City Manager Charged Home Owners Mitigation Fees

By: Libi Uremovic, July 27, 2014 | Original Article at Patch.com

Beaumont City Manager Admits Developers Did Not Pay Mitigation Fees

2014-08-06-dAt the July 15, 2014 Beaumont Council Meeting the City presented ‘Community Facilities District Management & Administration’ to address Castaldo’s 12 Step Program. Kapanicas rambled on for almost 20 minutes, but never addressed the issue; which is the fact that City Administration Officials Kapanicas, Alyward, Aklufi, Dillon, Moorjani, Egger, Gregg are violating California State Law because their private companies that are profiting from the acquisition of Bond Debt.

More annoying than the inaccuracies, ramblings of nothingness, and pointing the finger at everyone else to deflect from their own corruption is Council’s deaf, dumb, blind reaction to the inaccuracies, ramblings of nothingness, and constant slander of other agencies to deflect the focus from themselves.

What we can derive from Kapancias’ ramblings is that the City didn’t charge mitigation fees to the developers. The property owners were charged the mitigation fees that were supposed to be paid by developers.

“..Before Prop 13 it was easy to say we’ll just raise taxes later on the people that are here to pay for what wasn’t built before. Mitigation really came out after Prop 13 with the idea that you have to mitigate those expenses…”

Word Origin & History Mitigation mid-14c., from L. mitigationem, noun of action from mitigare

Mitigation has been around for 1,600 hundred years and is used throughout the world. Prop 13 is a California State Law enacted in 1978 to prevent local governments from acquiring debt without voter approval. Housing developments were ‘invented’ after WWII to accommodate the Boomer Generation. But they were built by developers paying mitigation fees, not by obtaining government debt.

“…The CFD can be used to cover mitigation fees…”

No, CFDs can not be used to pay mitigation fees. Mitigation fees are to cover city-wide needs for the additional homes. CFDs are only to cover improvements for those property owners that are paying the debt.

“…How to mitigate. Developer can build or pay for public improvements. The cost improvements are included in the house price to be paid off in the mortgage. Or cost improvements can be included in a CFD Mello Roos to be paid off and included in your home price or allow up to 30 years to pay off the taxes….”

Mitigation fees are paid by developers to offset the impact of their projects to the city. The city was supposed to negotiate the cost needed to absorb the homes with the developers, but the transcripts make it clear that the City and Developers got together and decided they would push all of the costs of construction onto the purchasers of the homes.

“…Now the other way they could it was to build all the homes, tell people: “Over there will be your park”…”

That’s what happened anyway. People were told they would have parks with ‘luxuries’ like water fountains and bathrooms that were never completed. Council had brought up the subject of incomplete parks, but Kapanicas jingled a ‘super park’ fantasy in front of Council and they were mesmerized like children.

“…So there’s your two choices. The two comes back; the developer can pay the cost or the developer can bond to the CFD….”

The developers in Beaumont were allowed to choose whether they wanted to invest their own money into their business venture or push the debt onto the city that would push the debt onto the property owners.

“…It gives you lower home prices…”

Yes, CFDs lower the value of the home. Property owners pay more for their home through CFDs, but it does not build equity in their home. Beaumont property owners pay an additional $70,000 – $90,000 in what the City is now telling them are the mitigation fees that should have been charged to the Developers.

“…and if anyone has ever moved to an area that didn’t build the roads first; when you’re trying to get home at night and they’re telling you that you can’t get there because they’ve blocked your street off or they haven’t built your street. …”

Yea, that’s what happens. Houses are constructed and people moved in without a road leading to the house. Then one day the property owners want to drive home, but without massive debt there are no roads to their house.

“..My street had to be torn up, or actually built. They built me a little one lane road to get to my house then they spent a lot of time building the four lanes to get there later…”

But you don’t pay additional Mello Roos property taxes, do you Kapanicas? If Kapanicas thinks that CFD properties are so great then why doesn’t he own a home with additional Mello Roos taxes so he could have that lovely boulevard in front of his house the day he moved in? Apparently that ‘necessity’ isn’t worth $70,000 when it’s coming out of Kapanicas’ pocket.

