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Presentation to the

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RDA LegislationImpact on Redevelopment Bonds

August 4, 2011

Ralph J. HolmesPrincipalEmail: rholmes@ejdelarosa.comTel: 415-217-3390Fax: 415-495-8864

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2011 TAB Issuance At-A-Glance

• A tremendous supply of tax allocation bonds (TABs) were issued in early 2011 as many RDAs sought to issue bonds ahead of any State action

• Total issuance of California TABs in the first half of 2011 doubled the issuance in 2010• 2011 – 82 TABs totaling $1.4 billion

• 2010 – 34 TABs totaling $685 million

• Approximately 73% of the TABs were tax-exempt

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What Does the Legislation Mean for Bonds?

• With the passage of ABx1 26 and ABx1 27, the issuance of redevelopment bonds has virtually halted in California

• Three principal questions regarding redevelopment debt:

1. How does the legislation affect existing debt?

• Are bondholders harmed by the new legislation?

2. Can agencies issue new bonds?

• If you do not opt in, you clearly cannot.

• What if you opt in?

3. How do the increased pass through payments affect bonding capacity?

• Where do the remittances fall in terms of debt service?

• If redevelopment bonds are not an option, what other options are available to cities to fund economic development and infrastructure?

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Redevelopment Bonds Under ABx1 26

• ABx1 26 suspends an agency’s ability to issue additional debt

• Existing bond debt service is protected

• Absence of a housing set aside deposit moves debt service up a level and likely improves debt service coverage

Gross Tax Increment

20% Housing Set-Aside

Senior Pass-Throughs

Debt Service

Subordinate Pass-Throughs

Administrative Expenses / Ongoing Expenses

Gross Tax Increment

Senior Pass-Throughs

Subordinate Pass-Throughs

Remaining Revenues to Taxing Entities

Administrative Expenses

Debt Service

Old Flow of Funds New Flow of Funds

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Redevelopment Bonds Under ABx1 27

• Under ABx1 27, new money and refunding bonds are permitted

• General consensus among bond attorneys is that no one will deliver a clean opinion for new bond issues while the CRA lawsuit is outstanding

• The concern is that ABx1 27 is invalidated but ABx1 26 remains

• This includes all new financings

• New money bonds

• Refunding bonds

• Take-out of notes

• However, lease-back structure may be possible Would require General Fund Pledge

• Even if a stay is granted, it is unlikely that bond attorneys will give a clean opinion

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Redevelopment Bonds Under ABx1 27

• If the courts uphold ABx1 27, tax increment, and thus bonding capacity will be significantly constrained

• 2011-12 remittance is approximately 28% of gross tax increment

• Ongoing remittance is approximately 7% of gross tax increment

• Remittances are a city obligation and are subordinate to debt service

• An Additional School Payment is required if an agency incurs new debt

• Preliminary analysis for some agencies suggests a 30% surcharge on new debt

• This effectively raises the cost of a 6% borrowing to 8%

• Additional School Payment is likely senior to new debt service

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Rating Agency and Investor Views

• Standard and Poor’s released a report based on the Governor’s budget that suggests no negative impact on redevelopment ratings

• Existing bondholders were protected in legislation

• No additional debt would be a credit positive

• Investors expressed some concern but became more comfortable as more TABs were sold

• Interest rates improved over time

• New investors entered the TAB market

• Investors have shown some concern with ABx1 27

• With no new debt investor s have not had to digest the effect of ABx1 27

• Existing deals are trading at strong levels in the secondary market

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How Will Cities Fund Projects?

• A principal concern is how cities will fund projects

• Limited options for funding economic development and general infrastructure

• Potential infrastructure funding sources may include

• Governor suggested that the legislature decrease the requirement for GO bonds for cities from 2/3 to 55%

• Infrastructure financing districts are a potential tax increment tool for regional development that is supported by both the city and county

• Mello Roos and assessment districts may serve as financing tools for development projects

• During the time when the CRA lawsuit is outstanding, a hybrid structure with a pledge of tax increment with a backup CFD might work for developer sponsored projects

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QUESTIONS?

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