Taxes from this property near Sacramento will pay off bonds for infrastructure that will support a mixed-use housing-hotel-retail development.

LOS ANGELES — Investors appear to have an appetite for California dirt bonds again, after buying up a $5.9 million unrated deal for undeveloped land this year that priced with a top yield below 5%.

As the real estate market stabilized over the last year-and-a-half, so-called Mello-Roos bonds have become a more sought after vehicle for financing, said Bill Mullally, president of Alamo Capital, the underwriter of the recent Rancho Murieta Community Services District deal.

After the economy tanked in 2008, there had not been any approved California Mello-Roos community facilities district deals in the market, said Jerry Liang, vice president of public finance for Walnut Creek, Calif.-based Alamo.

"The values weren't there," Mullally said. "It would be worth $10 million one week and $8 million the next."

Mello-Roos bonds fund infrastructure improvements and services through creation of a special district; special property tax assessments within that district are used to support bonds.

The financing method, approved by the state legislature in 1982, was named after its co-authors, Sen. Henry Mello, D-Watsonville, and Assemblyman Mike Roos, D-Los Angeles.

Following the downturn, the market for Mello-Roos bonds shifted toward built-out land with homes, said Dan Massiello, senior vice president of public finance for Kosmont Companies.

"It had been virtually impossible to issue Mello-Roos on bare land," he said. "A year ago, we started seeing some deals coming back on the market."

In this case, the private developer, Rancho Murieta Properties LLC., owed the local community services district development impact fees to fund the expansion of a water treatment plant needed to have water to support its development.

The cost of improvements to the district's water treatment plant is estimated at $12.8 million, of which roughly $4.3 million is expected to be paid for with bond proceeds, according to bond documents.

The developer's project is the final phase of the 40-year build-out of the master-planned Rancho Murieta community. It is located within the gates of the pre-existing community, 23 miles southeast of Sacramento.

The new project consists of 823 acres split into three separate parcels. On the largest 733-acre parcel, the plan is to build 925 single-family homes in two phases.

On a separate 53-acre parcel, the developer will build a four-story, 83-room hotel with meeting and conference facilities, six two-story condominium villas with 24 units each, a grocery-anchored shopping center, a self-storage facility and a one-acre park. On a third 40-acre parcel that is not contiguous, the developer plans to develop light industrial or business park uses.

Once the backbone infrastructure has been established on the single-family lots, the developer plans to sell lots to merchant developers, who will build the homes.

Kosmont Companies., the developer's financial advisor, was able to obtain financing for the project at a top yield of 4.862% for term bonds with a 2044 maturity, terms that conventional financing can't typically match, Massiello said.

Yields were as low as 2.66% for the 2018 maturity.

The $5.96 million sale of Rancho Murieta CCD Community Facilities District No. 2014-1 bonds closed on Jan. 28.

The bonds are structured as a fully-amortizing, 30-year loan with all issuance costs and two years of interest funded. The property owners also have the right to pre-pay the special taxes, so the lien could be removed early if desired.

"The low 5% total interest cost speaks volumes," Massiello said. "We first started on the track of finding private investors, because none of us thought we would be able to access the public markets."

Initially Kosmont Cos. had trouble finding a bank willing to underwrite financing at an attractive interest rate on undeveloped land that has not been entitled, Massiello said. The developer anticipates it will take 18-24 months to obtain the development approvals, known as entitlements.

"There are some underwriters who hear no entitlement on a dirt deal and they don't want to be exposed to that type of risk," Liang said. "For Alamo, we didn't just look at the numbers, we looked at the area."

It helped that Alamo has been handling Mello-Roos financings for 27 years; and it also helped that the developers had a good story laid out in the 260-page offering statement.

"This is a great tool that people should realize is available again," Massiello said.

The developers - Carol Anderson Ward, John Sullivan and Tom de Regt - are experienced developers, well-known in the community, Massiello said.

"It's not a fly-by-night operation that no one has heard of," he said. It is capitalized with equity; it is not a 100% financed deal, he said.

The law requires a three-to-one lien ratio on deals financed this way in case the county needs to sell the land to make the bondholders whole, he said. The land appraised at $22.5 million compared to the $5.9 million bond sale.

The bonds are structured at a slight discount done on a favorable basis to the developers and investors at a taxing rate that is easier for the future residents to shoulder, Massiello said.

The bonds, callable at seven years, were sold to retail investors.

The initial approach was to look at deep-pocketed investors, Massiello said.

"Alamo Capital has a deep client base and they wrote a lot of tickets," he said. "They wrote over 100 tickets on the 10 maturities to a lot of individual purchasers."

The successful completion of this deal signals a new era and a renewed source of project financing that can be used to enable developers and special districts to help kick-start stalled projects by financing infrastructure, Massiello said.

"I don't know if the Pied Piper is blowing the pipe and the mice will follow," Mullally said. "I would say that, yes, we will see much more of this in the future, because it is a tremendous vehicle to get homes built."

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