“Let’s take the school as a mitigation….”

This isn’t supposed to be about mitigation, it’s supposed to be about CFD management and administration; but since the City has brought it up we will use schools to understand the proper use of mitigation.

Developers pay mitigation fees to school districts to off-set the cost of the children they estimate will occupy the houses that they are building. The fees are paid in advance and based on square footage of a home because a five-bedroom home will usually have more children than a one-bedroom home.

Developers are also supposed to pay mitigation fees to cities to off-set the cost of the additional population, but the City of Beaumont didn’t charge the developers mitigation fees, they pushed the cost onto the future property owners.

From the WRCOG Judgement: “NO UP FRONT MONEY WAS REQUIRED TO BE PAID BY ANY DEVELOPER WHO OPTED FOR THIS FORM OF FINANCING. THE DEVELOPERS THEREBY HAD NO CARRYING CHARGES FOR THE COST OF BORROWED MONEY TO PAY UP FRONT FOR CONSTRUCTION OF THESE TRANSPORTATION PROJECTS. MOREOVER,THE COSTS ARE EFFECTIVELY HIDDEN FROM THE PROPERTY BUYERS,WHO DO NOT SEE PRICE INCREASES TO COVER DEVELOPER OUT-OF-POCKET DEVELOPMENT COSTS. INSTEAD, THE BUYER PAYS
FOR THE PROJECT INCREMENTALLY OVER THE LIFE OF THE BOND THROUGH THOSE TAX ASSESSMENTS OR ADDITIONS TO THE TAX BILLS.”

Beaumont CFD home owners are paying thousand of dollars in property taxes that are not their legal responsibility. The Judgment was focused on the TUMF mitigation fees, but according to Kapanicas the City also pushed the city’s basic mitigation fees onto the future property owners instead of charging the Developers.

“…CFD loan passes through the property tax to whoever owns the property, including the developer…”

Incorrect. In the original bonds the taxes were paid by the developer, but in the new bonds there’s a clause that the additional property taxes do not start until there is an occupancy permit required by the person that purchases the home.

Kapanicas didn’t have to ‘include the developers’ in his sentence, but he’s so comfortable lying to Council and the Public that it just rolls right off his tongue.

“..To put it properly, in 1993 we had about 10,000 people here; 8-10,000. For them to create the $650 million to $1 Billion of public infrastructure that the next 70,000 or 80,000 people…”

And here we have the base of the problem: throwing meaningless numbers around and feeding Council some grandiose fantasy that has no basis in reality. One, there is no water and two, there is no economic driver.

The reason cities like Las Vegas and Palm Springs are able to grow and prosper is because they have a large water supply and they developed entertainment industries. The housing market was a bi-product of the economic catalyst, not the primary motivation.

Below is the full transcript of Kanpancias speaking regarding the workshops. Audio is found on City website: http://www.ci.beaumont.ca.us/index.aspx?NID=212

49:50 Kapanicas: The Council came up with 12 items they’d like us to look at. We’ve grouped them into the four, and I hope that’s ok, really five. One is a subgroup: Communities Facilities District management and administration. Two is the City financial, internal controls, city travel policy, ongoing contracts, and future projects. Then we did have the request from the Park District last time, so we want to talk about all of these somewhat in general and get more direction from the Council as to what you’d like to see. As always, we put together a powerpoint presentation at least to get the thing kicked off, if that’s ok with Council?

The first one is a little bit of information. We’ve done a lot on the CFD’s presentations throughout and we’re going to continue giving presentations on both the CFD and the financials throughout the year until Council tells us their tired of it, the public tells us their tired of it.

