RMWD approves Horse Creek Ridge sewer service, inspection, CSCDA agreements

The Rainbow Municipal Water District (RMWD) approved a trio of agreements with D.R. Horton regarding the Horse Creek Ridge development.

A 5-0 Rainbow board vote Feb. 28 approved a change order in the contract for inspection services. A pair of 4-1 votes that day, with Helene Brazier in opposition, authorized a Community Facilities District for the Horse Creek Ridge area and authorized an amendment to the sewer service agreement between the district, D.R. Horton, and Passerelle, LLC.

What is now called the Horse Creek Ridge development was at one time planned for a Hewlett-Packard office facility. In 1987, the Hewlett-Packard Company and RMWD executed a water and sewer services agreement which included a payment of $2,707,129 for construction of infrastructure for sewer service to the property in exchange for 950.57 equivalent dwelling units of sewer capacity.

The sewer infrastructure included a 12-inch force main and a 24-inch line to Gird Road, and the planning also included an 18-inch transmission waterline on Old Highway 395 with connections to the development.

RMWD entered into agreements with subsequent ownership interests in 2002 and 2012. The December 2012 updated water and sewer service agreements were with Passerelle, LLC. In May 2011 the San Diego County Board of Supervisors approved Passerelle’s Campus Park project on 416 non-contiguous acres bisected by the future Palomar College campus in Fallbrook.

The project approved by the county supervisors will include 521 single-family dwelling units, 230 multi-family dwelling units, a town center commercial area totaling 61,200 square feet, 157,000 square feet of professional office space, a community center, an 8.5-acre active sports park, and six neighborhood parks.

D.R. Horton subsequently purchased the residential portion of the property, which is now known as Horse Creek Ridge. The agreement included the acquisition of a portion of Passerelle’s sewer rights. The purchase of 81 acres of the former Hewlett-Packard property by the Palomar Community College District also included acquisition of sewer capacity for the new Fallbrook campus.

In July 2015, RMWD’s board approved a new agreement which documented the obligations and rights of D.R. Horton and also reflected updates to the project. The sewer service agreement revision included documenting the assignment of 754 equivalent dwelling units (EDUs) to D.R. Horton, 100 EDUs to Palomar College, and 96.57 EDUs to Passerelle and also incorporated a designed and improved lift station.

In addition to the updates on the capacity rights owners, the amendments to the water and sewer service agreement also revised the alignment of the waterline. The alignment was changed from between Horse Creek Ranch Road and State Route 76 to between Horse Creek Ranch Road and Pankey Place, which reflects environmental and cultural restrictions, and detailed the estimated cost for repayment of the waterline.

In September 2013, the RMWD board approved a memorandum of understanding with the Valley Center Municipal Water District to coordinate infrastructure of new development projects in the Horse Ranch Creek area.

The use of common potable, recycled, and wastewater pipelines rather than separate pipelines would not only reduce construction costs but also allow for reduced operation and maintenance costs and potential mutual aid with appropriate reimbursement, and a single set of pipelines would also eliminate the problem of determining which district is responsible in the event of a break or a spill.

RMWD’s 2015 memorandum with D.R. Horton and Passerelle reflects that coordination by revising the project plans to eliminate parallel mains and implementing changes to the lift station, and an estimated $527,860 will be credited to D.R. Horton.

The county supervisors’ 2011 approval of the Campus Park project included the creation of a tentative map, which can be recorded as a final map after all conditions of the map, other than those for which a final map is required, are fulfilled. The conditions include a joint subdivision agreement which ensures that all infrastructure facilities, including water and sewer, are bonded.

The County of San Diego will process the actual bonding agreement which will include security for labor and materials as well as for completion of the infrastructure.

In March 2014, the Rainbow board approved a joint agreement for the improvement of water and sewer pipelines, a sewer lift station, and a pressure reducing station. The joint facilities agreement calls for a performance bond totaling $8,140,100 which will cover $2,601,300 for improvements to the sewer facilities, $2,904,000 for the Horse Creek Lift Station, $1,501,700 for improvements to the water facilities, $961,000 for the sewer force main and water line, and $172,000 for the pressure reducing station.

Although the developer pays for the installation of the facilities, the infrastructure becomes property of the district and is subsequently operated and maintained by the district. RMWD or a contractor inspects the construction of new facilities to ensure their conformance with district standards, applicable codes, and manufacturer requirements. That inspection ensures the optimized useful lives of the infrastructure assets.

In 2015, RMWD approved an agreement with the San Diego company Hoch Consulting for as-needed construction inspection services. RMWD staff requested that Hoch Consulting provide a proposal specifically for the Horse Creek Ridge project, and Adam Hoch responded with a proposal for up to $279,220.50 based on time and materials costs.

“It’s for additional inspection services,” said RMWD general manager Tom Kennedy.

