San Jose redevelopment set to default after Brown vetoes bill

Bond Buyer reports that a bill written to help the ailing (and largely shuttered) San Jose Redevelopment Agency limp along until its fate was decided by the state Supreme Court in January was vetoed by Governor Brown. Senate Bill X1 8 was designed to extend SJRA’s credit facility past a November 25 deadline. Redevelopment reform bills passed in concurrence with the budget disallowed any new borrowing or even extensions such as the one San Jose (and Rocklin, also in the bill) was asking for.

San Jose wasn’t doing itself any favors by becoming a plaintiff in the League of California Cities/California Redevelopment Agency’s lawsuit against the state and Brown, so no one could expect a favor back from the Governor. San Jose is on the hook for $100 million in redevelopment debt, or rather, JP Morgan is. Buyers of the issued redevelopment bonds are not on the hook according to an earlier Bond Buyer report.

Typically, (Tom Jacobs, Moody’s) said, principal would amortize over three to five years starting a few months after the draw, with interest accruing at an above-market interest rate.

But in this agreement, the San Jose RDA would immediately be obligated to repay the full amount drawn by the trustee — the full $95 million, and the JPMorgan letter says the San Jose RDA will not have the capacity to repay that amount.

It’s unclear what options SJRA will have over the next few weeks, or after the default is triggered. The Diridon ballpark properties have been transferred to San Jose Diridon Development Authority, which should in theory insulate the ballpark project from creditors, but any such speculation is extremely premature at this point. The $100 million at stake is a drop in the bucket compared to SJRA’s $3.5 Billion in total debt. One thing is clear: any new projects San Jose was planning to do in the future will come with extremely high borrowing costs as SJRA’s credit rating (Moody’s: Baa1/Baa2, S&P: BBB+/BBB-) is blown to bits. At this point, SJRA is toast.

12 thoughts on “San Jose redevelopment set to default after Brown vetoes bill

  1. So what is the precise impact on the ballpark from this action? None at all?

  2. Could be nothing, could be the end of the ballpark in San Jose. It all depends on whether the courts eventually allow the Diridon Development Authority to be separated as they currently claim they are (since it was to skirt around being tied to the SJRDA) or if they determine it was a purposeful evasion and force them to liquidate. But we knew something along these lines was going to come up eventually with RDA essentially dead and the DDA being created to get around the demise of the SJRDA. Just figured it would be Brown coming for the DDA not creditors.

  3. @pjk,
    None at all I would assume. Besides, SJRDA has acres of other property it could sell off to cover its debt. Diridon wasn’t the only RDA owned property (now officially under the DDA umbrella). So if SJRDA is in such dire straights (ie dead), where would that leave other RDA’s who had “hopes” for a ballpark?

  4. This $100 million debt due on these bonds was triggered in the bond agreement because the RDA’s are going away. Otherwise it was not due all at once if RDA’s continue?? Of course that is a city issue.
    So this debt is seperate than the “pay to play fee” to continue the usage of RDA funds in CA? SJ still needs to use the RDA funds for the last few parcels, unless Wolff buys them himself. San Jose by transfering the properties to the SJDDA has protected these current assets for the ballpark.It seems to me that all though this was done in response to the RDA Situation, there is certainly nothing sinister about the transfer.

  5. …Of course, any dissolution of RDAs impacts Oakland, too. With the distinction that while San Jose has been banned from having a ballpark by MLB, Oakland could have used redevelopment funds a decade ago to get a ballpark project going but did zip instead. Let’s hope it’s not too late for either city.

  6. @Robo – The debt is due because SJRA is unable to get additional financing to extend the payment schedule because any such activities are frozen right now. It is separate from the payment the agency will have to make to the state.

    My guess is that SJDDA sells the existing Diridon parcels to Wolff/Fisher, transfers the proceeds back to SJRA, which then makes a payment however it’s negotiated. It’s sort of up to JP Morgan. Will they sit around and let the default occur or will they try to work something out knowing the bind SJRA is in politically?

  7. IMHO, worst case scenario, even if the state were to somehow seize the Diridon plots, the city of SJ would still have the authority to say what is built there. The state would probably care less if it was a ballpark, condos or office/retail. But alas, I don’t think we’ll have to worry about that.

  8. RM,
    I was thinking the same thing re Wolff/Fisher buying Diridon and SJ using the proceeds toward SJRDA debt. Regarding my worst case scenario: if the state owns land within city limits, does the city still have authority on what’s built there, be it housing, commercial or recreational?

  9. @Tony D. – It’s not a realistic scenario. The state couldn’t act until well after January, when the first payment was due. I doubt that City and Wolff/Fisher will wait that long given the urgency. If any land were “seized” by either the state or private creditors, it’d still have to be liquidated anyway to take care or ongoing debts. The state holding land is useless. They’ve been getting rid of dead assets for years.

  10. ML – I’m still not clear on exactly what is going to happen here. Since the state is inheriting all the previous RDA’s tax increments, does it also mean they will take the debt service owed to them as well? Which means SJ problem is now also CA problem?

  11. Thanks ML for the explanation,That clears it up for me and I think you are right.

  12. @Anon – No, the new law allows the state to create a successor agency (call it Ghost of RDA) to take care of all debt service and payments to the state. It would be overseen by a county-appointed board or committee.

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