One of the questions that’s come up recently is ‘fair share’. Fair share really is a nice way to say ‘mitigation’. Every city does some kind of mitigation. We found in 1993 that many cities were not doing the right mitigation. They really – County was a good example: we weren’t really building roads back then. They were letting developments come into the county and other cities were building homes without the roads being built hoping they would be built later. Now prior; that was easy to do. Before Prop 13 it was easy to say we’ll just raise taxes later on the people that are here to pay for what wasn’t built before. Mitigation really came out after Prop 13 with the idea that you have to mitigate those expenses. If you don’t do it ahead of time you probably never will. So to mitigate, if you want to call it, fair share sounds better, but it’s truly mitigation. There are mitigation fees, every city has some type. The CFD can be used to cover mitigation fees – all the different ways, but by paying your fair share you’re mitigating the impacts of your home and development. For example; new roads and traffic lights for traffic that new development has placed on the community. The new parks to handle increased population and increase sewer, water, and public services.

52:15 Kapanicas: To put it properly, in 1993 we had about 10,000 people here; 8-10,000. For them to create the $650 million to $1 Billion of public infrastructure that the next 70,000 or 80,000 people would need would be impossible. So each home, as it comes in, pays its mitigation. At that time it was about $20,000, now it’s about $30,000 for each home. Water, sewer, traffic, parks, city facilities, we’re going to need another fire station before long. If we don’t plan in advance, we won’t have it when we need.

How to mitigate. Developer can build or pay for public improvements. The cost improvements are included in the house price to be paid off in the mortgage. Or cost improvements can be included in a CFD Mello Roos to be paid off and included in your home price or allow up to 30 years to pay off the taxes. The first one was how it could have been done. The problem is that you pay off as each house is built. If you build very quickly, as we did a couple of years, in 2006 and 2007, it wouldn’t have mattered. But as we’ve seen very little has been built between 2008 and 2013; projects would have stopped. Parks, in this way, parks get built at the end of the project instead of the beginning. We always brag on Sundance were their group; they opened their big park the day they started their models. Now the other way they could it was to build all the homes, tell people: “Over there will be your park”, and then when all the homes are built and they’re racking up mitigation money to build the park. So there’s your two choices. The two comes back; the developer can pay the cost or the developer can bond to the CFD. The developer pays the, it comes out not quite even. Developer can borrow money from the bank to start the improvements. Cost can be passed through to; well, cost are always passed through to future buyers and a higher home cost. It actually even raises the taxes up because the higher the home price the higher the add-on tax. Improvements may be built only as money is acquired through the sale of homes and there’s no guarantee when the improvements can be built. State law is very clear that you can not make a developer build before its time. An old commercial; no improvements before their time. With our situation we have more parks than the State requires, almost twice as much. It means a developer can come in here that doesn’t come in with a CFD decides to pay as they go; they can wait and build the park after the last house is built in their development and still be within their rights. The other way we do it is they borrow money from the City through the long term bond. It gives lower long term interest rates than the bank. CFD loan passes through the property tax to whoever owns the property, including the developer. It gives you lower home prices, down payment, and regulator taxes, but it does give you higher special taxes. Improvements are completed prior to homes being built. As we’ve seen, we also call it our pioneering program.

55:25 What kind of improvements? We’ve done major roads, (knight and kapanicas share a giggle) high roads, we took the high roads on that one. New major high roads to access development. Sewer and water for the development. Sewer lift stations, bridges, parks, traffic signals, and street lights. If they’re not there when the people get their we then put them in and if anyone has ever moved to an area that didn’t build the roads first; when you’re trying to get home at night and they’re telling you that you can’t get there because they’ve blocked your street off or they haven’t built your street. That actually happened in the County down in French Valley when they built that, which I moved up from. My street had to be torn up, or actually built. They built me a little one lane road to get to my house then they spent a lot of time building the four lanes to get there later.

