Presentation - California

Presentation - California

Presentation to Officials of the State of California SPWB BOND TRAINING SEMINAR Presented by: Stradling Yocca Carlson & Rauth, a Professional Corporation, Bond Counsel October, 2016 1 Overview of Seminar

Pre-Issuance Matters 1. Real Estate Due Diligence 2. Project Status and Description 3. Tax Law Due Diligence Bond Issuance Process 1. Required Legal Documents 2. Disclosure Documents 3. Closing Process 2 Overview of Seminar (Contd) Post-Issuance Matters

1. Project Completion and Occupancy 2. Annual Disclosure 3. Significant Event Disclosure 4. Facility Lease Compliance Matters 5. Tax Compliance 3 Overview of Bond Sale SPWB sells Lease Revenue Bonds to finance Projects which most often are sold as tax-exempt bonds SPWB sells Lease Revenue Refunding Bonds to refinance Projects and lower debt service payments and

lease payments Bonds are secured by lease payments made by Departments Department leases site to SPWB pursuant to Site Lease SPWB leases back site and Project to Department pursuant to Facility Lease 4 Overview of Bond Sale (Contd) Department agrees to make lease payments pursuant to Facility Lease SPWB and State Treasurer enter into Supplemental Indenture

establishing terms of bonds Bonds are offered to investors by Preliminary Official Statement (POS) Bonds are sold to Underwriters pursuant to Purchase Contract among SPWB, State Treasurer and Underwriters or by Competitive Sale Final Official Statement delivered after pricing of Bonds SPWB, State Treasurer and Departments enter into Continuing Disclosure Agreement 5 Real Estate Due Diligence

Purpose 1. Review to ensure no encumbrances that would interfere with use and occupancy of the Facility 2. Discover any items that should be disclosed in POS 3. Discover any items that could have tax law consequences Process 1. Review of preliminary title report 2. Department prepares unrecorded rights letter (Exhibit 1) 6

Real Estate Due Diligence (Contd) Potential Issues 1. Reversionary Rights 2. Prior leases requiring subordination 3. Oil, gas and mineral rights 4. Easements impacting Project site 5. Agreements causing tax law impacts 7 Project Status and Description Description of Project 1. Included in POS/OS, Facility Lease and Indenture

2. Physical description of site and improvements 3. Status of construction contract and remaining approvals 4. Reference significant real estate matters learned in due diligence process 5. Seismic, flood or hazardous waste issues 6. Pending or threatened litigation related to Project 8 Pre-Issuance Tax Analysis Receive and complete Tax Questionnaire (Exhibits 2A and 2B)

Participate in due diligence call with tax counsel 1. Discuss existing and expected agreements affecting the site 2. Analyze private use issues 3. Revise existing agreements/arrangements if needed for tax compliance 9 Bond Issuance Process Participate in document review sessions to finalize forms of legal documents and POS POS must disclose all material facts re Projects

1. Project Description 2. Litigation 3. Issues that could affect timely completion 4. Circumstances that could affect use and occupancy 10 Bond Issuance Process (Contd) SPWB Rule 15c2-12 Certificate (Exhibit 3) 1. Deems the POS final per Securities and Exchange Commission Rule 15c2-12 to allow Underwriters to offer the Bonds for sale 2. SPWB certification relies on certificates of

Departments and others POS certificate of Department with 10b-5 representation (Exhibit 4) 1. Information concerning Department and its Project does not contain a misstatement of a material fact or omit a material fact 11 Federal Securities Laws Securities Act of 1933 and Securities Act of 1934 contain antifraud provisions applicable to municipal securities Rule 10b-5 provides that: It shall be unlawful for any person . . .

a) To employ any device, scheme or artifice to defraud, b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . . 12 The Materiality Standard [w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether

or not to invest. Materiality is determined in context of all the facts and circumstances Guidance comes primarily from court decisions and SEC enforcement cases. 13 When Do Disclosure Rules Apply? Rule 10b-5 applies whenever an issuer is speaking to the market New offerings Annual Report under Rule 15c2-12

