Council approves lease financing for St. Catherine property in South Laguna
By SARA HALL
City Council members wore multiple hats during a dual meeting this week and in both roles they unanimously approved lease financing $12 million to finance a portion of the purchase of a closed Catholic school property in South Laguna.
Although the process and their responsibility as the Laguna Beach Financing Authority, as well as the roles of city treasurer versus the LBFA treasurer, caused some confusion both on the dais and with some city staff. It was settled after some clarification from a consulting attorney and some back and forth between city staff members.
Council approved lease financing $12 million with Truist Bank to finance a portion of the cost to acquire the property at 30516 Coast Highway (formerly St. Catherine of Siena School). It also included related documents and actions required to complete the financing agreement.
After the vote, council recessed and reconvened as the LB Financing Authority to discuss the lease before returning to finish the regular council meeting.
Councilmembers voted 5-0 on August 16 to approve the purchase and authorize the city manager to make a formal offer to the Diocese of Orange for $23 million for the purchase of the St. Catherine of Siena school property, with an escrow period up to 120 days.
The August action adopted a financing plan that includes appropriating $23.5 million for the purchase of the property using $4 million from the Future City Facilities account, $2 million from the available American Rescue Plan Act (ARPA) funds designated for city facilities, $3 million from the General Fund mid-year savings, $2 million from Vehicle Replacement Fund mid-year savings and $1 million Insurance Fund mid-year savings.
At the August meeting, council also directed staff to seek a direct loan via a private placement sale for the balance of $11.5 million, which is what they approved on Tuesday.
The city sent out a request for proposals from qualified banks and received 11 applications with terms of 15 or 20 years and interest rates between 3.32% and 4.98%. According to the staff report, Truist Bank was selected because it offered financing that best met the city’s parameters.
Truist Bank offered financing that included a term of 20 years at a competitive interest rate of 3.95% with an annual debt service of approximately $872,000. The financing also has an option to prepay the lease payments after five years without penalty. The amount financed is $11.66 million, which includes $11.5 million for the purchase of the property and $160,000 in related transaction fees.
Mayor Pro Tem Bob Whalen was impressed with the deal staff and the consultants received.
“You got a great result here, under 4% in this market,” is good, he said.
Mayor Sue Kempf was “pleasantly surprised” as well.
All of the contingencies could be removed as early as November 12, said Director of Administrative Services Gavin Curran. They should know by then if there are any concerns or issues with purchasing the property or delaying the deal.
The term sheet is good until November 18, which is why they are trying to close by November 17, he explained.
“We’re going to try and work with them to extend that a little bit and try to become even closer to the closing date for the purchase of the property,” Curran said. “We’ll try to close that risk window.”
The facilities assessment is completed and the immediate needs were determined to be around $21,000, noted Assistant City Manager Ken Domer and that included tests “to kick the tires on everything.” An accessibility analysis was completed on Tuesday and that’s also looking good, he added.
“We are on track to close as soon as possible,” Domer said.
All the contingencies should be cleared by mid-November, he noted.
Whalen directed staff to report back if anything changes.
“I’m just concerned about us borrowing $11.5 million if we haven’t removed all contingencies,” he said.
Click on photo for a larger image
Photo by Steven Georges/Diocese of Orange
An aerial view of the former St. Catherine of Siena school property
Tuesday’s action also approved a lease agreement between the city and the LB Financing Authority.
The city will lease a maintenance facility property (aka corporation yard) and fire station #3 to the Financing Authority in exchange for $11.66 million. The agreement is for LBFA to lease the property back to the city in exchange for annual debt service payments.
The city determined that the two sites, the corporation yard and the fire station #3, have a value in the excess of what is being borrowed, Whalen clarified.
Financing authority boards are allowed under state law as a way to streamline financing capital improvement projects.
It’s a common arrangement as a financing mechanism that’s recognized by courts as being valid under California law, said Juan Galvan, an attorney from Jones Hall who acted as legal counsel on the transaction.
Galvan explained that the main reason why this structure is used is because under California law there is a provision, commonly referred to as the constitutional debt limit, that requires before cities like Laguna Beach incur an obligation that exceeds a year’s worth of revenues, the city obtain the approval of the voters. There have been three exceptions recognized by the courts over the years, including this procedure, called a lease exception.
Essentially, the city is agreeing to make the lease payments each year, he added.
