M E M O R A N D U M

TO: Mayor and City Council

FROM: Glenn Sabine, City Attorney

DATE: November 5, 2014

RE: Consideration and Possible Adoption of a Fourth Implementation Agreement Addendum to the Encinitas Ranch Development Agreement (Development Agreement) – Incorporating Recommendations of the Encinitas Ranch Golf Authority (ERGA) Council Subcommittee Approved by the City Council

Section 4.10 of the Development Agreement provides for the execution by the parties of Operating Memoranda when refinements and clarifications are appropriate regarding the performance of the terms, conditions and obligations contained therein. Attached is a draft Fourth Implementation Agreement to the Development Agreement which, if adopted by the Council, would incorporate the recommendations of the ERGA Council Subcommittee (Deputy Mayor Kranz and Council Member Shaffer) approved by the Council in April of 2014. Specifically, the Fourth Implementation Agreement would do the following:

Confirm and incorporate into the Development Agreement the City Attorney Memorandum, dated November 3, 2013, identifying the rights and obligations of the parties beyond its December 13, 2014 expiration date;

Affirm the definition of gross revenues to include all revenues whether or not from the golf course operations;

Affirm the annual timeline agreed upon in 2012 for making the calculations regarding Encinitas Golf Course Net Revenues (EGCNR) and Surplus Golf Course Net Revenues (SGCNR);

Acknowledge more detailed definitions of EGCNR and SGCNR;

Provide guidelines for handling capital lease revenues;

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Clarify that payment of SGCNR must be made within a defined time frame after the end of the fiscal year in which they occur (i.e., not spread over multiple years);

Clarify ERGA Board policy regarding funding the recently created contingency reserve (i.e., defining whether the Board has discretion to contribute to the CFD-1 bond payments instead of placing the full $100,000 into the reserve if it is available);

Confirm the assignment of rights, duties and obligations from the Carltas Company, a California Limited Partnership, to Golf Holding LLC, a California Limited Partnership, with the Carltas Company serving as a managing member; and

Provide that for so long as any obligation for contribution by ERGA to the CFD Golf Course Bond remains unpaid, a representative of the Encinitas Ranch Homeowners Association shall serve as a non-voting member of the governing board.

If adopted, the Fourth Implementation would become effective immediately upon its execution by the parties to the Development Agreement.

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FOURTH IMPLEMENTATION AGREEMENT ADDENDUM

WHEREAS, Section 4.10 of the Encinitas Ranch Development Agreement (“Agreement”) provides for the execution by City and Owner of Operating Memoranda when refinements and clarification are appropriate with respect to the details of performance by Owner and City; and WHEREAS, the Agreement expires on December 13, 2014, and certain rights and obligations survive the expiration which Owner and City desire to identify and clarify: NOW, THEREFORE, the parties hereto agree to the following: 1. The expiration and identification of rights and obligations which continue as identified in the City Attorney memorandum dated November 3, 2013, and contained in Attachment “A” to this Agreement, hereby incorporated by reference, are confirmed. 2. The provisions clarifying financial reporting by the Encinitas Ranch Golf Authority as contained in Attachment “B” to this Agreement, hereby incorporated by reference, are confirmed. 3. The assignment of all rights, duties, and obligations with respect to the Encinitas Ranch Golf Course, including further amendments or modifications to the rights and authority of either City or Owner (as defined in the Encinitas Ranch Development Agreement), heretofore assigned to Golf Holding LLC, a California Limited Liability Company (“GHLLC”) with Carltas Company, a California Limited Partnership, as Managing Member, is hereby confirmed. Such assignment does not affect Owner obligations with respect to the Sales Tax Advance as set forth in the Encinitas Ranch Development Agreement. 4. The provisions for the governing board of the Encinitas Ranch Golf Authority (“ERGA”) are hereby modified as follows: a. So long as any obligation for contribution by ERGA to the CFD Golf Course Bond remains unpaid, a representative of the Encinitas Ranch Homeowners Association shall serve as a non-voting member of the governing board; provided, however, that the parties hereto agree to meet and confer on or about a date five (5) years subsequent to the effective date of this Agreement and again on or about a date ten (10) years thereafter, to assess the effectiveness and continuing service of said representative. 5. The expiration of the original term of the CFD Bonds, the CFD Golf Course Bonds and the Golf Course Revenue Bonds (plus the original term of any bond used to refinance such bonds in whole or part) includes the

