San Juan Capistrano

               Kinoshita Bond Illustrates the Importance of Watchdog Leadership

Publicly financed Bonds allow the public to purchase and pay over time for such big ticket items as “open space”. But how many taxpayers thought they would still owe the original amount of the purchase price for “open space” that they purchased in 1991? The case in point is the purchase of the Kinoshita property, on which the Sports Park and Community Center were built.

When the Measure D “Open Space” bond was first proposed to the public in 1990, proponents claimed that the Kinoshita farmland was being eyed by developers and that taxpayers should purchase the property to preserve it as “open space”. This same argument was used 18 years later in 2008 to convince voters to tax themselves yet again to purchase “open space” in San Juan to protect it from development. In that case, a few well-connected insiders used the $27.5 million of taxpayer funding to purchase the Rancho Mission Viejo Riding Park “open space” property, which San Juan residents are still restricted from using.
In the case of Kinoshita property, records reveal an alarming sequence of events involving the Redevelopment Agency and previous City Councils.

Records indicate that the Kinoshita family was reluctant to sell their property due to Federal and State tax obligations they would incur if they were paid cash for their property with Measure D bond proceeds.

So, the Redevelopment Agency and the City devised a plan to convince the Kinoshita family to sell their property to the Redevelopment Agency which would purchase the property with tax exempt, interest-only notes for a 20 year period, with the principal due at the end of the 20 years. That way they would not have to pay tax on the sale for 20 years.

On October 31, 1990, then-City Manager Stephen Julian presented the Redevelopment Agency with a memo outlining the terms of the deal; the Redevelopment Agency would purchase 56.45 acres from the Kinoshita family for $9.5 million ($168,289 per acre) in exchange for 20-year tax exempt, interest-only notes. The Redevelopment Agency would then sell 45 acres to the City for $9.5 million plus closing costs/ This resulted in a profit to the Redevelopment Agency of $1.87 million. The Agency then used the bond proceeds to pay the bond debt.

In the memo, the City Manager stated, “…the [Redevelopment] Agency’s involvement is to provide a financial tool that allows the Kinoshita family to receive tax deferred treatment on the sale of this property that would not be possible if the city was the only party to the agreement. Quite frankly, without Agency involvement, there would be no agreement.”

The Redevelopment Agency purchased the Kinoshita property and acknowledged that upon the close of escrow, the property would be transferred from Seller to Buyer and then from Buyer to the City. Escrow documents show that the Agency owned the Kinoshita property for one day before it was transferred to the City on March 7, 1991. 

The City used Measure D bond funds to pay the Redevelopment Agency a total of $9,665,535 to purchase 45 acres of the Kinoshita farmland. The Agency charged the City $2 million more for the property than they paid for it. In addition, the Agency retained 11 acres of the property, a portion of which they sold to the Capistrano Unified School District for $2,618,336 ($368,779 per acre), making even more profit from the original purchase - again at taxpayer expense.

The Kinoshita notes matured in 2011 but the City Council majority chose to extend the tax exempt interest-only notes for another 10 years, to the year 2021.

By the time it is paid off, the taxpayers will have spent $43 million for a $9.5 million piece of property. Members of the Kinoshita family have received approximately $600,000 per year in tax-exempt interest-only payments since 1991, and will still be owed the principal when the note comes due.

This is just one of a number of situations in our town that illustrates the importance of voting for the right leaders to protect the taxpaying public.






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