Diablo Grande water district wins cases over unpaid taxes. What next for troubled resort?
The water district serving Diablo Grande has prevailed in court cases charging that the project’s new owner did not pay millions of dollars in Mello-Roos taxes.
Angels Crossing LLC, a corporation formed in December 2019, also hasn’t funded the water and sewer operations of the Western Hills Water District or assumed the liabilities of the previous developer, according to water district officials.
That’s a serious problem because the 600-home Diablo Grande community in western Stanislaus County has relied on previous developers to pay for improvements and basic services.
The Western Hills Water District board gave an update on the litigation to about 30 residents who attended a meeting Wednesday.
Mark Kovich, who was appointed board president, said the unpaid Mello-Roos tax debt was $24 million including penalties.
Western Hills filed foreclosure lawsuits on behalf of Mello-Roos bondholders, including one suit in June 2021 charging that Angels Crossing did not pay $13.7 million in special taxes on 14 parcels. Another suit alleged the developer failed to pay the special taxes on 65 other undeveloped parcels.
The court also ruled that World International, the former owner of Diablo Grande, had unpaid special taxes on a parcel that’s part of the former Ranch golf course that was never transferred to Angels Crossing.
A Sacramento attorney who has represented Angels Crossing in the litigation did not return messages from The Modesto Bee.
Water district steadily losing money
The legal action will lead to sale of the affected parcels as the water district deals with financial struggles and the challenge of maintaining basic services for Diablo Grande households.
“The district is in a real financial bind and we lose money every month,” Kovich said.
He told the residents that Western Hills owes $5.5 million to the Kern County Water Agency for water deliveries and owes $1.7 million to Patterson, which treats Diablo Grande’s wastewater.
Diablo Grande doesn’t have enough residents to pay for the costs of water and sewer service. “Our desire is to get the community and the development built out,” Kovich said earlier in the week. “We need at least another 1,800 homes built here to make the water district solvent. We need more customers.”
Carmen Kearney, former chief financial officer for World International, said the company never was given credit for spending millions funding Western Hills’ operations, maintaining the golf courses, making improvements and paying taxes.
World International hoped to eventually profit from the residential development, but the spending had limits and it eventually became bad for business, Kearney said.
“Western Hills needs money to keep in operation,” said Kearney, who lives at Diablo Grande. “Any developer has to fund Western Hills to continue (water and sewer service).”
Angels Crossing acquired the master agreement for the Diablo Grande development from World International in May 2020.
Water district officials say the new developer did not fulfill obligations to Western Hills to cover shortfalls, inherit the liabilities of World International and pay for services.
Kearney said Angels Crossing paid a moderate sum of money to acquire Diablo Grande’s first phase development plan with the understanding it was assuming the liabilities of World International. Some suggest that Angels Crossing paid as little as $100,000 to World based on the transfer tax paid to Stanislaus County.
The project’s history
Diablo Grande once was conceived as a nearly 30,000-acre development trimmed with golf courses, homes, a hotel and convention center. Two golf courses came to life and about 600 homes were built, sold and occupied in the first phase that was approved by the county.
The original developers, including pharmaceutical industry giant Donald Panoz, spent more than $120 million on planning, infrastructure, streets and golf courses at the former cattle ranch and subsidized services, with the aim of eventually turning a profit for his heirs.
But the nation’s housing boom fizzled and Diablo Grande went into bankruptcy in 2008. World International acquired the development later that year and still owns 25,000 acres of the Diablo Grande site, Kearney said.
For business to continue as usual, another developer with deep pockets would need to step forward. Western Hills is now operating more like a community services district to keep providing basic services for Diablo Grande residents.
Western Hills originally had a landowners board, which guaranteed control for World International. But county supervisors made an appointment to the board that served to shift control to Diablo Grande residents. Board members in May 2021 changed it to a governing board elected by registered voters.
Supply could be cut off
The Kern County Water Agency notified Western Hills in 2021 that it could stop supplying water for Diablo Grande since Western Hills had not made payments for water since July 2019. A transfer arrangement with the Bakersfield-based Kern Water Agency has allowed Diablo Grande to withdraw water from the California Aqueduct.
The two agencies are trying to negotiate an amended agreement for water, while Western Hills has cut back annual use to 250 to 400 acre-feet of water.
Diablo Grande residents have paid $146 for water service in average months since an increase last year raised the rate from $100 a month. According to a consultant’s study, the revenue generated by water rates amounts to $1.4 million a year, falling well short of $3.55 million in annual expenses. A water rate based on true costs would be astronomical.
Financial statements for 2020 show that Western Hills collected a monthly $55.97 per household for sewer service and was charged a monthly $74.91 per household by Patterson. Western Hills has kept the lights on by neglecting to pay what’s owed to Patterson and Kern.
Western Hills also has been in negotiations with Patterson. “We hope to have a deal in place with them, but I can’t go into specifics,” Kovich said.
In August, the county treasurer-tax collector published a list of tax-delinquent properties, including $2,072,208 owed by Angels Crossing on 65 parcels. According to the county notice, $1.43 million in property taxes was owed since the 2018-19 fiscal year on the Diablo Grande clubhouse property, and an additional $643,160 was owed on 64 other parcels.
Kovich told residents at Wednesday’s meeting there are options for Diablo Grande’s future plans. As an example, the two dried-out golf courses could be sold or leased to an independent operator and restored.
The board member said the district has a good relationship with Stanislaus County supervisors and he expects the Board of Supervisors will support plans for continued development.
“We have to get these foreclosures to the finish line before going to the next step,” Kovich said.
This story was originally published December 16, 2022 at 5:00 AM.
