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Poway's Mandatory Bond Hearing Fails To Satisfy Appellate Court

The City of Poway did not conduct an adequate hearing before issuing tax-exempt bonds for the purchase of a mobile home park, the Fourth District Court of Appeal has ruled.

The issuance of tax-free bonds for a housing project requires a public agency to conduct a "TEFRA hearing" (named for the Tax Equity and Fiscal Responsibility Act of 1982), at which the agency accepts public input regarding affordable housing needs. However, there was no evidence Poway officials "brought forth or discussed any information on the provision of low-income housing at the park, a critical element in the maintenance of the tax-free status of the bonds," the court ruled.

In addition, the hearing and the city's bond resolution were misleading because they did not explain the precise deal the city was contemplating or the uncertain tax-exempt status of the private entity acquiring the mobile home park, the court ruled.

The court rejected arguments from mobile home owners that the city had to abide by earlier oral promises that the city would offer to sell the park to the residents.

In 1991, Poway's Redevelopment Agency purchased Royal Poway Mobilehome Park with the intent of preserving affordable housing. Four years later, the Redevelopment Agency transferred ownership to the city, which issued $31.7 million in bonds to pay off the debt remaining on the agency's original purchase. The city and contract employees managed the 399-unit park until 2004, when the city hired Wakeland Housing and Development Corporation for the task.

In November 2004, the city announced it intended to sell the park to a 501(c)(3) nonprofit housing corporation using tax-exempt bond financing. Members of the Royal Poway Mobilehome Owners Association protested that city officials said in 1999 that if the city ever sold the park, residents would have a chance to purchase it. The association made an offer in February 2005, but the city rejected it and went forward with its plan to sell the park to Wakeland, even though Wakeland's 501(c)(3) status was pending.

The deal was this: The city would issue $32 million in tax-exempt bonds and loan the proceeds, plus another $9.5 million, to the Redevelopment Agency. The agency would then loan all of that money to Wakeland, who would purchase the park for $35.6 million and assume all of the debt payments. At the time, Wakeland did not have a determination from the IRS on 501(c)(3) tax-exempt status. If Wakeland failed to get 501(c)(3) status, the city's backup plan was to have the Redevelopment Agency take ownership of the park.

The city filed a validation action to get a court ruling on the legality of the financing plan. Meanwhile, the owners association filed their own lawsuit attempting to block the deal. After the legal actions were combined, San Diego County Superior Court Judge Yuri Hofmann approved the city's request for validation and rejected the owners association's various arguments. The Fourth District overturned part of the decision.

The appellate court explained that a local public agency may not issue tax-exempt bonds and loan the proceeds to a private business if the bond proceeds are going to be used for "residential rental property for family units." There is an exception, though, for "qualified" projects in which at least 20% of the units are occupied by individuals whose income is 50% or less of the area's median. These are among the things a city must consider at a TEFRA hearing.

Poway noticed a TEFRA hearing on June 14, 2005, at which the city and the Redevelopment Agency approved resolutions approving the bonds and related transactions. The owners association argued in court that there was no evidence at the hearing that Wakeland or its subsidiary, Poway Royal Estates LLP (PRE), was a tax-exempt charitable corporation, and that the city did not satisfy the low-income housing requirements.

The city countered that the deal was contingent on Wakeland getting 501(c)(3) status. The city also said it was not required to present evidence regarding affordable housing because the agreement with Wakeland called for 20% of spaces to be available to very-low income residents and for an additional 40% to be available to "lower-income" households.

The court was not satisfied. The first step of the city's plan was to loan the bond proceeds to the Redevelopment Agency, which is not a 501(c)(3) charitable corporation, the court noted.

"The city explains that to take advantage of favorable interest rates and retire existing debt on the park, it sought to issue tax-exempt bonds before Wakeland or PRE obtained a determination letter from the IRS. For reasons not satisfactorily explained, the city did not refinance the debt itself," Presiding Justice Judith McConnell wrote for the court. "Rather it decided to first loan the proceeds of the bond issuance to the Redevelopment Agency for its interim purchase of the park."

"[I]t appears that in a rush to take advantage of favorable interest rates, laudable in and of itself, the city put the cart before the horse," McConnell continued.

The hearing did not give the public adequate opportunity to comment on low-income housing, and apparently no such discussion took place, the court found.

"We conclude that given the contingent nature of step two of the city's divestiture plan, the uncertain status of Wakeland or PRE at the time of the hearing, and the lack of any information on the low-income aspect of the project, the city's hearing was essentially tantamount to no TEFRA hearing at all," McConnell wrote.

As for city officials' oral promises made in 1999 about selling the park to residents, the court concluded that such pronouncements are not enforceable contacts.

The Case:
Royal Poway Mobilehome Owners Association v. City of Poway, No. D048211, 07 C.D.O.S. 4305, 2007 DJDAR 5486. Filed April 20, 2007.
The Lawyers:
For the owners association: James C. Mitchell, Mitchell & Gilleon, (619) 702-8623.
For the city and Wakeland Housing and Development Corporation: Douglas J. Evertz, Stradling, Yocca, Carlson & Rauth, (949) 725-4000.
For the city: Lisa A. Foster, McDougal, Love, Eckis, Smith & Boehmer, (619) 440-4444.

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