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Nearly seven years after completing infrastructure work for housing developments in Natomas, developers are still receiving reimbursement payments from the city as part of an unusual “pay-as-you-go” arrangement between the city and the developer.
“(This situation) is unique in that the city doesn’t pay for everything at once,” City Councilwoman Angelique Ashby said Tuesday.
When the City Council agreed Tuesday to take $1.1 million from a Mello Roos special tax fund to reimburse a developer for public improvement projects, it was the eighth such payment in four years on an ongoing agreement that is usually handled a different way.
Typically, the city issues bonds to pay builders immediately for the completed infrastructure work, and then taxes collected are used to pay the interest on the bonds.
In the case of K. Hovnanian Forecast Homes in Natomas, the forces of timing and bad economy played a part in creating an alternate method of reimbursement.
“The work was done and costs were verified,” said Mark Griffin, program manager with the city Finance Department.
“Just as we formed the district to issue bonds, the economy went bad. We couldn’t issue bonds,” he said.
The downturn in the economy coupled with a Federal Emergency Management Agency construction moratorium in the Natomas area made it too expensive to issue bonds for the projects.
Griffin said the “pay-as-you-go” agreement with the developer allowed the city to make payments as taxes were collected from the special tax district.
“It’s not great for the developer, but there really wasn’t a choice,” Griffin said. “The timing of the economy was very unfortunate.”
A Mello Roos tax district is set up by the city for specific areas, and property taxes collected are solely for the purpose of financing public improvements within the district.
There are 24 such districts in Sacramento – some of those were formed to issue bonds that pay for infrastructure projects. Others were established to pay for ongoing services like streetscapes, park maintenance, drainage basin maintenance and open space maintenance.
“Most of the time, we set up these (Mello Roos) districts to issue bonds, and the developer is fully reimbursed for work already done from the bonds,” Griffin said.
The situation in Natomas is unusual because it is the one of the few places in Sacramento where construction was started during the housing boom and halted after the housing bust – and it had the additional burden of being in a flood-prone area.
The “pay-as-you-go” agreement is not typical in Sacramento, but it was necessary to make sure the city lived up to its agreement with a developer that paid up front for required infrastructure work, Griffin said.
As inconvenient as it may be for the developer who is stuck waiting for payments to trickle in, the situation is “neutral” for the city and property owners, Griffin said.
“If we issued bonds, we’d be paying a debt service on the bonds with the taxes collected,” Griffin said. “With pay as you go, we are still collecting taxes and reimbursing costs.”
The cost difference for the city and property owners between pay as you go and issuing bonds is negligible, Griffin said, because taxes are still being collected – they are just being disbursed differently.
As of March 15, the city has collected $10.1 million from special taxes in Natomas and paid out close to $9.1 million, according to the city staff report.
After the current $1.1 million payment from the special district tax fund, the developer is still owed approximately $1.45 million on a total $11.5 million billing.
“All we are doing here is reimbursing developers for work that they paid up front to make sure was completed,” Ashby said.
Griffin said K. Hovnanian has done other work that they haven’t requested reimbursement for yet – perhaps as much as $10 million more in eligible costs – and when the entire bill is paid, the pay-as-you-go agreement ends.
Melissa Corker is a staff reporter for The Sacramento Press. Follow her on Twitter @MelissaCorker.