TITLE:
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2026 LEASE REVENUE BONDS FOR FIRE STATION NO. 2 RECONSTRUCTION PROJECT
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DEPARTMENT: FINANCE AND PUBLIC WORKS DEPARTMENTS
PRESENTED BY: MARK KHOU, BUDGET & PURCHASING MANAGER KINGSLEY OKEREKE, FINANCE CONSULTANT
CONTACT INFORMATION: MARK KHOU, BUDGET & PURCHASING MANAGER, (714) 754-5241
RECOMMENDATION:
recommendation
Staff recommends the City Council:
1. Approve and authorize staff contracts/agreements with the assembled bond issuance team, including financial advisor, bond counsel, disclosure counsel, underwriter, trustee and others as required to effectively issue and execute all the necessary bond financing transactions.
2. Hold a Public Hearing and Adopt the City Council Resolution No. 26-XX approving, authorizing and directing execution of certain lease financing documents and directing certain related actions in connection with financing capital improvements. (Attachments 1, 4 through 7)
3. Adopt the Financing Authority Resolution No. 26-XX approving, authorizing and directing the issuance and sale of Lease Revenue Bonds in an amount not to exceed $16.0 million to assist the City of Costa Mesa in financing capital improvements, and approving related documents and actions. (Attachments 2 through 9)
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BACKGROUND:
Fire Station No. 2, located at 800 Baker Street, provides fire protection and emergency response services to the Costa Mesa community. The Fire Department's mission is to prevent the loss of life and property. In addition to responding to fires, Fire Station No. 2 also responds to medical emergencies, motor vehicle accidents, rescue calls, and incidents involving hazardous materials.
Built in 1966, Fire Station No. 2 has undergone many maintenance and service issues over the years and requires a complete overhaul and reconstruction. Fire Station No. 2 has exceeded its useful life and is not compliant with current standards and specifications, underserves current personnel capacity demands, and does not provide gender-neutral accommodations. Issues that need to be addressed include electrical and mechanical upgrades; heating, ventilation, and air conditioning improvements; modernization of life safety fire equipment and communications; improved parking facilities; enhancements to the living quarters; improved landscaping; and structural and architectural improvements that comply with current building codes and regulations.
The City intends to finance the construction of Fire Station No. 2 through a combination of bond proceeds and available cash reserves and has presented project plans to the City Council for consideration and approval over the past four (4) years:
• On February 15, 2022, the City Council approved an architectural and engineering design services contract for Fire Station No. 2.
• On August 27, 2024, a community meeting was held to present conceptual alternatives, and this was followed by a presentation to City Council on October 15, 2024, to receive and file the conceptual design of Fire Station No. 2.
• On April 1, 2025, a Professional Services Agreement with Capital Projects LLC was approved by City Council to perform a constructability review of the reconstruction plans and specifications and a general contractor prequalification process.
The final design of the new approximately 9,445 square foot Leadership in Energy and Environmental Design (LEED) Gold fire station is completed and provides improved infrastructure for Fire and Rescue Department operations. The new station will provide increased gender-neutral living quarters, an enlarged apparatus bay, utility, dining, medical, and storage rooms, improved site circulation, new mechanical, electrical, and plumbing systems. The construction cost of the new station is estimated at $14.8 million with an anticipated duration of three (3) years including pre-and-post construction activities.
The contractor, AMG & Associates, Inc., who is the apparent lowest bidder, is required to complete all tasks necessary to perform the scope of work as outlined in the contract documents, plans, and specifications. Given the magnitude of the cost and anticipated long useful life of the new fire station, it has been anticipated that the project would be funded with a combination of funds-on-hand (cash) and long-term debt financing. This ensures future generations benefiting from the fire station are responsible for a share of the cost, as has been done with other similar public infrastructure projects undertaken by the City.
Staff, following City Council direction, assembled the requisite bond financing team, including a financial advisor, bond counsel, disclosure counsel, underwriter, trustee, and other parties as may be required to effectively execute the long-term debt (lease revenue bonds) financing.
ANALYSIS:
City staff have been working with the City’s financing team, including our municipal financial advisor, bond counsel, disclosure counsel, underwriter, trustee, and others since 2025 to prepare a plan of finance and forms of the legal documents necessary for the issuance of long-term debt for the project. The debt will be structured as Lease Revenue Bonds issued by the Costa Mesa Financing Authority, payable from lease payments made by the City to the City Mesa Financing Authority from any legally available funds of the City. This is a common financing structure used by cities and other local agencies throughout California and well received in the municipal bond marketplace.