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period of makeup obligation for payment by ERGA pursuant to Section 3.2.13.1 as set forth in the Second Implementation Agreement, Addendum Two dated November 8, 1995. 6. All other existing terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Fourth Implementation Agreement Addendum Four on _____________________. City of Encinitas By: _________________________ Mayor Kristin Gaspar Owner By: Carltas Company, a California Limited Partnership, Agent for Owner per Section 4.25 of the Agreement By: Carltas Management, a California Corporation, its General Partner, By: _________________________ Christopher C. Calkins, President Assignee Golf Holding LLC, a California Limited Liability Company By: Carltas Company, a California Limited Partnership, Managing Member By: Carltas Management, a California Corporation, its General Partner, By: _________________________ Christopher C. Calkins, President

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CITY OF ENCINITAS

MEMORANDUM

TO: MAYOR AND CITY COUNCIL

FROM: CITY ATTORNEY

DATE: NOVEMBER 3, 2013

RE: ENCINITAS RANCH DEVELOPMENT AGREEEMENT—EXPIRATION

________________________________________________________________________

INTRODUCTION

The memorandum addresses Deputy Mayor Shaffer’s question: “What happens when the

[Encinitas Ranch] Development Agreement expires?” Prior to providing that analysis, it is

necessary to briefly note the purpose and authority related to traditional vested rights in

California and, in particular, development agreements. As a general rule, a developer who has

obtained a building permit, completed substantial work and incurred substantial liabilities in

reliance on that permit obtains a vested right to finish the project within the scope of the permit

despite changes in applicable land use regulations.1 Aside from these circumstances, a developer

may also obtain a vested right to complete a project subject to the rules existing at the inception

of the project if the developer either obtains approval of a vesting tentative map2 or enters into a

development agreement with a local government.

In the context of a development agreement, the developer and the local government agree to

“freeze” applicable rules, regulations and policies (including zoning) that are in place at the time

of the execution of the agreement.3 Additionally, other terms and conditions such as financing

and land exchanges may be incorporated into a development agreement to implement a

development plan. It is important to note that since a development agreement is a contract

(versus a regulatory tool), an aggrieved developer that is a party to the agreement may pursue a

breach of contract action, and a public agency can be held liable for damages in such instances.4

Finally, you should note that the adoption or amendment of a development agreement may only

be challenged in court within 90 days of the adoption or amendment.5

1 See Avco v Community Developers, Inc. v South Coast Reg’l Comm’n (1976) 17 C3d 785, 793, cert

denied (1977) 429 US 1083. 2 See Government Code Section 66498.1(b); if a property owner obtains the approval of a vesting

tentative map, the owner can proceed with the development in substantial compliance with the ordinances, policies and standards in place at the time the application for the map was complete. 3 See generally Government Code Sections 65864 et seq.

4 See Mammoth Lakes Land Acquisition, LLC v Town of Mammoth Lakes (2010) 191 CA4th 435.

5 Government Code Section 65009(c)(1)(D).

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This memorandum analyzes the Encinitas Ranch Development Agreement (the “Development

Agreement”), including four related implementation agreement addenda, for purposes of

summarizing the parties’ significant rights and obligations that continue after its expiration. With

the exception of addressing traditional vested rights in the context of land use and development,

this memorandum does not address aspects of rights which have been exercised or obligations

which have fulfilled. Except as otherwise defined herein, all of the capitalized terms in this

memorandum have the same meaning as defined in the Development Agreement. All references

to “Section” reflect sections in the Development Agreement unless otherwise stated.

