AUSTIN, Texas--()--Fitch Ratings assigns an 'A' rating to the following Sand Creek Metropolitan District, Colorado (the district) general obligation limited tax (GOLT) bonds:
--$4.6 million GOLT refunding bonds, series 2013A;
--$4.7 million GOLT refunding bonds, series 2013B.
The bonds are scheduled to price the week of Feb. 4, 2013.
In addition, Fitch affirms the 'A' rating on the following bonds:
--$66.6 million outstanding GOLT bonds (pre-refunding).
The Rating Outlook is Stable.
The bonds are payable from the district's property tax levy, limited to 42.5 mills, and from specific ownership taxes.
TAXPAYER CONCENTRATION: This limited purpose district has a mix of commercial, industrial and residential space with high concentration among the top tax payers.
LIMITED OPERATIONS; SOLID RESULTS: The operations and maintenance (O&M) requirements of the district are modest and funded by an unlimited O&M mill levy which Fitch considers positively. The district maintains a healthy financial position.
WEAK DEBT PROFILE; MINIMAL NEEDS: The debt profile is characterized by high debt levels and slow principal amortization, balanced against limited future debt needs.
MODERATE TAX BASE LOSSES: Recessionary pressures did impact the district's tax base moderately but Fitch believes recent market absorption trends, notably improved vacancy rates, and ongoing development of the multi-use district may serve to mitigate any further material erosion of its taxable values.
ADEQUATE TAXING MARGIN: Recent assessed value (AV) losses have required increases in the district's limited debt service mill rate but adequate margin remains. The absence of future debt plans further aids the prospect of sufficient debt service coverage by the district's existing resource base.
WHAT COULD TRIGGER A RATING ACTION
LARGE SUSTAINED TAX BASE LOSSES: Sustained and large tax base declines that lead to significantly diminished taxing margin would likely lead to negative rating action.
The Sand Creek Metropolitan District is a limited purpose special district encompassing 1,253 acres in the northeast Denver metropolitan area, approximately 12 miles east of downtown Denver and 10 miles southwest of Denver International Airport (DIA). The district provides financing for the construction and installation of streets, drainage structures, street safety controls, parks, water and sewer improvements and other infrastructure systems needed to encourage and support the existing and future development.
The district consists of Gateway Park, a master-planned office park, which has been in development since 1995. The mixed-use business park currently totals about 3.8 million square feet of diverse commercial development. Represented sectors include warehouse, distribution, and research and development facilities (comprising about 70% of total square footage), office buildings (21%), and retail, restaurants, and services (8%). The district also includes 15 hotels with over 2,234 rooms and a residential area with 110 town homes and 728 apartments.
HIGH TAX BASE CONCENTRATION
The primary credit weakness is the concentrated tax base. The top 10 taxpayers total 36% of the district's AV, down from 67% concentration in 2006. Fitch believes such concentration is somewhat balanced against the diverse lease-hold interests represented by 139 different tenants and stable occupancy trends.
AMPLE FLEXIBILITY IN MEETING LIMITED OPERATIONS
The district's limited operating costs and high reserve levels provide it with ample financial flexibility, aided by an unlimited O&M mill levy. Liquidity of the district's general fund has improved notably in the last two years, now equaling nearly one year's worth of expenditures. However, reserves remain modest as a nominal dollar amount, totaling $1.1 million in 2011.
HIGH BUT STABLE DEBT; LIMITED CAPITAL NEEDS
Proceeds of this issuance will be used to refund outstanding debt for interest cost savings. The district's overall debt burden is a high 21% of market value, driven by city and county of Denver debt as well as the Denver county school district. Debt service carrying costs are very high at 85% of spending but not unusual for limited purpose entities with minimal responsibilities. Amortization is below average with 38% of debt retired in 10 years.
Future capital needs are minimal and no additional debt is planned. Due to recent AV losses, the district raised its debt service millage to 29 in 2013 and is projected to increase to a maximum of 34 mills in the event that AV remains stagnant, leaving sufficient margin below the 42.5 mill cap. State law allows a maximum mill rate of 50 but this would require a change to the district's service plan by Aurora.
MODERATE TAX BASE LOSSES
The maturing district is 67% developed and benefits from a favorable location for further growth, along Interstate 70 near DIA in the City and County of Denver (GO bonds rated 'AAA' by Fitch) and the City of Aurora. After posting steady gains to its tax base since its inception, the district's AV declined by a cumulative moderate 10.8% in 2011-2012, fueled by rising vacancy rates and exacerbated by the delay or cancellation of planned projects. Although the AV losses were not insignificant, Fitch notes that these losses compared favorably to losses posted by surrounding metropolitan districts.
POSITIVE OCCUPANCY AND DEVELOPMENT TRENDS
Fitch believes notably improved vacancy rates and ongoing development should help mitigate any further tax base erosion in the next reassessment cycle in 2014. The district reports that occupancy has increased to 100% for most parcels except office properties. The district reports 12 projects, totaling an estimated $26 million in AV (an 18% gain), are either completed, under construction, or permitted. These projects represent diverse sectors and are scheduled to impact the tax rolls by 2016. Additional transit-oriented development may also materialize in the medium term, following completion of the Regional Transportation District's East Line (to DIA), which includes a station within the district.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Schiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria