To: City Council Members
From: The Encinitas Ranch Community Association
Date: July 11, 2011
Subject: Encinitas Ranch Development Agreement and
Encinitas Community Facilities District #1 Mello-Roos Taxes
The purpose of this memorandum is to formally request the Encinitas City Council take the following actions with respect to the above mentioned subject:Rescind the Council decision of April 27 regarding the establishment of a new Encinitas Ranch Golf Authority (ERGA) contingency reserve fund. Further, if the council were to reconsider such a fund in later years, it should be undertaken only after all other obligations of ERGA have
1. Fund a comprehensive audit of the operations covered under the Developer Agreement, ERGA and CFD 1 since its inception and including all modifications and extensions.
a. Such an independent auditor to be expert in this area and to be approved by Encinitas Ranch HOA.
b. The terms of such audit to include a full accounting of monies transferred either from the Town Center or the Golf Course to the City, and those amounts of Mello Roos taxes paid as a result of Golf Club or Town Center operations.
c. The audit should also include the economic impact of any non-completed obligations of the developer under the original contract, and the consequences of any failure to pay bond or other obligations on the part of the developer.
2. Revise the composition of ERGA board to include representatives of the homeowners at risk.
Recent Encinitas City Council action has called into question the basic fairness and even handedness of the Encinitas Ranch Development Agreement (“Agreement”). Close scrutiny of the Agreement and its implementation suggests that an economic burden was illegally imposed on the individual home buyers within Community Facilities District No. 1 (“CFD 1”) without their full knowledge and consent.
The 500 homeowners of Encinitas Ranch have just learned how directly and significantly their individual Mello-Roos CFD 1 tax liability is tied to the economic performance of the City’s golf course and the privately owned Encinitas Town Center commercial area.
This revelation came as a complete and total surprise to the Encinitas Ranch homeowners. It is fair to say that it will come as an equal surprise to the other 424 homeowners who together with Encinitas Ranch make up the total 924 homes in CFD No. 1. The facts surrounding this economic link, together with the potential negative financial impact, came to light as a result of City Council action taken on April 27, 2011. Specifically, the City Council, at the request of the Encinitas Ranch Golf Authority (ERGA) and Carltas, approved staff recommendation that allowed the golf course to divert $100,000.00 a year for the next five years from funds that would otherwise be available to pay the golf course’s obligation to pay its annual share of the CFD No. 1 bill, thereby shifting responsibility to pay to the individual homeowners of CFD No. 1.
Irrespective of the fact that the action taken by the City Council on April 27 had a clearly defined potential for direct negative impact on the homeowners of Encinitas Ranch, absolutely no advance notice was given to the homeowners.
The action taken by the City Council on April 27 caused The Encinitas Ranch Community Association Board of Directors to launch an immediate investigation into the underlying circumstances, which of necessity led to a review of the original Encinitas Ranch Development Agreement, which is a document allegedly prepared by the private developer Carltas with apparently little City oversight. The Agreement provided in part for the development of a commercial area known as Encinitas Town Center, which is owned by the developer Carltas and others, and a golf course, which is owned by the City. In conjunction with the development of the golf course, the City created an entity known as Encinitas Ranch Golf Authority (ERGA), which is managed by a City-appointed board and whose sole function is to manage the golf course for the City. The ERGA board consists of five members, three of whom are city employees, one a Carltas employee and a fifth at-large member. There is absolutely no representation by or input from an Encinitas homeowner despite the fact that action taken by the ERGA board can have a direct impact on the financial wellbeing of the homeowners.As part of the Agreement, a Mello-Roos special tax district, CFD 1, was created to provide the funding for the infrastructure and other specified amenities associated with the development. CFD 1 calls for the levying of an annual tax on all property owners in the district, with the exception of the golf course, which is technically not part of CFD 1.
However, pursuant to an Amendment to the Agreement, the golf course is legally obligated to pay a specified share (14%) of the total CFD 1 annual bill. This obligation resulted from the fact that the golf course is a clear and substantial beneficiary of the CFD 1 infrastructure. Also, unknown to the district’s homeowners until this recent investigation is a proviso that the golf course only has to pay its annual obligation to the extent that its revenue exceeds a defined amount. As exemplified by the City Council’s action of April 27, that amount can be manipulated to the homeowner’s detriment by re-defining the terms. The net effect of the April 27 City Council was to create a new layer of expense under the guise of establishing a contingency reserve despite the fact that the golf course already had three separate reserve funds totaling over $800,000.00 and more than adequate insurance coverage in the event of an undefined catastrophic event.
The Encinitas Town Center, which is a privately owned commercial enterprise, is part of CFD 1 and is therefore subject to an annual CFD 1 special tax obligation. The Town Center is a major beneficiary of infrastructure paid for by CFD 1 and should bear a fair share of the cost. However, like the golf course, it appears that the Town Center only has to pay its CFD 1 obligation if its retail sale revenue exceeds a defined amount. If the Town Center has a bad economic year and does not pay its annual bill, the unpaid amount will be passed on to the homeowners.
No such forgiveness provision exists for homeowners. If a homeowner has a bad year, no matter how bad, he/she will be required to pay the bill in full and may even have to pay a pro-rata share of the golf course and/or Town Center obligation. Moreover, it appears that if these entities have a surplus year, the excess may go to the city or private investors, and are not used to mitigate homeowner burden in poorly performing years.
The Agreement requires that each homebuyer be given notice regarding the existence of a special tax district such as CFD 1 and, to the best of our knowledge, which notice was given by each merchant builder. However, absolutely no notice whatsoever was given regarding the fact that what each homebuyer actually paid from year to year was tied to the economic performance of the golf course and the Town Center.
Even the administration of CFD 1 gives reason for concern. The finance manager for the City is also the administrator for CFD 1 and the finance officer for ERGA. The overlapping relationship between the CFD 1 administrator and the finance officer for ERGA would appear to raise a conflict of interest issue from the point of view of CFD 1 homeowners. This conflict presumably wearing all three hats, advised the City Council to approve ERGA’s request to create a new contingency reserve to the financial detriment of the CFD 1 homeowners. Mr. Lembach was unequivocally advocating for the benefit of ERGA.
There appears to be no independent oversight regarding the administration of CFD 1. No governmental agency, entity or individual has that responsibility. The CFD 1 administrator seems to have unfettered discretion, which is of particular concern when one considers the potential for bias based upon the duties of that position.
As part of its investigation into the above discussed matters, the Encinitas Ranch HOA Board looked at and considered the financial performance record of the golf course. Although the golf course is a for profit business, it has realized very little profit over the years and has lost money in recent years. Certainly, the overall economic downturn has had an impact, but there was probably reason for concern before the downturn. Because of the potential for shifting financial burdens resulting from poor economic performance, homeowners in CFD 1 are justifiably concerned about what would happen if the golf course was a complete economic failure and went bankrupt.Would the golf course’s obligation to pay 14% of the annual CFD 1 bill shift entirely to the CFD 1 residential property owners? This question was asked at a recent information meeting attended by City representatives and Encinitas Ranch Community Association representatives. The question was put to Mr. Lembach, and he either didn’t know the answer or
didn’t want to answer because he gave no answer. This is a significant concern to homeowners.
The residential property owners in CFD 1 are entitled to answers. If the answers show that the residential property owners would bear the cost of the golf course and/or retail elements’ failure, this would represent yet another example of lack of notice regarding CFD 1 liability.
Please respond to the Encinitas Ranch Community Association’s request for the actions outlined above within 30 days from the date of this memorandum.