LOS ANGELES - The Sacramento Court of Appeals has upheld the constitutionality of the Integrated Financing District Act of 1986, paving the way for Sacramento County and other local governments to sell bonds.
Few entities in California have taken advantage of the act, designed to help finance costly projects, partly because of its complexity and pending litigation that led to last week's court decision.
"Now that there is some law in this area, it is a financing tool local government entities can look to more," said Kenneth C. Mennemeier, a partner at Orrick, Herrington & Sutcliffe, the law firm representing the county.
The act provides a financing method to build expensive public projects, such as a freeway interchange or school, in areas where not all property owners are ready to develop their property and pay required assessments. The assessments can be used to secure tax-exempt bonds.
Under the act, a joint powers authority can be created to levy so-called "contingent assessments" on property owners once their land is developed. Most importantly, the act allows for reimbursement of assessments to the investor, either a public or private entity, who advances the bulk of funds or pays the most initial assessments to build the project.
"The-guy who puts up the front money is reimbursed with this tool, more than you can with a straight Mello" Roos Community Facilities District, said Carlo S. Fowler, a partner at Orrick Herrington.
If the plaintiffs do not take the case to the California Supreme Court, and the court ruling of the Third Appellate District, Court of Appeal of the State of California, becomes final, Sacramento County expects to create an assessment district to finance street and highway improvements. Sacramento may sell an estimated $10 million bond issue secured by assessments from the integrated financing district.
The county tried to create the district in 1988. But a local property owner, Southern Pacific Pipe Lines, challenged the constitutionality of the district.
The lawsuit was "the most broadside attack on assessment law I've seen in some time." said Dean J. Misczynski, principal consultant for the state Senate Office of Research, who wrote the Integrated Financing District Act.
Mr. Misczynski noted the court specifically upheld the idea of "contingent assessments," which he said "more equitably distribute the costs of financing a project."
According to Antonia Dolar, a lawyer at Orrick Herrington, one advantage of the act is that it allows a large public facility to be financed when one or two landowners are ready to develop, while allowing other landowners to develop at their own pace.
Another advantage is that it allows a developer who wishes to finance the facility to proceed and be assured of reimbursement, she added.
The disadvantages are that the act is complex and districts could be costly to create, Ms. Dolar said. Because the integrated district is a new, relatively unused financing tool, interest rates on bonds also may be higher than those on a more famillar financing tool.
Market participants were unsure whether the use of integrated financing districts would grow. San Jose is reportedly one of the few issuers that has created a district and sold bonds.
"Is there a great flood of people watting to use this tool?" Mr. Misczynski asked. "I don't know the answer."