Orange County Growth Issue Drying Up Builder Financing Source

Although it will not be put to a vote until June, Orange County’s slow-growth initiative is drying up one of the most attractive sources of financing for development.

The growing uncertainty caused by the initiative has made raising capital through the sale of municipal bonds all but impossible, according to bond underwriters.

The bonds, which provide money to build the roads and other infrastructure improvements needed to serve new residential and commercial developments, have become an increasingly popular financing vehicle in recent years.

The prospect of voter approval of the slow-growth initiative is causing developers to postpone planned bond issues because they fear they will be saddled with repayment taxes on projects that could not be completed as planned, underwriters said.

As a result, they said, the initiative already appears to be accomplishing its goals.

“The spigot has been turned off since about the first of the year,” said Robert Heaney, a bond salesman for Stone & Youngberg, a Los Angeles brokerage that has underwritten many Orange County municipal bond issues in the past.

“It would be crazy to come to market until the initiative is decided one way or the other,” Heaney said, expressing a view shared by other municipal bond salesmen, bond lawyers and county officials.

If approved by voters, the slow-growth initiative would set strict conditions on future development in unincorporated areas of Orange County. The measure was qualified Thursday for the June 7 ballot.

The shadow cast by the initiative already has had a significant impact on prospective residential and commercial development in the Foothills area.

Eleven development companies plan to build as many as 35,000 homes in the Foothills area, a corridor located east of Interstate 5 and extending from northern San Diego County to the middle of Orange County.

Robert Whalen, a bond attorney representing the investment banking firm of Drexel Burnham Lambert, said the slow-growth initiative has become a factor in Drexel’s plans to underwrite a $35-million Foothills bond issue.

“The timing for the financing is under active discussion, and the slow-growth initiative certainly gives us one more thing to talk about,” Whalen said.

If it proceeds as planned, the Drexel-led issue will be the first phase of $250 million in financing for the Foothill Circulation Phasing Plan. The roads to be built under the plan must be in place before residential construction can begin in the Foothills area, said Sarah Walker, associate county administrative officer.

“Obviously, the underwriters have a real problem with the level of uncertainty that the slow-growth movement has created,” Walker said.

The Foothill road-building program is needed to handle increased traffic volume generated by the proposed developments.

The questionable outlook for county bond financing prompted County Supervisor Gaddi H. Vasquez to delay action on three agreements that would protect three Foothill developments: Rancho Santa Margarita, the Whiting Ranch and the Dove Canyon Planned Community.

Vasquez also has instructed county staff members to look into concerns expressed to him by the financial community that planned bond offerings to pay for the Foothill road system may no longer be viable. Their report is expected to be released prior to the Board of Supervisors meeting next Wednesday,

Another supervisor, Thomas F. Riley, said Thursday that the entire Foothills Circulation Phasing Plan may be in jeopardy as a result of the initiative and its impact on bond financing.

Other developments likely to be affected by the unavailability of municipal bond financing include the Irvine Coast and the Aliso Viejo developments, Walker said.

In both cases, the county plans to issue Mello-Roos bonds, a financing vehicle that has been successfully used for the past two years as an inexpensive and easy way to raise capital.

Mello-Roos bonds were authorized by the California Legislature in 1982 as an alternative to earlier forms of municipal financing that became impractical with the passage of Proposition 13.

Under the Mello-Roos legislation, a city, county or other governmental entity is allowed to create a community facility district to undertake construction of such improvements as roads, bridges, firehouses and schools.

Community facility districts generally are formed for the purpose of floating a bond issue to pay for the improvements. Creation of the districts must be approved by two-thirds of the property owners who live within their boundaries.

Mello-Roos bonds usually are repaid from the proceeds of a special tax levied on property owners within the district.

But in the case of unincorporated areas of Orange County, a single developer often owns all of the land within a proposed district. As a result, he single-handedly can approve creation of a district, said Joseph Rosenblum, head of Western Regional Ratings for Moody’s Investor Services.

Existing Mello-Roos bond issues in Orange County have been structured so that developers assume responsibility for payment of the special tax used to repay the bonds. As houses and businesses are built and occupied, their owners assume a portion of the tax burden.

With the outlook for future construction clouded by the slow-growth initiative, developers are leery about assuming the tax burden of a Mello-Roos bond issue.

“No one is going to sell bonds in this environment,” said Raywin Lindsay, a spokeswoman for the Dove Canyon Development Co., one of the companies planning to develop the Foothill Corridor area.

For instance, under the terms of a $24-million Mello-Roos issue sold in 1986, the Santa Margarita Co. is obligated to pay an annual tax of about $2,500 per acre on 833 acres of undeveloped land to service the bonds, said Robert Vincent, a bond analyst with California Municipal Statistics, a private consulting firm that assists in structuring bond deals.

However, as the company’s land is developed and sold, homeowners assume responsibility for a bond repayment tax of up to $775 per family residence, Vincent said.

Since zoning laws allow a maximum of six residences per acre within the development, the home buyers ultimately will pay back the bulk of the bonds if the project proceeds as planned, Vincent said.

Since much of the project already is under construction, the Santa Margarita Co. is not in danger of being saddled with a huge tax bill if the initiative is approved, said Fritz Stradling, a partner with Stradling, Yocca, Carlson & Rauth, a law firm that advises the county on many of its bond issues.

The danger, Straddling said, is the potential impact of the initiative on bonds that have been issued or will be sold to finance development that has not yet begun.

“Nowhere in these bond issues is there a provision that guarantees construction of projects,” said Straddling.

At the same time, California municipal bond buyers have expressed concern that future Mello-Roos bonds issued in Orange County may be risky investments, underwriters said. They fear that passage of the slow-growth initiative could cause developers to either call the bonds ahead of schedule or possibly even default.

“This is an area that we will be looking into more closely,” said Thomas Kenney, a bond analyst with the San Francisco-based Franklin Fund, which owns $7.7 billion of California municipal debt.