ANALYSIS

a. Expiration of Rights and Benefits

A key component and purpose of the Development Agreement is identified in Section 3.1.1

captioned: “Land Uses, Densities and Intensities.” That section states in pertinent part:

“City agrees that Owner shall have the right to develop the Property in accordance with the land

uses, densities and intensities specified in the Specific Plan, subject to the conditions imposed by

this Agreement. Provided that Owner is not in default of this Agreement, the City shall not

change the land uses, densities and intensities specified in the Specific Plan during the term of

this Agreement without the prior written approval of Owner…Owner shall have the rights and

benefits afforded by this Agreement and this Agreement shall be enforceable by Owner and the

City notwithstanding any change in the applicable general or specific plans, zoning, subdivision

or building regulations adopted by City which alter or amend the rules, regulations or policies

governing permitted uses of land, density and design….”6

Essentially, this language, via the Specific Plan, imposes a “freeze” (as noted above) on

applicable rules, regulations and policies (including zoning) that were in place at the time of the

execution of the Development Agreement. As such, the Owner has a vested right to develop the

Property in accordance with the Specific Plan and related building regulations and the City may

not change the land uses, densities and intensities specified in the Specific Plan or existing

building regulations without the consent of the Owner. This vested right continues until the

expiration of the Development Agreement on December 13, 2014 (see discussion below).

Thereafter, the current rules, regulations and policies would apply.7

6 The language contains a limited exception related to the Regional Commercial Center whereby the City

reserves the right to modify the development standards (e.g., engineering specifications), zoning standards (e.g., setback requirements) and design standards (e.g., color of buildings) provided Owner can still obtain the benefit of the land uses, densities and intensities specified in the Specific Plan. 7 Alterations to existing development or redevelopment on the Property after the expiration of the

Development Agreement, due to circumstances related to damage, repair, or remodel will need to be evaluated on a case-by-case basis under the Encinitas Municipal Code provisions related to continuing legal nonconforming uses.

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b. Continuing Terms and Conditions

The Development Agreement contains terms and conditions establishing ongoing obligations

between the Owner and City beyond its expiration date and potentially until 2055. Section 4.2 of

the Development Agreement states:

“This Agreement shall commence upon the Effective Date and shall remain in effect for a term

of twenty (20) years thereafter, unless this Agreement is terminated, modified or extended by the

provisions of this Agreement or by mutual consent of the parties [emphasis added.]”

Section 4.1 defines the Effective Date as the date upon which the Development Agreement is

signed by the Owner and City. The City executed the Development Agreement last on December

12, 1994 (recorded on December 14, 1994). Pursuant to Section 4.2, therefore, the Development

Agreement expires on December 13, 2014. Thereafter, as discussed above, any further

development of the Property or changes to existing development would be subject to the (then)

current applicable rules, regulations and policies (including zoning) of the City—including the

application of Proposition “A.”

However, pursuant to the language emphasized above in Section 4.2 (“…extended by the

provisions of this Agreement….”), specific provisions of the Development Agreement extend

beyond December 12, 2014. Section 3.1.8 captioned, “Duration of Owner’s Rights and

Benefits,” further supports this interpretation and provides as follows:

“Subject to all of the terms and conditions of this Agreement, Owner’s rights and benefits under

this Agreement shall be available for a term of twenty (20) years commencing on the Effective

Date… [emphasis added.]”

Specific terms and conditions extend certain rights and obligations of the Development

Agreement beyond December 12, 2014, including the (a) management of the Golf Course, (b)

compensation to the Owner for the Golf Course Parcel and Related Improvements/Sharing of

Golf Course Revenues (c) Owner’s sales tax advance repayment obligations (d) agricultural

preserves covenant, (e) Owner’s irrevocable offer to dedicate the Performing Arts Theatre Pad,

and (f) certain indemnity and warranty provisions.