The current sitting councilmembers act as the governing board for the Laguna Beach Financing Authority. LBFA was essentially created as a vehicle to make the payments to the bank and then lease the property back to the city, Galvan explained.
Answering a council question, he confirmed that the city will still own the property.
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Procedurally, the council meeting was recessed after their vote on the item and the meeting as the Financing Authority opened for their discussion.
City Treasurer Laura Parisi asked if LBFA acts as the vehicle for the financing involved in the transaction, if it in turn changes the role of the city treasurer.
There is no role of the city treasurer, replied City Manager Shohreh Dupuis. Council assigned Curran as the treasurer of the Financing Authority in an action during a previous meeting.
Dupuis reminded Parisi that, since she isn’t part of the Financing Authority, her comments would have to be made during the public comment period.
“You are not participating in the Finance Authority, you are not part of the board,” Dupuis said.
Following this exchange, Kempf opened the public hearing and Parisi repeated her question.
“I would like to know how the Finance Authority, if it’s an integral part of the city, is changing the role of the city treasurer? Is the city treasurer responsible for the financial aspects of what is going through the Finance Authority, like investment of cash, signature of documents, making sure that they comply with other policies that the treasurer would administer?” Parisi asked.
“Specifically with respect to the functions of the treasurer, the joint powers agreement that was approved by the city council previously does designate the director of financial services as the ‘treasurer’ of the Financing Authority as permitted in the California law. So that is the current setup,” Galvan answered.
Councilmember George Weiss asked if the council could have previously assigned different roles to Parisi and Curran.
Dupuis repeated that the council already took that action, which Weiss acknowledged, but asked if, theoretically, they could have done it differently.
“We didn’t have a choice, necessarily, because you had a recommendation, but we didn’t discuss Laura [Parisi] acting as the treasurer, if it could have been done or could be done in the future,” Weiss said.
Curran noted that the city treasurer typically handles investments, but the Financing Authority isn’t dealing with investments at all and so the treasurer role for the FA is limited.
“Really, the role of the treasurer position is really making the lease payments to Truist Bank. So, what’s going to happen is, we’ll make payments into the Financing Authority and then, almost same day, those payments go to Truist Bank,” Curran said. “It’s really kind of a pass-through transaction, almost simultaneous.”
Only a few residents spoke during the public hearing, commenting on transparency, use of the property and asking for clarification.
On Wednesday, the Planning Commission unanimously agreed to find the proposed acquisition of the property, to be used for the continuation of public services, consistent with the city’s general plan.
Click on photo for a larger image
Photo by Steven Georges/Diocese of Orange
City Council approved the lease financing to purchase the former St. Catherine of Siena school property
In a rare agreement, council unanimously decided to move forward on July 19 to study possible uses, gather more community feedback and directed staff to develop a detailed financial plan for the 6.5-acre property.
In 2021, the Roman Catholic Diocese of Orange County contacted Laguna Beach officials to determine if the city was interested in acquiring the property, City Manager Shohreh Dupuis explained at the July meeting. Staff has since been discussing the term and price of the sale with the council in closed session.
A few months ago, the diocese reached back out about the property. It took some time because the diocese had to get approval from Rome to confirm they wanted to sell the property, she noted.
Council and city staff previously discussed working on a comprehensive, multi-year process to develop a master plan for the future use of the property. At that time, staff will continue to pursue all partnership opportunities that align with the council and residents’ vision of the property.
At the July 19 meeting, staff suggested a few possible long-term preliminary concepts, including a community pool, parking structure, permanent skate park, city hall/civic center, or a cultural arts building.
Considering the good condition of the buildings on the property, which were constructed in 2010, many short-term services could kick off immediately.
The property includes four buildings which provide approximately 39,500 square feet of indoor space.
A large, indoor gym has a multipurpose court and a performance stage, along with a kitchen, bathrooms and class space. It could also be used for pickleball courts, a community meeting site, a safe refuge site for evacuation, or an emergency incident camp for first responders.
Other buildings on the property could be used for community meeting rooms, a library extension, technology center, pre-school/transitional kindergarten or day care facility, an Emergency Operations Center, public safety substations and training center, or a city administration annex.
There are also multiple outdoor spaces, including a basketball court, grass sports field, playground structures and picnic areas. The grassy area could provide up to 70 spaces for overflow or summer parking needs.
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Sara Hall covers City Hall and is a regular contributor to Stu News Laguna.