The Costa Mesa Financing Authority was created by the City in 2017 to help facilitate debt financing. The governing board of the Costa Mesa Financing Authority (Financing Authority) is the City Council. In connection with the issuance of the Bonds, the City and the Financing Authority both need to enter into certain agreements and authorize an offering document and approve certain related actions, all as further described herein. The issuance of the Bonds will be through a negotiated sale to Stifel Nicolaus & Company, Inc., as underwriter for a period of 20 years, as more particularly described below. The City expects to receive approximately $14 million for the Project from the sale of the proposed Bonds, with remaining Project costs funded from other City sources, including existing funding in the Capital Improvement Fund (Fund 401). The City Council resolution (Attachment 1) approves the documents requiring approval by the City and the Financing Authority resolution (Attachment 2) approves the documents needing approval by the Financing Authority.
For this action item, a Resolution of the City Council and a Resolution of the Financing Authority will authorize the issuance of the Bonds, approve the form of certain documents to effectuate such issuance, and authorize certain actions in connection therewith. The funding of the Project from proceeds of the proposed Bonds is a necessary component of the financing plan for the Fire Station No. 2 Reconstruction Project being undertaken by the City. If the City Council and Financing Authority adopt their respective Resolutions, then the Bonds issued pursuant thereto will provide funds to allow the Fire Station No. 2 Reconstruction Project to continue as planned.
To facilitate the issuance of the proposed Bonds, the City and the Financing Authority will enter into a Site Lease (the “Site Lease,” which is attached hereto as Attachment 4), pursuant to which the City will lease certain real property, initially consisting of the site and facilities comprising Fire Station No. 1 and Fire Station No. 2, to the Financing Authority in exchange for an upfront site lease payment that will be used for the Project, and a Lease Agreement (the “Lease Agreement,” which is attached hereto as Attachment 5), pursuant to which the City will sublease the leased property back from the Financing Authority in exchange for semi-annual lease payments. Once the Fire Station No. 2 reconstruction is complete, there will be sufficient value in that site and facility alone, and Fire Station No. 1 will be automatically released from the leases.
The semi-annual lease payments are, in turn, pledged as security for the repayment of the Bonds by the Financing Authority pursuant to an Indenture of Trust by and among U.S. Bank Trust Company, National Association, as trustee (the “Trustee”), and the Authority (the “Indenture,” which is attached hereto as Attachment 8) and an Assignment Agreement (the ”Assignment Agreement,” which is attached hereto as Attachment 9). The proposed Bonds are secured by the lease payments and certain additional amounts on deposit in funds and accounts created under the Indenture. The City’s obligation to make lease payments under the Lease Agreement is a General Fund obligation, but is subject to certain limitations set forth therein, including abatement in the event of damage to, destruction of or condemnation of the Leased Assets. The Lease Agreement also includes a covenant of the City to budget sufficient monies each year from the General Fund or other legally available funds to make the Base Rental Payments.
In addition to authorizing the issuance of the Bonds and approving the forms of proposed documents that are described herein, the Resolutions of the City Council and Financing Authority authorize officials of the City and Financing Authority to take actions that are deemed necessary and advisable to effectuate the transactions contemplated by the Resolutions, including the purchase of a municipal bond insurance policy and/or a reserve surety policy for the Bonds, as needed, as well as the execution of certain certificates and documents required under the proposed Bond Purchase Agreement (as such term is defined below) in connection with the issuance of the Bonds.
As discussed above, the approval and adoption of the attached Resolutions will authorize the City and the Financing Authority to proceed with the issuance of the Bonds needed to finance the Project, which is a necessary component of Fire Station No. 2 reconstruction funding plan. Accordingly, the adoption of these Resolutions will allow the Fire Station No. 2 Reconstruction Project to proceed as currently scheduled.
SUMMARY OF DOCUMENTS:
The City’s Finance staff, together with other members of the financing group for the proposed Bonds, including the City’s municipal advisor, Fieldman, Rolapp & Associates, Inc., the City’s Bond Counsel and Disclosure Counsel, Jones Hall LLP (“Bond Counsel/Disclosure Counsel”), and the City Attorney have reviewed the attached documents prepared by Bond and Disclosure Counsel for consideration and approval. The attached documents are set forth below.
For approval by the City Council only:
• Continuing Disclosure Certificate. Pursuant to the Continuing Disclosure Certificate included as to form with the Preliminary Official Statement (the “CDC,” which is attached hereto as Attachment 7) to be executed by the City, the City covenants to report certain information on an ongoing basis for the benefit of owners of the Bonds, as required by Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934. The CDC also requires the City to report certain events which are significant to Bond owners when they occur (such as changes in the rating of the Bonds or redemptions of the Bonds). The City currently provides information for its other debt issuances. The Financing Authority is not a party to the CDC; accordingly, the CDC is submitted only to the City Council for authorization under the City Council Resolution.
