LAND-SECURED FINANCING CURRENT TOPICS AND PRACTICES

SESSION THREE: REAL ESTATE MARKET AND CFDs

THE GREAT RECESSION AND LAND-SECURED FINANCING

DISTRICTS IN CALIFORNIA

HOW DID THEY DO AND WHAT HAS CHANGED?

MAY 1, 2015 CONCORD, CA

-350,000

300,000

250,000

200,000

150,000

100,000

50,000

0 1960 1965 1970 1975 1980

• Multifamily

• Single Family

1985 1990 1995 2000 2005

ALIFORM A

DEBT AND

INVESTMENT

AD 0 RV

COMMISSION

2010

Impacts of the “Great Recession”: New Construction Permits in California 1960-2010

-ALIFORM A

DEBT AND

INVESTMENT

AD 0 RV

Impacts of the Great Recession: Foreclosures in the U.S. 2000-2013

Fore

clos

ures

Mill

ions

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

Mello-Roos Bonds Outstanding

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

Billi

ons

Total Outstanding Principal (FY 2012-13) = $12 Billion

County

CFD Issuers by Type of Agency

City School District County Special District JPA Community Serv. District Other

43%

34%

6%

7%

6%

2% 2%

CFDs During the Great Recession: How Did They Do?

Generally, it was an impressive performance Different ways of measuring performance How should we define “default”: Missing a debt service payment? Drawing from the reserve fund? Bondholders do not get paid full principal investment?

Very few Mello-Roos bonds truly defaulted during recession; only 0.49% of outstanding bond principal remains unpaid

Policies, procedures and guidelines turned out to be effective

National Land Secured Bond Defaults

National Land Secured Market Bonds Issued 2000-2014 and Still Outstanding (as of 12/31/14)

2,398 issues, $26.9 billion

California and Florida dominate

Market Share Default Rate1Billions By Year of Issue and State

California 45% 0.49% $6

$5

$4

$3

$2

$1

$­

All Others

Total

1 – Defaulted par as % of outstanding par

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Florida 28% 17.77% 27% 8.83%

100% 7.55%

CA FL NY Other States

Source: Bloomberg. Special Tax and Special Assessment Bonds; data may be incomplete; as of 12/31/2014 7

California Land Secured Bond Defaults

Expectations for stress:

Hardest hit regions

Central Valley, Inland Empire

Projects with bankrupt developers

SunCal/Lehman

Reynen & Bardis, Dunmore Homes

Empire Land, Kimball Hill Homes

Others. . .

Late cycle projects

2006 and 2007 bond sales

=> Actual impact on outstanding bonds has been more muted

. .

Actual Payment Defaults:

Borrego Water CFD: $6.9 million

Lathrop CFD: $49.3 million

Reserve Fund Draws:

Merced (Bellevue Ranch, Moraga)

Northstar CFD

West Patterson CFD

Western Hills (Diablo Grande)

Several CSCDA pooled issues

Several timing or delinquency-related draws that were quickly replenished

Others:

Palmdale (Ritter Ranch) - again

Nevada County (Wildwood Estates) -still

Ione - still

What Changed in Latest Cycle?

Leverage: Lending practices

Project phasing

Use of proceeds to enhance value, acquire completed facilities

Local policies requiring developer-posted LOCs

Value-to-lien and quality of appraisals

Governance: Statutory and regulatory framework

SEC crackdown on fraudulent underwriting practices

Issuers required to adopt local goals & policies for CFD

Roving JPAs outlawed in response to ‘90s abuses

Quality of initial disclosure improved, requirement for continuing disclosure

CDIAC policy guidance on appraisal and disclosure standards

Ongoing CDIAC education and training of issuer community

Active District administration

Engaged bond-related professionals: issuers, underwriters, consultants, appraisers

Delinquency Management: A Key Component in Effective Administration

Demand letters should be sent immediately after missed payments (December and April installments)

For homes in foreclosure, send demand letters to bank Mello-Roos lien is senior to mortgage lien

Accelerated foreclosure provision is quite an effective motivator

Even in Teeter Plan counties: don’t wait to act Cumulative delinquencies are harder to remedy

Land-secured districts can be removed from Teeter at any time

Strip Mello-Roos taxes if homeowner cannot pay full bill

Inform Tax Collector that payment plans won’t work for special taxes and assessments

ALIFORM A

DEBT AND

INVESTMENT

AD 0 RV

Sample of Five CFDs in Northern California Delinquency Rates Through Recession

18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0% 2006-07 2007-08 2008-09

Woodland CFD No. 2004-1 Modesto CFD No. 2003-1 Lammersville CFD No. 2002

2009-10 2010-11 2011-12 2012-13 West Patterson CFD No. 2001-1 Rancho Cordova CFD No. 2003-1

2013-14

Managing Special Tax Delinquencies: Sample Central Valley CFDs

18.0%

16.0%

14.0% 13.22%

15.05%

17.80%

1.83%

4.32% 3.80%

2.23%

1.05% 1.05%

4.58%

6.94%

0.26%

2.36%

0.26%

1.44% 0.39%

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Before Demand Letters After Demand Letters

Del

inqu

ency

Rat

e 12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

Insights from California Market

Difficult development environment CEQA and other standards create tortuous, time-consuming and expensive process

=> Effectively winnows viable projects

Changing market landscape Ascendance of national builders, demise of many regional builders

=> More staying power through downturn

Location, location, location Geographic features limit supply of entitled land in key areas bolstering value

=> Problems occurred in fringe areas

Over-leverage Extended from developers to homeowners

=> Market stress affected built out districts, not just raw land projects => But residential delinquencies have been fairly “digestible” by lenders