(a) Management of the Golf Course

Section 3.2.1.2 of the Development Agreement provides: “Management and operation of the

Golf Course shall be under the control of the Golf Course Governing Entity….” Section 2.16

defines Golf Course Governing Entity to mean, “an authority or non-profit corporation governed

by a board consisting of the City Manager, the City Engineer, the City Community Services

Director, an individual to be selected by the City Manager and, until the repayment of all of the

bonded indebtedness issued to finance the Golf Course and the Golf Course Public

Improvements and the expiration of Owner’s participation interest in golf course revenues, a

representative of Owner.” The rights and obligations under these sections, including the

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structure of governance of the Golf Course, vested upon Owner’s delivery of the completed Golf

Course to the City and extend beyond the expiration date of the Development Agreement.

(b) Compensation to the Owner for the Golf Course Parcel and Related

Improvements/Sharing of Golf Course Revenues

Compensation from the City for the Golf Course Parcel and improvements is owed to Owner and

is a right that vested in Owner when, pursuant to the Development Agreement, Owner dedicated

the Golf Course Parcel and related improvements to the City. Consequently, the City is obligated

to compensate Owner for the same.

Section 3.2.1.3 of the Development Agreement provides as follows:

“3.2.1.3 Compensation to Owner for Contribution of Golf Course Parcel

In consideration of Owner’s dedication of fee title to the Golf Course Parcel and construction of

improvements thereon, City shall pay Owner, but solely from the sources of the payments and

credits expressly identified in subsections a through e of this Section 3.2.1.3, an amount of

money and credits, and as to the payment under sub-section d as limited by sub-section f below,

such amounts to be calculated, paid and credited as follows:

…

d. For a period of 25 years commencing upon the expiration of the original term of the CFD

Bonds, the CFD Golf Course Bonds, and the Golf Course Revenue Bonds (plus the

original term of any bond used to refinance such bonds in whole or in part), an amount

equal to 50 percent of Surplus Golf Course Net Revenues shall be paid to Owner. …”8

It is anticipated that the above-referenced bonds will mature in 2030. Therefore, pursuant to

Section 3.2.1.3.d (considering the 25 year period), the Owner’s entitlement to receive 50 percent

of the Surplus Golf Course Net Revenues may extend until 2055.9

It is important to note that Section 3.2.1.3.f may limit the total amount distributed to the Owner

pursuant to Section 3.2.1.3.d. That section states:

8 “Surplus Golf Course Net Revenues” is defined in Section 2.43 of the Development Agreement as

amended by Section 1 of the Third Implementation Agreement Addendum Three as follows: “…means Golf Course Net Revenues received by the Golf Course Governing Entity, to the extent that such Golf Course Net Revenues exceed debt service payments on: (a) Golf Course Revenue Bonds; (b) an allowance/reserve for contingencies of up to $100,000 per fiscal year, until such time as the Golf Course has a fully funded contingency reserve of (minimum) $500,000 or such greater amount as is deemed prudent by the Golf Course Governing Entity, after the completion and approval of a third-party evaluation of the Golf Course’s long term needs for a contingency reserve, and (c) CFD Golf Course Bonds (plus any bonds issued to refinance such initial bonds is whole or in part.)” 9 Owner’s timely repayment in full of the City’s sales tax advance with interests is a condition precedent to

Owner’s right to share in the Surplus Golf Course Net Revenues (see Third Implementation Agreement Addendum Three Section 4).

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“No payment shall be made by City or owed to Owner which exceeds the total Ceiling Value

Payments calculated in accordance with Addendum Exhibit A hereto. The parties acknowledge

that the ‘Ceiling Value’ represents a computational maximum assumption and does not reflect

the expectation of either party hereto of the total amounts to be paid to owner, which are strictly

limited to the lesser of (i) the share of surplus Golf Course New Revenue set forth in Section d

above, or (ii) the Ceiling Value Payments.”

