Financing Fire Station Projects in California

It was an all-too-familiar story. Lakeside Fire Protection District’s Station 3, first built in the 1970s, was now old and in constant need of costly repairs. It was originally designed for all-male crews and smaller fire engines. The sleeping quarters and restrooms did not allow for much privacy. The bays could barely fit the new bigger engines. Numerous upgrades were necessary to bring the station up to the Americans with Disabilities Act compliance. There was no decontamination room or space for turnout gear extractors. And besides getting functionally obsolete, the station was just too old and needed to be rebuilt after four decades of heavy use.

The station’s location was still optimal for the community, so Lakeside opted for its full redesign and renovation. The planning process was managed in-house by the Facility Committee and the improvements were done through a design-build contract. The new Station 3 was built up to the current codes and features individual bedrooms with climate control, up-to-date bathrooms, a weight room, a new classroom, and a state-of-the-art decontamination room.

Project financing was a key piece of the puzzle. While Lakeside had some reserves, they were insufficient to cover the full cost. Material prices were going up faster than Lakeside could build up savings. Several funding alternatives were considered, including a general obligation bond and a bank loan. Community support for a general obligation bond was limited, but with a strong tax base, Lakeside had the cash flow to take on some debt. The $4.5 million project ended up being financed with a tax-exempt low-interest rate bank loan structured as a lease agreement. To preserve cash reserves, the District opted for a 100% project financing.

“With an affordable loan, we were able to reset the time-clock for Station 3,” says the District’s Division Chief Humberto Lawler.

Lakeside is not alone in their dilemma. Hundreds of California communities are dealing with functionally and physically obsolete fire stations. Limited revenues and rapidly rising construction costs do not allow fire departments to save up for major upgrades and new facilities. Grant funding can be hard to get, may take years, and comes with a lot of complex conditions. Sometimes debt is the only solution.

There are five primary ways to finance a station renovation or construction in California.

1. General Obligation Bonds: Cities and fire districts can ask voters within their boundaries to approve an additional ad valorem property tax that is then pledged for issuance of bonds. This creates a new revenue source, so that the agency’s general fund is not responsible for the debt repayment. The community directly pays for the project. While financially this is one of the best solutions, getting it requires a two-thirds voter approval, which many areas have been struggling to achieve. If there are other outstanding general obligation bonds in the community, debt limits may be an additional obstacle. While gathering community support is hard work and takes time, it may be well worth it, especially if general fund revenues are limited.
2. Mello Roos Community Facilities District Bonds: Like general obligation bonds, Mello Roos community facility districts also create a new revenue source in the form of special tax assessments. Mello Roos bonds must be approved by two thirds vote, but the vote can be limited to the specific area of the jurisdiction that is receiving the benefit of the new facility. Unlike general obligation bonds, Mello Roos community facility districts can finance not just capital projects, but also on-going operations and service costs.
3. Assessment District Bonds: Forming an assessment district also allows to create a new revenue stream that complements the general fund. A simple majority vote is required to form an assessment district, a much easier threshold to clear. But an assessment engineer needs to calculate specific benefit for each parcel. Only benefiting parcels can be required to pay the assessments.
4. Lease Financing: Where general obligation, Mello Roos, and assessment district bonds are not an option, and general fund revenues are available to pay for the debt, a project can be financed through a lease financing. Lease financing can take on a form of certificates of participation, lease revenue bonds, or a lease agreement. While called a lease for regulatory purposes, this type of financing in California very closely resembles a mortgage or a loan. The financing is secured by a pledge of leasehold interest in a real property of the borrowing agency. Unlike mortgages, lease financing does not give creditors a right to foreclose on the property. If a default happens, the creditor has an option to lease the property to a third party, but only for the duration of the lease term. Lease financing is widely used in California to finance fire and police stations, city halls, courthouses, libraries, and other types of government facilities.

General obligation, Mello Roos, and assessment district bonds are usually issued through a public sale of investment securities and can have a term of up to 30 years. Lease financing can take on a form of a public sale or a direct bank placement, essentially a bank loan. Bank placements are usually limited to 15-20 years in financing term.

5. USDA Community Facilities Direct Loan Program: Rural communities may be eligible to apply for long-term low interest rate financing from the U.S. Department of Agriculture. This type of financing is similar to lease financing. Debt payments are made by the general fund and a pledge of facility as collateral may be required. The USDA financing usually entails a longer application and approval process and comes with more restrictive covenants and conditions, but it offers a longer term (up to 40 years) and a lower interest rate than bank financing.

In deciding which financing type is appropriate for your situation, it is important to remember that financial markets are constantly changing. Funding availability comes and goes. Each financing mechanism has its advantages and trade-offs, so good financial and legal advice is paramount.

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Ridgeline Municipal Strategies, LLC helps fire protection districts with financial planning and financing for facilities and equipment, including bond issuance, private placements, USDA loans, and equipment leasing. Contact us to discuss your financing needs.