For approval by the City Council and the Financing Authority:
• Site Lease. As discussed above, City will lease the Leased Assets to the Financing Authority pursuant to the proposed Site Lease. (Attachment 4)
• Lease Agreement. Also, as discussed above, the Leased Assets will be leased back to the City under the Lease Agreement (Attachment 5), and the City will make semi-annual lease payments to the Financing Authority in exchange, therefore. The lease payments will be pledged to the payment of debt service on the proposed Bonds as described in the Indenture and Assignment Agreement. The Lease Agreement also includes important covenants of the City, including a covenant to budget sufficient monies each year to make payments and a covenant to maintain insurance for the Leased Assets, and the terms under which payments will be abated in the event of damage to, destruction of, or condemnation of the Lease Assets.
• Bond Purchase Agreement. The proposed Bond Purchase Agreement (the “Bond Purchase Agreement,” which is attached hereto as Attachment 6), among the City, the Financing Authority and Stifel Nicolaus & Company, Incorporated, as underwriter (the “Underwriter”), sets forth the terms pursuant to which the Underwriter will purchase the Bonds from the Financing Authority for further resale to ultimate investors. The Bond Purchase Agreement contains standard closing requirements. Bond Counsel will prepare closing documents, certificates and opinions relating to the Bond issuance based on the requirements in the Bond Purchase Agreement.
• Preliminary Official Statement. The proposed Preliminary Official Statement (the “POS,” which is attached hereto as Attachment 7) is the offering document that will be presented to potential investors of the Bonds. The Underwriter uses the POS as a marketing document. The POS describes the terms of and security for the Bonds and contains information about the City’s General Fund finances, which will be used to make the lease payments. The POS is intended to present all material information about the Bond issuance and the City’s General Fund finances in order to enable investors to assess whether to purchase the Bonds. The City and Financing Authority are subject to federal securities law anti-fraud rules and will be required to certify that the information in the POS is complete and is not misleading. Following the printing of the POS, a final Official Statement will be prepared, reflecting the pricing of the Bonds and any minor updates.
For approval by the Costa Mesa Financing Authority only:
• Indenture. The Indenture is the legal document pursuant to which the Bonds are issued (Attachment 8). The Indenture sets forth the terms of the Bonds, including the pledge of lease payments, the payment terms and the terms by which the Bonds can be redeemed prior to maturity, and includes various additional provisions relating to the Bonds, the Trustee and any bond insurance or reserve policy purchased in connection with the Bonds.
• Assignment Agreement. Under the proposed Assignment Agreement (the “Assignment Agreement,” which is attached hereto as Attachment 9) between the Financing Authority and the Trustee, the Financing Authority will assign its right to receive the lease payments to the Trustee. The City is not a party to the Assignment Agreement; accordingly, the Assignment Agreement is submitted only to the Financing Authority for authorization under the Financing Authority Resolution.
ALTERNATIVES:
Staff recommends that the City Council and the Financing Authority adopt the respective Resolutions authorizing the issuance of the Bonds and approving certain documents and actions in connection therewith. As discussed herein, City staff, working with its financing team, has determined that the issuance of the Bonds offers the most cost-effective option for accomplishing the City’s financing goals and allows the proceedings for securing necessary funds for the Fire Station No. 2 Reconstruction Project to continue on schedule. Amounts have been budgeted to pay the semi-annual lease payments for Fiscal Year 2026-27.
FISCAL REVIEW:
The 2026 Lease Revenue Bonds will provide funding for the Fire Station No. 2 Reconstruction Project. The financing plan assumes the issuance of the Bonds in the principal amount of approximately $14 million (not to exceed $16 million) at a true interest cost of approximately 5% (not to exceed 6%) and with a not-to-exceed Underwriter’s discount of 0.70%.
The financing is expected to have a 20-year term and is structured with level annual debt service payment of approximately $1.13 million per year. Interest payment on the Bonds begins April 1, 2027, while principal payment begins October 1, 2027.
The final maturity of the Bonds would be October 1, 2046, with a ten-year call provision (i.e., the City will have the ability to prepay the lease payments and the Bonds without penalty after 10 years). Additional “good-faith estimates” regarding the Bonds required by Government Code section 5852.1 are set forth as an attachment hereto (Attachment 10).
The City will budget the bond repayment annually in the General Fund (Fund 101 - Non Departmental) and deduct such funds (the debt service amount) from the annual allocable funds (5%) due for transfer to the Capital Asset Need Fund (Fund 401) in accordance with the CAN Ordinance (2020-06).
LEGAL REVIEW:
The City Attorney and Bond Counsel have reviewed this agenda report and the City Council and Financing Authority Resolutions and concur with the recommended actions by the City Council and the Financing Authority.
CITY COUNCIL GOALS AND PRIORITIES:
This project works toward achieving the City Council goal to strengthen the public’s safety and improve the quality of life.
CONCLUSION:
The City Manager and counsel recommend that the City Council and Costa Mesa Financing Authority each adopt their respective Resolutions authorizing the issuance of the Bonds, approving the form of certain documents in connection therewith and authorizing certain actions in connection therewith. The pricing and sale of the Bonds is tentatively set for November 4, 2026. Bond closing and receipt of funds is tentatively set for November 19, 2026.