
Issuance volume has been down, dominated by refundings
Investor interest has ebbed and flowed in uncertain rate environment
Municipal Mutual Fund Flows Municipal Market Annual Supply
($ in Billions) $35.3 billion in 4 inflows
($ in Billions) Annual Average Issuance (Past 6 years): $356.4 bn 2
450 500
2015 Issuance (1/1-4/16): $124.2 bn 0
400 (71% rise from 2014 350
-4
same period) -2 300 250 200 -6 150
-8 100 50 -10
2008 2009 2010 2011 2012 2013 2014 2014 2015 (1/1-4/16) (1/1-4/16)
New Money Refunding
$45 billion in outflows (Nov. 2010-May 2011)
$61 billion in inflows
(Sep. 2011 -Dec. 2012 )
$65 billion in outflows
( May 2013 -Jan. 2014)
(Jan. 2014 -Apr. 2015 )
Apr
-11
Jun-
11A
ug-1
1O
ct-1
1D
ec-1
1Fe
b-12
Apr
-12
Jun-
12A
ug-1
2O
ct-1
2D
ec-1
2Fe
b-13
Apr
-13
Jun-
13A
ug-1
3O
ct-1
3D
ec-1
3Fe
b-14
Apr
-14
Jun-
14A
ug-1
4O
ct-1
4D
ec-1
4Fe
b-15
Marketing Considerations for New Issues
Narrower base for land-secured credits Most sensitive sector to supply/demand
Investors “reach for yield” in low rate environment -- but to a point
Results in “spread compression” between strongest and weaker credits
Institutional interest High yield funds flows tend to drop amid rising interest rates
Institutional interest increases with issue size of $25 million or greater, promise of future liquidity
Retail interest Ebbs and flows depending on market conditions and investment alternatives
Sophisticated retail investor demand for “story” credits remains strong
Development “story” is important Investors carefully evaluate strategic advantages of projects: location,
competition, developer, development momentum
Geographic diversification is helpful
San Mateo Bay Meadows CFD - Overview
Redevelopment of the 170-acre site of former racetrack into mixed-use community
Location 20 miles southeast of San Francisco
Intersection of Highways 101 and 92
Walking distance to CalTrain station
Development plan 1,066 residential units
802,000 sq ft class A office
85,000 sq ft retail
Private high school campus (Nueva)
Developer Wilson Meany Sullivan/ Stockbridge
Capital
San Mateo Bay Meadows CFD - Bonds
$31.8 million January 2012 sale 6.5%
No vertical development, VTL of 6.5-to-1 5.5%
10 institutions and 157 retail investors 4.5%
True interest cost of 6.05% 3.5%
2.5% $26 million January 2013 sale Developer responsible for 94%of taxes 1.5%
8 institutions and 213 retail investors
TIC of 4.84%
$28.5 million January 2014 sale Developer carries 80% of max tax levy;
Tri Pointe Homes 8%; Shea 7%; Nueva School 5%
10 institutions and 211 retail investors
TIC of 5.48%
Bond Yields on January 2012, January 2013 and January 2014 sales
2012 Sale: TIC 6.08%
2013 Sale: TIC 4.84%
2014 Sale: TIC 5.49%
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042
Spreads to Municipal Market Data (MMD) at time of sale
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
January 2013 Sale
January 2012 Sale
January 2014 S ale
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042
An Industry Study of CFD Reserve Fund Draws: Contributors and Correlations
CFD Bond Sales and Bond Draws: 1,510 CFD bond Issues in California from 2000-2013
31 of these had reserve fund draws; a draw percentage of 2.05% Of the 31 with draws, 7 draws appear to be for
administrative reasons
Issuers’ track records were most telling factor 16 issuers had 27 of the 31 reserve fund draws 14 of the 16 issuers had draws on one or more of their
first five bond issues Agencies with polices based on CDIAC guidelines
experienced minimal draws