LOS ANGELES -- San Diego defaulted Friday when it failed to make a scheduled $1.61 million debt service payment on assessment bonds issued in 1987 to fund land improvements in the city's Mission Valley.
City officials want to meet late this month with the 135 affected bondholders in a last-ditch effort to restructure the troubled issue. In August, bondholders rejected a restructuring plan developed by members of the original bond financing team.
Seven years ago, San Diego issued $24.1 million of unrated improvement bonds for Assessment District No. 4007, also known as the First San Diego River Improvement Project. A total of $20 million of bonds remain outstanding.
Bond proceeds financed flood control improvements, including three bridges and landscaping, along the bottom of the river bed located near Jack Murphy Stadium.
The project was intended to pave the way for commercial and residential development adjacent to Mission Valley's retail and hotel hub. But troubles materialized when the district's largest landowner, developer Donald Sammis, ran into financial problems.
Sammis was general partner of three partnerships that owned a number of parcels that were to become the "Park in the Valley" a mixed-use retail, hotel, and office project. Since April 1990, Sammis has been delinquent on the partnerships' special assessments and property taxes.
The delinquent development represents about 45% of the aggregate assessment liens securing the bonds; the remaining property owners are current on their obligations as of April 10.
Sammis' partnerships entered Chapter 11 bankruptcy in September 1990. The bankruptcy was later changed to a Chapter 7 liquidation, but in March a federal bankruptcy judge terminated bankruptcy proceedings. San Diego is bringing judicial foreclosure proceedings on the parcels. A San Diego County Superior Court trial is scheduled to begin Oct. 28.
"Assuming a judgment in favor of the city, it is anticipated that a foreclosure sale for the delinquent parcels would occur in late spring of 1995," a city release dated Aug. 26 said.
The reserve fund, originally funded with $2.4 million of bond proceeds and first tapped in 1991, was exhausted last year. San Diego escaped default last Sept. 2 when it contributed $1 million toward the scheduled interest and principal payment, Paul Whitaker, an analyst in the city's office of auditor and controller, said Friday.
The $1 million was advanced to the city by the Metropolitan Transit Development Board, a 14-member joint powers authority that plans to build a light rail system in Mission Valley. The authority reportedly plans to acquire about five acres of land from the Park in the Valley development.
When the authority did not step forward again this year, council members had no choice but to try to restructure the bonds, said L. William Huck, a partner with Stone & Youngberg. The council does "not want to involve the city's general fund because it is not lawfully required to be used," he said.
The council is "trying to bring the bondholders and property owners into the same room to facilitate a solution that is consistent with the bond documents," Huck said.
City staff has proposed that the meeting be held Sept. 27, although the council will officially set the date when it returns from its legislative recess Sept. 12.
Earlier this summer, bondholders rejected a restructuring plan placed on the table by Stone & Youngberg, the deal's original underwriter, and San Diego-based Brown Diven & Hentschke, the original bond counsel firm on the deal.
Ninety-five of 98 bondholders voted in favor of the restructuring plan. However, the plan was rejected when two bondholders who own 56% of the outstanding bonds totaling $11.2 million voted it down. One of the two holders owns $20,000 of bonds, while the second is an institutional investor, Whitaker said.
Despite Friday's default, there is still $773,713 on deposit in the debt service fund, also called the bond interest and redemption fund. The amount due to bondholders last Friday consisted of $850,000 of principal and $761,314 of interest.
Huck said the decision to not deplete the debt service fund was based on the statute under which the bonds were originally issued, known as the Improvement Bond Act of 1915.
"Assessment law says that if the treasurer determines that there is a danger of an ultimate loss to bond owners, it is the treasurer's statutory obligation to notify the city council of that danger," Huck said.
That notification was made by city Treasurer Connie Jamison in July.
Now, Huck said, council members must "hold all the money up and not pay anybody until they hold a public hearing." The hearing will help them "evaluate whether this condition is temporary or if there is enough information to conclude that it is a situation that will lead to an ultimate loss to bondholders," he said.
If the council decides the loss is permanent, it could direct Jamison to pay bondholders a pro rata portion of the amount in the debt service fund, then make similar pro-rated payments "periodically as funds become available" from the assessment district, a release said. No priority would be given to holders based on the maturity dates of their bonds.
On the other hand, the council could believe that judicial foreclosure against the delinquent parcels will succeed, meaning that the loss to bondholders is only temporary. In that scenario. the money in the debt service fund could be used to make the payment on the interest portion due last Friday, the release said. But principal payments would be made only "as additional funds become available," the release said.
Huck does not believe the assessment district default should have credit implications for San Diego.
"This is not a city general obligation -- far from it," he said. "It is an obligation of which the city is acting as a conduit. Technically, it should not be a reflection on the city's credit at all."