Material event reports or voluntary filings on EMMA Other circumstances Public statements by officials --whether this will be considered speaking to the market will depend on the official making the statement, and the audience. Political speech has in the past been viewed as OK, but recent SEC actions suggest using greater caution. Investor website 14 Overview of Official Statement Official Statement is offering document to investors

Equivalent to prospectus in corporate market Must contain all material information for the particular bond sale Official Statement is the SPWBs document Underwriters, financial advisers and lawyers can help develop the Official Statement but the SPWB is ultimately responsible for its content 15 Official Statement Other than Appendix A Description of Bond Provisions Description of Projects

Description of Factors Affecting Construction Status of construction bid process Remaining approvals needed Completion timeline Completion risks 16 Official Statement Other than Appendix A (cont.) Description of Factors Affecting Occupancy Hazardous materials/soils Seismic

Flood zone Mineral rights Rights of reversion Other encumbrances 17 Official Statement Other than Appendix A (cont.) Risk Factors Construction and completion Capitalized interest period limited Abatement

Failure to complete or damage, loss, condemnation Continuing Disclosure Annual reports Notices of enumerated events Past compliance (5 year look back) 18 Disclosure Considerations Tomorrows hot topic may be different than todays Disclosure must evolve to reflect changing circumstances

Read the disclosure with fresh eyes important to remain diligent on each bond issue If you think something may be a concern, raise the issue with colleagues and the working group Confidentiality concerns and political sensitivity are not exceptions to disclosure requirements 19 Consequences of Bad Disclosure SEC Investigation large fees for lawyers and consultants Adverse publicity

Reduced market access May have to impose new procedures and oversight to settle SEC actions Rating Downgrades (triggers increased credit/liquidity provider fees) Fines against issuer or culpable officials (increasing) 20 Closing Process Bond Purchase Contract lists required closing items Closing approximately one week after bond sale Closing Documents from Departments

1. Executed legal documentsSite Lease, Facility Lease, Continuing Disclosure Agreement 2. Closing Certificate of Department (Exhibit 5) 3. Opinion of Counsel to Department (Exhibit 6) 4. Department Certificate to Tax Certificate (Exhibit 7) 5. Tenant Certificate of Tax Certificate (Exhibit 8) 21 Post-Issuance Matters Facility Lease Compliance Matters (Exhibit 9) Facility Lease contains expected completion date and Departments must promptly communicate any potential delays to SPWB

Facility Lease requires insurance from Departments 1. Builders risk upon start of construction and then commercial property insurance 2. Rental interruption insurance upon completion of construction 3. Departments to deliver each July a schedule of insurance in effect 22 Post-Issuance Matters (Contd) Facility Lease requires prior written consent of SPWB for any Permitted Encumbrance which includes 1. Easements and licenses granted during or after the

construction process 2. Any lease or other agreement granting a real property interest in the Facility Facility Lease requires compliance with Continuing Disclosure Agreement Facility Lease requires compliance with Tax Certificate 23 Post-Issuance Matters (Contd) Continuing Disclosure Agreement 1. Annual Disclosure Report due by each April 1 coordinated by State Treasurers Office and input from

Departments will be requested early each year 2. Significant Event Disclosure requires reporting of certain events within 10 business days of occurrence 3. Key information from Departments is a delay in Project completion and any post-completion event that could interfere with use and occupancy 24 Post-Issuance Matters (Contd) Tax Law Compliance Issues (Exhibit 10) 1. Expenditure of proceeds by certain dates 2. Recordkeeping

3. Private Use Restrictions IRS Audits 1. Purpose and potential outcomes 2. Areas of focus 3. Recommendations to SPWB and Departments 25 QUESTIONS? Contacts: Stradling Yocca Carlson & Rauth Bob Whalen: [email protected], 949-725-4166 Carol Lew: [email protected], 949-725-4237

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