Everyone does use mitigation too. If I could pick on the school districts for a moment because it’s probably easiest to understand. Let’s take the school as a mitigation. You pay a fair share fee of four dollars per square foot in your home price to the Beaumont Unified School District. This fee is to mitigate the cost of building and modernizing schools in Beaumont. The fee is levied regardless of how many children you have or don’t have. The fee money can be used anywhere in Beaumont, not just on the school in your development. For example; school fees raised in Sundance may or may not have been used on either Sundance school and there should be enough money to build schools once all homes are built. For example; all school fees are set at current cost and collected years before a school can be built. Hopefully the fees raised were sufficient. A way to look at this is; we had one school that we collected all the fees at their original rate at about $12 Million for the elementary school. It ended up costing $17 Million by the time it was done. That’s the reason many times you see on a fee program they build after the fact you see a lot of portables going in because there’s no way to charge the ultimate costs and as we say in the 2000’s prices increased 10% a year even during the downturn when we saw fuel prices go up. Here’s a good example in Fairway Canyon, not Tournament Hills. Fairway Canyon; all those homes were built and they all paid a fee. Originally it was going to be a full plan there, but now they don’t know if they are going to need it and they will not put a school under that area and the school district won’t put one until they get all the homes built in that area. So far they’ve done about almost 2,000 homes in the area of which they paid school fees, but it went to help other areas of the same school. If we mitigate the expenses throughout the community we don’t just mitigate our home expenses, that’s the developers’ job to pay for. His cost in track; it’s the out of track that is needed to be done. Roads, major arterial roads to get to a development, the major schools to get to the development, the major water/sewer. So, school districts, hospital districts, and other tax entities have fees that are somewhat disclosed to you prior to purchase. I hope from the school forgives me for telling people that there’s a $4 fee in their house when they bought it. Beaumont City taxes are fully disclosed in your escrow documents. The Beaumont CFD has its own web page. Improvement Areas have their own information sheets that we put up each year, so we try to do it through as much transparency as we can. And in fact we’re going to ask Council for some direction on different ways we may even improve that. We’ve been doing this now since 1993. We’ve done a great job of pioneering the different facilities ahead of time. We have a lot more traffic with 40,000 people than we did with 10,000, but you still can move through town with probably better ease than it used to be. We all remember 25 years ago there was really only one way to get across town all the way and that was the freeway. Every other street ended or all ended one direction together.

59:30 Kapanicas: Now one of the other items was asked was an independent compliance audits. We just need to bring Council and Public up to what we’re already doing. We have a continuing disclosure compliance audit that we’ve set up. We have a bond proceeds expenditure audit that we’re putting through and we’ll bring through contracts back the next time. Municipals securities rule making, EMMA, is also been monitoring for the last about 5 or 6 years they’ve been required us to file all of our continuing disclosures. We’ve had IRS audits as they do with many of the bonds, public bonds, and we have legal review. All those go to some of the questions that were asked. The compliance report, the continuing disclosure we’ve been doing since 2000. They’re posted on EMMA. They’re doing a review to make sure we’ve got it completely compliant with every point on it. It’s interesting; one of the things that happened this time is our Trustee somehow was not able to get it up on the Registry in February like they were supposed to do and this one actually had a January, so it went up late, so we will let them know why it happened and we’re looking closely at doing it ourselves. In fact I was listening to the tape today on EMMA to figure out how to put it up for ourselves so we’re not taxing those people.

60:45 Kapanicas: So the compliance reports will be done for each of them. This is being done by Wildan who has a contract with us. This fits into their current contract. So as Council so directs I’ll go ahead and have them get started on it. Next one is the scope of service of what they’ll be doing. Bond proceeds expenditures, audit, and they’ve done a preliminary one for us. If we want the more detailed of course they’re going to charge us for it. Transportation, drainage, and flood, we’ve done about $59 Million; sewer, we’ve done $56 Million; water, about $79 Million; park and recreation, fire and civic facilities, about $33 Million for total of $227 Million. Those numbers are being refined down by each bond issue, but each bond issue went into the pioneering for mitigation city-wide. So we’re bringing those, we’ll bring those back if Council so directs. A good example, 2008 facilities, this was the original 14, 11, and 3 Areas. They did about $12 Million in improvements. We’re going to put, Dave offered to put together a list of the amounts and which areas contributed to each amount. But again; mitigation is for city-wide facilities. We’ve had our IRS audit, kind of make some notes of what was said. We have selected the debt issuance for the above examination. The IRS routinely examines municipal debt issues to determine compliance with federal tax requirements. These are tax institutions.