SAN FRANCISCO - All the ski resort of Mammoth Lakes wanted was a gondola. And a bigger airport. And a newer police headquarters. And a few other improvements that the town in California's Sierra Nevada mountains hoped to finance by creating a redevelopment zone.
But Mammoth Lakes may have to find another way to finance its plans to become more competitive with other ski resorts because a state court of appeals recently invalidated the zone. The court ruled that the zoned area was not sufficiently blighted to merit redevelopment status, which would allow the town to retain a larger portion of tax revenues in order to fund development.
The Mammoth Lakes project zone was the latest of three redevelopment zones in California to be invalidated as courts begin to enforce a 1993 law that tightened the definition of redevelopment zones. A proposed zone in Murrieta was rejected in 1998, and a Diamond Bar zone was invalidated more recently.
While the number of redevelopment zones being created each year may be shrinking because of stricter rules, existing zones still issue a lot of debt, and are becoming stronger credits because of the booming economy.
California already has 373 redevelopment agencies qualified to issue tax-exempt debt, including bonds that are repaid with taxes generated by the increased property values that redevelopment has helped bring about. Throughout the state, agencies operate 823 zones and have $17 billion in outstanding tax increment bonds, as well as $2.3 billion in revenue bonds, according to Bill Carlson, executive director of the California Redevelopment Association.
This year to date, agencies have issued about $461 million in bonds, down from $1.1 billion in each of the past three years, according to the California Debt and Investment Advisory Commission.
The popularity of redevelopment zones has led to complaints from other taxing entities, including counties, cities, and school districts, that the redevelopment agencies are getting more than their fair share of tax revenues, said Amy Doppelt, managing director of public finance for Fitch.
In response to these criticisms, the CRA in 1993 sponsored legislation aimed at maintaining the integrity of redevelopment zones. The measure, Assembly Bill 1290, tightened the definition of "blight" used to establish a redevelopment zone.
Previous to AB 1290, an entity looking to establish a redevelopment zone could establish either economic blight through high vacancy rates, crime, or decreases in property value, or establish physical blight through deteriorating buildings and the like. With the new law, an entity must prove that it has both forms of blight.
Also, an entity used to be able to establish a redevelopment zone if it could prove that an area lacked adequate infrastructure, such as sewer service and roads. The revised law says that lacking infrastructure does not justify redevelopment on its own, but can be considered a factor if other blight conditions exist.
"AB 1290 definitely made it more difficult to create redevelopment zones, but I don't see any further tightening," said Andy Hall, a lawyer at Jones Hall in San Francisco. "I think people will learn to live with these rules. Areas that have legitimate blight will still be able to use zones, but the court will strictly enforce the rules."
Historically, the financial strength of redevelopment zones is closely tied with assessed valuation and increases in property value. After California passed its landmark property tax cap, Proposition 13, in 1978, ratings on many redevelopment zones dropped but none defaulted, according to Standard & Poor's director of public finance David Hitchcock.
Many built their way out of their problems, as new construction gradually raised assessed values. Then the severe economic recession in California during the early 1990s cast a new shadow on property values.
"In the early 90s, assessed value hit a rough patch, particularly in industrial areas," Hitchcock said. "Growth was weak until last year, but then there was a new surge in assessed value and we're seeing another wave of tax allocation bond financing in California."
Fitch tends to assign BBB to A ratings to redevelopment agencies, Doppelt said. Better credits at this point are larger or more developed zones that have already eliminated much of the blight that existed when they were first established. For example, the agency in San Rafael is now rated AA because it sits in affluent Marin County. San Jose Redevelopment Agency is rated A because of the large land area it encompasses in what is now the Silicon Valley. The agency was first established in the late 1960s.
Doppelt said the greatest risk factor for redevelopment zones is they completely rely on the tax rates of overlapping entities. Each zone has no taxing power of its own and therefore no recourse to make up for any loss in the tax base. Its share of taxes amounts to the incremental increase in property taxes that results from redevelopment.
"If there's no development in the area, that means no growth" and no tax increment, she said.
Standard & Poor's analyst Gabe Petek said the average Standard & Poor's rating on a redevelopment zone is an A, though older or bigger zones tend to get better ratings.
"Older agencies can balance out short dips in assessed value, adding strength because their revenue stream is more stable," Petek said. "The benefit of a larger project area is it tends to be more diversified," meaning it is not solely reliant on housing or retail demand.
Many bond issues sold by California's redevelopment agencies in recent years have been insured, which has bolstered their popularity with investors who recall past concerns with tax allocation credits.
Standard & Poor's rated next week's $16 million in tax allocation notes from the Chula Vista Redevelopment Agency an A-minus, citing the project's large area, good debt service coverage, renewed growth in assessed value, and existing retail, office, and residential development.
The San Diego Redevelopment Agency plans to sell two issues next week, for $13 million and $7 million. Moody's Investors Service rated them Baa1, citing the projects' size, current uses, average debt service coverage, and other factors.
Standard & Poor's assigned the San Diego deals a BBB.
Sutter Securities Inc. has served as financial advisor or underwriter for some of the larger redevelopment deals of the past decade, including $692 million sold for San Jose and $202 million sold for the Los Angeles Community Redevelopment Agency, both in 1993.
Dennis Ciocca, managing director of public finance at Sutter, said the firm has no trouble selling redevelopment deals "if there's a good history of tax increment revenue in the area. These deals are now pretty well understood by the market, and it doesn't take a great deal of innovation to put one together."
However, the firm last managed a tax-allocation redevelopment bond issue in 1999.
"Over the last few years, our activity level has been declining, partially due to AB 1290," Ciocca said.
Ciocca is a member of the board of directors of the Institute for a Better California, a group of underwriters, government and agency personnel, real estate professionals, and bond lawyers formed last year to promote redevelopment and public-private partnerships.
Meanwhile, the town of Mammoth Lakes has requested a review of its redevelopment plan from the state Supreme Court, according to senior planner Karen Johnston.
