Marin judge may invalidate bonds for Marin City housing project

A Marin County Superior Court judge has issued a tentative ruling invalidating actions by Marin County supervisors and the California Municipal Finance Authority that authorized tax-exempt bond funding for a 74-unit apartment building in Marin City.

Judge Stephen Freccero, who issued the ruling, listened to oral arguments from the attorneys representing the various parties in the case on Tuesday. The judge is expected to issue a final judgment shortly.

What remains murky, however, is what the practical effect will be on the project, if Freccero sticks with his tentative ruling.

“I had lots of questions before, and I still have them,” Freccero said. “I’m trying to understand what happens next.”

Over $30 million dollars in tax-exempt bonds to finance the project have already been sold.

Save Our City, an advocacy group, filed suit in May 2023 to void the Marin County Board of Supervisors’  3-2 decision in March 2023 to approve the issuance of up to $40 million in tax-exempt revenue bonds for use in underwriting the planned building at 825 Drake Ave.

The supervisors were asked to approve the issuance of the bonds by the California Municipal Finance Authority, a joint powers agency of some 350 California counties, cities and special districts. The authority assists local governments, nonprofits and businesses with the issuance of taxable and tax-exempt financing. Marin County is one of the authority’s members.

Under federal law on tax-exempt financing, projects seeking to use tax-exempt bonds issued by finance authority must have the approval of a government whose territory includes the land where the projects will be located.

In its suit, however, Save Our City, asserted that the supervisors’ approval of a resolution authorizing the bond issuance was invalid because some supervisors wrongly believed they lacked authority to do otherwise.

During the supervisors’ hearing on the issue, County Counsel Brian Washington told supervisors, “Generally you have broad discretion to make decisions. You can’t abuse that discretion. You have to have a bona fide rationale for your decision. There are factors here that I think limit the range of discretion more so than typical discretionary hearings.”

In his tentative ruling, Judge Stephen Freccero agreed with Save Our City’s argument.

“Finally,” Freccero wrote, “each of the three supervisors who voted in favor of authorizing the bonds appeared to do so under an explicitly stated misunderstanding of the applicable standard.”

Freccero also agreed with Save Our City’s assertion that if the court found the county’s approval invalid then a finance authority resolution authorizing the issuance of the tax-exempt bond financing was necessarily also invalid.

“Without public approval,” Freccero wrote, “the required elements for the issuance of tax-exempt bonds are not satisfied. Accordingly, the resolution authorizing their issuance is invalid.”

Daniel Cucchi, an attorney representing some of the defendants, including the developer, Pacific West Communities Inc., argued Tuesday that the supervisors who voted to approve issuance of the bonds understood they were empowered to deny approval, even though they expressed great frustration about Senate Bill 35 limiting their discretion to shape what the project would look like.

SB 35 deprives counties and municipalities of discretionary planning and zoning authority over housing projects by requiring a ministerial approval process for certain affordable projects when a locality has failed to provide its share of regional housing.

Cucchi noted that supervisors who cast the dissenting votes — Stephanie Moulton-Peters and Eric Lucan — understood that they had the discretion to vote no.

In its suit, Save Our City asserted that the three supervisors who voted to approve the bond issuance conflated their lack of authority to mandate changes in the project with their authority to vote on the issuance.

“Does the county want to weigh in on this?” Freccero asked Tuesday.

“I’m a little perplexed that the county has never taken a position on the conduct of the Board of Supervisors here,” the judge said. “I would think the county would want to take a position as to whether the board acted with the proper standard.”

Deputy County Counsel Brandon Halter said the county did not want to express an opinion.

Cucchi also argued that the finance authority’s resolution to approve issuance of bonds for the project was separate from the supervisors’ decision. Cucchi based his argument on the fact that the finance authority resolution authorized any combination of taxable and tax-exempt bonds while the supervisor’s authorization was only required for tax-exempt bonds.

Thomas Lippe, an attorney representing Save Our City, challenged the suggestion that Freccero should rule the finance authority’s resolution valid.

“A broader remedy is actually in order,” Lippe said, “and that is to invalidate the bonds. They issued invalid bonds.”

Freccero asked what the effect on bond holders would be if he declared their issuance invalid.

“What’s the practical impact for someone who bought a tax-exempt bond that some judge somewhere just said is invalid?” he asked.

Cucchi maintained that Freccero’s ruling would not affect the bonds, only the rulings having to do with their issuance.

“This case does nothing,” Cucchi said. “You don’t have jurisdiction over the bonds that are issued.”

Lippe, however, disagreed. The attorney said that he had already submitted a declaration with the court from an expert outlining the consequences.

In that document, Jack Chen, a principal of Sophrosyne, a consultancy specializing in asset-backed securities, residential mortgage-backed securities, and affordable housing, wrote that if the supervisors’ resolution were deemed invalid, “it would invalidate and void all subsequent corporate actions and agreements premised upon that initial authorization of the financing of the project.”

Chen predicted that the invalidation of the bonds would “create events of default” that “would likely cause a foreclosure of the project.”

He added that Citibank and bond investors would likely seek return of their capital.

Neither Cucchi nor Caleb Roope, president and chief executive officer of Pacific West Communities, responded to requests for comment.

Since Save Our City filed its suit, the county has negotiated a plan with Roope to relocate 32 of the units planned for the Marin City site to 150 Shoreline Highway, a vacant lot near Tamalpais Junction.

Supervisors are scheduled to review the proposed changes to the Drake Avenue project on Oct. 15.

Grading and foundation work could begin at the Marin City site at any time. About 30 people opposing the project have demonstrated there in recent weeks anticipating that work was about to begin, but so far there has been no action.