In the course of routine surveillance, Fitch Ratings has taken the following action on Arcadia Redevelopment Agency (Central Redevelopment Project), California's tax allocation bonds, series 2001A:
--$7.8 million tax allocation bonds, series 2001A to 'A+' from 'A'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating upgrade reflects very high levels of debt service coverage stemming from a recent refunding of a portion of all the agency's outstanding senior lien bonds, the closed lien for additional senior bonds, and substantial taxable value growth which offset the limited size of the project area and high taxpayer concentration;
--Steady growth in the agency's tax increment revenues, which have increased every year since fiscal 1997. Over the past ten years, tax increment revenues grew by 80%;
--Rapid debt amortization with remaining principal fully retired by 2023;
--Although incorporating only 252 acres, the project area represents the commercial /retail core of the city of Arcadia;
--High taxpayer concentration offset by robust coverage margins; Under Fitch's stress test scenario, all debt service requirements could continue being met even with the loss of the project area's top ten taxpayers.
KEY RATING DRIVERS:
--Stability of the project area's tax base.
SECURITY:
The bonds are secured by a pledge of the agency's tax increment revenue net of the county administrative fee, tax-sharing payments to overlapping taxing entities, and the standard 20% set-aside for low and moderate income housing.
CREDIT SUMMARY:
The city of Arcadia (Fitch general obligation rating of 'AA+') is an affluent suburban community of approximately 56,000 residents located about 20 miles northeast of downtown Los Angeles. The presence of a large regional mall supports the city's extensive retail sector. In addition, the Santa Anita Racetrack, adjacent to the project area, is a well-known horseracing venue which periodically attracts large numbers of visitors. The city's economy appears to have weathered the recession better than its immediately surrounding Los Angeles environs, as indicated by significantly lower unemployment and foreclosure rates.
The project area encompasses 252 acres and includes much of the city's downtown and central business districts. As a mature district, it is relatively built out. The agency's redevelopment plan was adopted in 1973 and taxable values have increased considerably since then, currently exceeding base year values by 13 times (x).
Debt service coverage of the agency's outstanding senior bonds widened considerably to 3.6x maximum annual debt service (MADS) from 1.9x with the recent refunding of nearly half of the outstanding senior bonds. In late 2010, the agency issued $19.8 million of subordinate lien tax allocation bonds which were used in part to refund $7.3 million of the then outstanding $15.1 million senior lien bonds. As part of the restructuring, the senior lien was closed, eliminating the risk of additional leverage. Fitch estimates that taxable assessed values could suffer a 75% drop and still cover maximum annual debt service (MADS) by at least 1.0x. Current coverage of combined senior and subordinate MADS is approximately 1.2x. While the agency is not planning additional subordinate lien bonds at this time, officials would consider refunding the remaining outstanding Series 2001 bonds, if economically feasible.
Over the last ten years, tax increment growth has been both consistent and robust, expanding at a 6% average annual rate during this period. Much of this growth was propelled by the escalating value of land within the project area, although the value of improvements also increased, albeit at a reduced rate. In fiscal years 2010 and 2011, increment value expansion slowed to 4% and 2.6%, respectively and officials expect modest growth to continue over the next few years as additional developments are added to the tax base.
The project area is primarily commercial although it does include parcels zoned for single and multi-family development. Approximately two thirds of assessed values are classified for commercial land use. Recent development includes the construction of new medical offices, spurred by the completion of the nearby Methodist Hospital addition. The agency is also in the process of acquiring land for the expansion of a Mercedes Benz dealership. Current agency projects include site improvements around the planned train station for the Gold Line, the proposed rapid transit line extension into the city, and a new police, fire and public works training facility. Project costs total about $4 million and the agency has signed agreements with the city to perform the work in exchange for an agency pledge of future tax increment revenues to cover those costs. The pledge with the city is subordinate to outstanding agency bonds.
Residential values, which comprise 12% of the tax base, increased in each of the past five years, despite the downturn in the housing market. The tax base is concentrated as the top ten taxpayers constitute about 37% of taxable assessed values and 40% of the tax increment revenues. Five of the top ten taxpayers are hotels, four of which have been among the top taxpayers for at least the last ten years. These five hotels account for 23.4% of the tax increment revenues. While hotel occupancy data is not available, officials indicate that the city's hotel tax collections are up this year after a sizable drop between fiscal years 2008 and 2010.
Assessment appeal activity is moderate and is not expected to have a sizable impact upon the tax base. The agency was able to make its $1.55 million mandated SERAF payment to the state last year and pay the final SERAF payment of slightly over $300,000 this month. Proceeds of the 2010 subordinate bond issue were also used to pay off a long term $4 million agency obligation to its low and moderate housing fund.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight,
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct 2010.
'Redevelopment Agencies in California Face Financial Pressure' dated 21 March 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
Redevelopment Agencies in California Face Financial Pressure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=613126
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