Crucial Vote by City Council Avoids Financial Disaster
By Jeff Kilbreth (Jeff Kilbreth is a former Richmond Planning Commissioner with a Yale MBA and a background in finance.)
May 15, 2022
In a unanimous vote on March 18, 2022 the Richmond City Council refused to risk the city’s finances to back a plan for a mixed commercial and luxury housing development at Point Molate as proposed by SunCal Inc. and its derivative corporation, Winehaven Legacy LLC (“Developers”).
The vote was 4 to 0 against putting the city at risk, with Councilmembers Claudia Jimenez, Gayle McLaughlin, Melvin Willis, and Vice Mayor Eduardo Martinez voting to turn down SunCal’s request for $292 million in Community Facilities District (CFD) municipal bond funding.
The vote followed a lengthy discussion and presentation of the financial risks to the City. Councilmembers Claudia Jimenez and Gayle McLaughlin explained that the proposal for the CFD for the Point Molate Project was deeply flawed, was missing critical information and was illegal under the state law rules for a CFD. As proposed by the Developers, the CFD would require property owners to pay over 3% of their purchase prices in total property taxes when state law limits this to 2%.
State law would allow the project to borrow only about $70-90 million via a CFD. But the Developers proposed that the City approve a $292 million CFD. The Developers provided no phasing and financing plan for covering the total $400 million or so in infrastructure that the proposed development at Point Molate will require. This was a contract requirement.
The analysis of Councilmembers McLaughlin and Jimenez was supported by findings by City staff and its consultants.
And the problems were not limited to the financing of the infrastructure work. In the analysis of Councilmembers Jiminez and McLaughlin, the City found that the project would also require $6.5 million per year of City staffing costs from the city general fund for a dedicated police and fire station. This cost would rise with standard inflation from Year One whereas property taxes and other revenues could take fifteen years to reach full contribution and would never catch up to the true costs of providing a 24×7 fire station.
Reasonable projections showed that the project could, therefore, easily produce large losses for the city’s General Fund. The exact amount would depend on whether the significant pension tax payments that homeowners pay could be used for General Fund police and fire costs. Many people think it is unlikely, but it is not a settled matter yet. However, even if all 1,452 units were built, and could be sold and occupied in fifteen years (which would require selling 97 units per year – unlikely because no other developments in Richmond have sold that fast) total City losses would still be between $50 and $65 million in the first thirteen years and between $150 and $270 million in Years 14-50.
The City Council concluded that the City has to be protected against the risks of losing anywhere between $200 and $335 million. The Developer failed to offer any financial assurances to prevent or to cover such large-scale losses.
When confronted with the failure to provide financial guarantees to cover the debt, SunCal offered to pay for the potential loses during the phase when the buildings are first being built, which might have meant $50-$65 million in the first thirteen years, but provided no guarantee for, and refused to address, potential General Fund shortfalls after construction was finished.
The developer kept using unsupportable assumptions about how much the units could sell for, how quickly the units would sell and how much total revenue could be produced. Despite numerous requests from the city for a 50-year cash flow analysis with more accurate numbers and more realistic assumptions, the developer concealed the risks, making the city ferret out the truth on its own.
Ultimately the City Council voted to not allow the city’s finances to be put in almost certain danger and voted down the CFD proposal. The Council recognized that it couldn’t approve an illegal and unrealistic CFD bond amount, nor could the City risk millions in General Fund losses that could require Richmond to face layoffs in every department in the City.
In the end only Mayor Butt continued to insist that the City vote to approve city financial backing of the project, although when the vote came he did not participate.