The total cost could be less than the maximum authorized amount. Hoch Consulting will charge $150 per hour along with materials costs, and subconsultants will inspect certain facilities.

“All this is being paid for by the developer, so there’s no ratepayer money,” Kennedy said.

In December 2016, the RMWD board approved the entry of RMWD into the California Statewide Communities Development Authority (CSCDA). RMWD ‘s participation in the CSCDA will allow the planned Horse Creek Ridge project to utilize a Community Facilities District to provide tax-exempt financing for the development’s water and wastewater infrastructure improvements.

The Dec. 6 action only approved entry into the CSCDA and did not involve an agreement with D.R. Horton to create a Community Facilities District.

The CSCDA was created to provide local governments, non-profit public benefit corporations, and private entities with access to low-cost, tax-exempt financing for projects which create jobs, help communities prosper, and improve the quality of life for local residents. Since its inception in 1988 the CSCDA has issued more than $50 billion of tax-exempt bonds.

The CSCDA is a joint powers authority whose members consist of more than 500 cities, counties, and special districts. The CSCDA has the statutory authority to issue bonds, notes, or other financing documents in order to promote economic development, including the provision and maintenance of multi-family housing. However, the jurisdiction in which the project is located must approve the project and the financing in order for the CSCDA to issue the financing mechanism.

The CSCDA also facilitates the creation of Community Facilities Districts where bonds for infrastructure are repaid through assessments on property sometimes referred to as Mello-Roos taxes due to the state legislators who authored the option for services on new development to be funded by an annual assessment.

Although the Mello-Roos taxes can deter some potential homebuyers, the up-front funding of the infrastructure improvements may increase initial house prices and make a Mello-Roos assessment attractive to developers. An assessment must be approved by a majority of property owners, although a developer who owns a project before it is subdivided can cast the sole vote in favor of a Community Facilities District (CFD).

The current interest rates make the cost of financing a project historically low, so D.R. Horton is interested in financing a portion of its infrastructure and capacity fees through a CFD. D.R. Horton approached RMWD staff about the formation of a CFD to fund certain infrastructure improvements related to water and wastewater services as well as for capacity fees paid by developers to support the infrastructure the development requires.

“This is a fairly typical type of financing vehicle used by developers,” Kennedy said. if cutting – down to next highlighted section

RMWD ‘s board is responsible for defining the parcels subject to the CFD. The district’s CSCDA membership enables that authority to handle the resolution of intention to form a CFD, the special election, and the resolution of issuance for bonds.

“Right now it all goes through the CSCDA,” Kennedy said.

The first step required to form a CFD is a petition from the developer. The governing board then adopts an intent to form a CFD and schedules a noticed public hearing at which the CFD will be created if the property owner vote favors the formation.

D.R. Horton will be responsible for preparing a special notice to homebuyers informing them of the CFD and their tax responsibilities.

In order to obtain the tax-exempt status Rainbow must execute a bond closing certificate certifying that the infrastructure being financed is public infrastructure, but the CSCDA would issue the bonds in the municipal bond market and the CSCDA would handle all administration of the CFD.

The improved properties would be considered collateral for the bond indebtedness. “They can’t issue bonds until they improve the land out there,” Kennedy said. “You can’t get a very good bond rating until your asset to debt ratio is at a good level.”

The $2,707,129 paid by Hewlett-Packard in 1987 has a present value of $5.08 million, and D.R. Horton will be constructing facilities valued at $2.4 million. The cost of sewer capacity fees for the current project is approximately $12.8 million, which created a shortfall of $5.4 million. RMWD notified D.R. Horton that the district’s conditions to form a CFD included D.R. Horton covering that shortfall.

“They had to agree to update their sewer capacity fees,” Kennedy said.

A CFD has already been formed for Horse Creek Ridge, as the one percent base property tax for Horse Creek Ridge will not be sufficient to cover county, San Diego County Flood Control District, or North County Fire Protection District services which will be needed to serve the district.

That CFD allows for the collection of three special taxes: one for county services, one for flood control services (although the Board of Supervisors members are also the board of the San Diego County Flood Control District and the district is administered by the county’s Department of Public Works, it is a separate legal district), and one for emergency medical services.

D.R. Horton indicated that a Mello-Roos assessment to cover an additional $5.4 million in sewer capacity fees in conjunction with the other assessments would hinder the ability to sell homes. D.R. Horton indicated that an additional payment of $2.75 million would create the upper limit on the tax burden D.R. Horton was willing to place on the residences. RMWD accepted that compromise.

The amended sewer service agreement is contingent upon issuance of bonds. “Those fees will be paid from the bond proceeds,” Kennedy said.

If the bonds are not sold, D.R. Horton is not responsible for the increased capacity fee payment.

Because the improved lots will be used as the collateral, the timing of the bond issuance depends on the building schedule. “It really depends on how the pace of construction is,” Kennedy said.

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