Foreclosure and bankruptcy of developer can be more problematic Larger developer delinquencies can cause reserve draw and halted construction

=> Toxic combination was developer and lender stress

California Land Secured Market Today

Annual California Land-Secured Issuance Since 2000 By $ Amount Issued

Par I

ssue

d ($

in B

illio

ns)

Num

ber o

f Iss

ues

$3.5 $3.0 $2.5 $2.0 $1.5

$0.8 $1.3

$1.6 $1.6 $2.0

$2.9 $2.4

$1.8

$0.4 $0.3 $0.4 $0.9

$1.6 $1.7 $1.6

$0.8

New Money Refunding

$1.0 $0.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Annual California Land-Secured Issuance Since 2000 By Number of Issues

188200 169

146150 New Money Refunding 131 108 108 106 99100 78 74

52 72

4450 35 25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

28

Issuance Volume by Region

69% of issues and 68% of par issued by Southern California issuers since 2000 California Land-Secured Bonds by County of Issuer

From 2000 - 2015 YTD*

Par I

ssue

d ($

in B

illio

ns) Top 5 Southern California Counties 5.5 Top 5 Northern California Counties

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Or ang e Rive rside San Los San All O ther Sacrame nt o Pla cer San San Yolo All Other Die go Ang eles Be rnard ino Jo aq uin Fr ancisco

Source: SDC. As of 3/31/2015.

Low General Interest Rate Environment

Long Term Revenue Bond Index (RBI) and Short-Term SIFMA Index

8.0%

Since Inception Average RBI = 6.70% 7.0%

6.0% Current RBI = 4.18%

5.0%

4.0%

3.0%

2.0% Since Inception Average SIFMA = 2.41%

1.0% Current SIFMA = 0.04%

0.0% 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: Thomson Financial. As of 4/16/15.

Municipal Bond Supply and Demand

Municipal interest rates are influenced by macro-economic conditions and more technical supply-demand trends

Issuance volume has been down, dominated by refundings

Investor interest has ebbed and flowed in uncertain rate environment

Municipal Mutual Fund Flows Municipal Market Annual Supply

($ in Billions) $35.3 billion in 4 inflows

($ in Billions) Annual Average Issuance (Past 6 years): $356.4 bn 2

450 500

2015 Issuance (1/1-4/16): $124.2 bn 0

400 (71% rise from 2014 350

-4

same period) -2 300 250 200 -6 150

-8 100 50 -10

2008 2009 2010 2011 2012 2013 2014 2014 2015 (1/1-4/16) (1/1-4/16)

New Money Refunding

$45 billion in outflows (Nov. 2010-May 2011)

$61 billion in inflows

(Sep. 2011 -Dec. 2012 )

$65 billion in outflows

( May 2013 -Jan. 2014)

(Jan. 2014 -Apr. 2015 )

Apr

-11

Jun-

11A

ug-1

1O

ct-1

1D

ec-1

1Fe

b-12

Apr

-12

Jun-

12A

ug-1

2O

ct-1

2D

ec-1

2Fe

b-13

Apr

-13

Jun-

13A

ug-1

3O

ct-1

3D

ec-1

3Fe

b-14

Apr

-14

Jun-

14A

ug-1

4O

ct-1

4D

ec-1

4Fe

b-15

Marketing Considerations for New Issues

Narrower base for land-secured credits Most sensitive sector to supply/demand

Investors “reach for yield” in low rate environment -- but to a point

Results in “spread compression” between strongest and weaker credits

Institutional interest High yield funds flows tend to drop amid rising interest rates

Institutional interest increases with issue size of $25 million or greater, promise of future liquidity

Retail interest Ebbs and flows depending on market conditions and investment alternatives

Sophisticated retail investor demand for “story” credits remains strong

Development “story” is important Investors carefully evaluate strategic advantages of projects: location,

competition, developer, development momentum

Geographic diversification is helpful

San Mateo Bay Meadows CFD - Overview

Redevelopment of the 170-acre site of former racetrack into mixed-use community

Location 20 miles southeast of San Francisco

Intersection of Highways 101 and 92

Walking distance to CalTrain station

Development plan 1,066 residential units

802,000 sq ft class A office

85,000 sq ft retail

Private high school campus (Nueva)

Developer Wilson Meany Sullivan/ Stockbridge

Capital

San Mateo Bay Meadows CFD - Bonds

$31.8 million January 2012 sale 6.5%

No vertical development, VTL of 6.5-to-1 5.5%

10 institutions and 157 retail investors 4.5%

True interest cost of 6.05% 3.5%

2.5% $26 million January 2013 sale Developer responsible for 94%of taxes 1.5%

8 institutions and 213 retail investors

TIC of 4.84%

$28.5 million January 2014 sale Developer carries 80% of max tax levy;

Tri Pointe Homes 8%; Shea 7%; Nueva School 5%

10 institutions and 211 retail investors

TIC of 5.48%

Bond Yields on January 2012, January 2013 and January 2014 sales

2012 Sale: TIC 6.08%

2013 Sale: TIC 4.84%

2014 Sale: TIC 5.49%

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042

Spreads to Municipal Market Data (MMD) at time of sale

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

January 2013 Sale

January 2012 Sale

January 2014 S ale

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042

An Industry Study of CFD Reserve Fund Draws: Contributors and Correlations

CFD Bond Sales and Bond Draws: 1,510 CFD bond Issues in California from 2000-2013

31 of these had reserve fund draws; a draw percentage of 2.05% Of the 31 with draws, 7 draws appear to be for

administrative reasons

Issuers’ track records were most telling factor 16 issuers had 27 of the 31 reserve fund draws 14 of the 16 issuers had draws on one or more of their

first five bond issues Agencies with polices based on CDIAC guidelines

experienced minimal draws