(c) Owner’s sales tax advance repayment obligations

Pursuant to Section 3.2.13.2.1 of the Development Agreement, the City advanced to Owner an

amount equal to 50% of the aggregate Regional Commercial Center Net Sales Tax actually

received by the City for the 1996-97, 1997-98, 1998-99, 1999-2000 and 2000-01 fiscal years

subject to certain reductions. Section 3.2.13.2 provides that the purpose of such an advance is

“in recognition of the provision by the Owner of a variety of improvements that benefit the entire

City and region beyond servicing the needs of the property, at a point in time otherwise months

or even years in advance of their probable feasible construction….”

The Owner and City agreed to a repayment schedule pursuant to Sections, 3.2.1.3(b), 3.2.1.3(c)

and 3.2.13.2.4, as amended by the Third Implementation Agreement Addendum Three.

Essentially, the payment schedule obligations extend through June 15, 2018, at which point the

full remaining amount of the principal balance is due together with all accrued and unpaid

interest using a prescribed rate and method.10

(d) Agricultural Preserves Covenant

Section 3.1.4.1 captioned “Agricultural Restrictive Covenant” states:

“Owner hereby agrees, as a covenant running with the land, binding upon Owner, its successors

and assigns in perpetuity, that the areas zoned “AG” under the Zoning Ordinance shall be

devoted solely to agricultural uses including but not limited to Owner’s existing flower

business.”

The Owner’s agreement to preserve the agricultural zones of the property extends beyond the

expiration of the Development Agreement.

(e) Owner’s irrevocable offer to dedicate the Performing Arts Theatre Pad

Section 3.2.4 states:

10

Aside from money credits accruing in favor of Owner as against the Owner’s sales tax advance debt pursuant to Section 3.2.1.3(b), pursuant to Section 3.2.13.2.4, milestone pay back dates include: June 15

th 2016—20% of the outstanding balance is due, together with all accrued and unpaid interest, June 15

th

2017—25% of the outstanding balance is due, together will all accrued and unpaid interest, and June 15th

2018—the full remaining amount of the principal balance is due together with all accrued and unpaid interest.

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“Prior to the issuance of any building permit for Phase one construction, Owner shall make a

conditional, irrevocable offer to dedicate to the City fee title to the Performing Arts Theatre

Parcel (including appurtenant easements first approved in writing by the City) for use as

permitted under the Specific Plan…”

The Owner first satisfied this requirement in July of 2001 by causing the recordation of a

Conditional Irrevocable Offer to Dedicate Real Property for a Performing Arts Theater to the

City pursuant to a Condition of Approval of Final Map No. 13333 for Encinitas Tract 94.066

(“IOD”). On March 8, 2010, the City and Owner amended the IOD (via Encinitas Resolution

2009-47) in order to allow additional future options for the use of the parcel (Lot 16). To date,

the City has not accepted the IOD; however, it is irrevocable and the City may accept the IOD at

its convenience including after the expiration of the Development Agreement.11

All terms and

conditions related to the IOD run with the parcel.

(f) Indemnity and Warranty provisions

Section 3.2.11 provides that at all times after the City’s execution of the Development

Agreement, the Owner shall defend, indemnify and hold harmless the City for any claims,

judgments, liability, costs, fines, etc. relating to the presence and/or clean-up of Hazardous

Substances on, in or under the Property or any portion thereof. This protection survives the

expiration of the Development Agreement.

Section 4.12 provides similar protection to the City for liability that may arise from the direct or

indirect operations of Owner related to the implementation of the Development Agreement. This

provision also survives the expiration of the Development Agreement.

_______________________________________

The Development Agreement (including Implementation Agreement Addenda) is lengthy and

complex. It also contains numerous exhibits, cross references, and instruments of

implementation. As such, please feel free to contact me if you have any questions or desire to

review (or locate) a supporting document or the full text of a provision that may not be included

in this memorandum.

11

The City has not accepted the IOD for purposes of avoiding maintenance obligations and liability risks.

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