Fitch Affirms CityPlace CDD, FL's Special Assessment/Tax Increment Bonds at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the following outstanding bonds of CityPlace Community Development District, (the district):

--$38.4 million special assessment and revenue refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by special assessments levied within the 25 acre district and 80% of tax increment revenues from the surrounding 65 acre CityPlace Project Area (project area). Additional security is provided by a back-up pledge of the remaining 20% of project area tax increments plus tax increment revenues of up to $2 million levied within the yet broader 980 acre West Palm Beach Community Redevelopment Agency (CRA) City Center Community Redevelopment Area (CCCRA). Bondholders also benefit from a debt service reserve fund (DSRF) cash-funded to maximum annual debt service (MADS).

KEY RATING DRIVERS

SOLID COVERAGE: Fiscal 2014 pledged revenues (district assessments and the 80% project area tax increment as well as the backup pledge) provide healthy MADS coverage of 1.50 times (x) and can withstand significant tax base stress.

BACK-UP REVENUES FROM A WIDER BASE: In addition to the remaining 20% project area tax increment, tax increment from the much larger and diverse 980 acre CCCRA (Fitch rated 'AA-') are also available to cover any shortfalls in revenues up to $2 million. The $2 million of back-up funds represents nearly 48% of MADS but has not been drawn upon.

ESTABLISHED UPSCALE DEVELOPMENT: CityPlace is a prominent mixed use development which includes an upscale mall, 1,300 residences and 400,000 square feet of office space. CityPlace is a top visitor destination in the affluent Palm Beach area. Retail occupancy rates are well over 90%.

IMPROVED COVERAGE FROM PROJECT AREA TAX INCREMENT: Project area tax increments provide the primary source of bond repayment. Lower debt service due to the 2012 restructuring refunding coupled with strong project area assessed value (AV) growth since fiscal 2011 result in nearly full coverage of debt service by project area increment revenues, minimizing the use of developer-paid special assessments.

MARKET RISK: The retail core of the project area is vulnerable to changes in the market, including downturns in local economic activity, competition and consumer tastes, among others. This risk is partially offset by CityPlace's advantageous location in downtown West Palm Beach and its position as a popular destination site.

PROJECT AREA TAX BASE CONCENTRATION: The two leading taxpayers in the Project Area constitute over 50% of total values. This concentration risk is partly offset by the project area's high stress threshold combined with a cash-funded DSRF.

RATING SENSITIVITIES

DOWNTURN IN CRA VALUATIONS: Significant declines in either project area AV or the CRA's AV leading to narrowing debt service coverage could have a negative impact upon the rating.

CREDIT PROFILE

COMBINATION OF PLEDGED REVENUES HELP MITIGATE CONCENTRATION RISK

Pledged revenues consist of special assessments levied on the 25-acre district, representing the commercial core of the development, and the tax increment revenues (project area increment revenues) levied within the larger 65 acre project area, which incorporates the district and surrounding residential and office properties.

The project area tax increment revenues are derived from property tax levies from the city, the county and the West Palm Beach Downtown Development Authority (DDA). Almost all project area tax increments are generated from the city and county levies, the DDA tax levy generating less than 1% of tax increment revenues in fiscal 2014. Property taxes within the project area are largely paid by tenants through tenant lease agreements.

Each of the taxing entities is required to deposit 95% of the tax increment from their levy to the CRA, regardless of taxes actually collected, thereby eliminating collection risk. The CRA then deposits 80% of the tax increment revenues and special assessments into the revenue fund for debt service.

Special assessments are primarily the responsibility of the CityPlace developer and carry a parity lien on the project with ad valorem property taxes and a superior lien to mortgage liens. Pursuant to an interlocal agreement, assessments are only imposed to the extent needed to pay debt service if the 80% project area tax increment is insufficient. For fiscal 2014, the 80% project area tax increment generated about $3.43 million resulting in special assessments of $38 thousand to cover the $3.47 million in fiscal 2014 debt service. The coverage revenues provided an additional $2.85 million in pledged revenues. MADS is $4.2 million and occurs in 2025.

Revenue flows are timed so that project area increment revenues are deposited with the bond trustee before the special assessment levy is determined; allowing the district to set the levy amount at a level sufficient with project area increment revenues to produce 1.0x coverage of debt service each year.

COVERAGE REVENUES PROVIDE STRONG BACK-UP

To provide further credit support and mitigate risks from the modest size of the project area, the interlocal agreement requires the CRA to make additional annual transfers to the trustee. These consist of the remaining 20% of project area increment revenues ($858 thousand in fiscal 2014) and, tax increment revenues generated within the CCCRA, but outside of the project area up to a maximum of $2 million (collectively, coverage revenues). The $2 million is a senior lien of CCCRA tax increment and represents about 10% of fiscal 2014 tax increment. Coverage revenues are available to pay debt service, should increment and assessment revenues fall short. Fiscal 2014 coverage revenues accounted for 82% of debt service requirements or 68% of MADS.

The CCCRA encompasses 980 acres incorporating much of the downtown portion of the city, including the project area and district. The CCCRA's taxable value approaches $1.9 billion or over 5.0x project area valuations. Drawing from a much broader and diverse tax base, the CRA is required to annually deposit coverage revenues with the trustee at the same time as project area increment revenues and both are 'taken off the top' before the payment of all other CCCRA obligations. Once sufficient funds are on deposit in the bond fund to pay debt service, unused coverage revenues are then transferred back to the CRA for other uses.

PROJECT AREA INCREMENT REVENUES EXPAND

Project area increment revenues have more than doubled over the past 10 years, fueled by rapid project area tax base expansion and a recent uptick in property tax rates. Taxable values grew by 94% between fiscals 2004 and 2014, despite two years of significant recession-led declines, as major new developments came on line. More recent valuation growth reflects an improving economy and a higher revaluation of a large office building following its sale in 2012. The base year value is relatively negligible so assessed value trends are closely reflected in the tax increment. Property tax rates of the city and county increased by 2% in fiscal 2013 and have risen a combined 20% since fiscal 2008.

As project area increment revenues have grown to represent an increasingly larger share of the debt service, special assessment requirements have correspondingly contracted. Debt service coverage from project area increment revenues rose from 63% in fiscal 2004 to 99% in fiscal 2014, boosted by temporarily lower debt service requirements as a result of the 2012 refunding. Consequently, the special assessment levy requirements fell over the same timeframe from nearly $1 million in fiscal 2004 to $38,000 in the current year.

UPSCALE, WELL-POSITIONED, MIXED-USE DEVELOPMENT

CityPlace is a 72 acre mixed use development located in the downtown area of West Palm Beach (the city) that opened in 2000. With over 100 stores and restaurants, the district offers approximately 600,000 square feet of upscale shopping, dining and entertainment and is one of the leading destination sites in Palm Beach County (the county). According to the district, CityPlace received over 7.9 million visitors in 2013, the highest total in recent years, or almost 22,000 per day. Strategic advantages include accessibility to Interstate 95 and the Palm Beach County airport as well as its downtown location across from the Palm Beach County Convention Center and the Kravis Center for the Performing Arts.

Anchor stores include Macy's, an IMAX cinema complex and a Publix Supermarket. Residential and office properties are also situated throughout the development. While the development experienced significant turnover over the past two years, an influx of new tenants including LA Fitness, a national chain of fitness centers, and H&M, a clothing retailer have filled in the vacancies. Retail occupancy rates are typically high, currently ranging from 96% - 97%, according to the developer. Fitch believes Palm Beach Outlet Mall, which opened recently about three miles from the district could represent increased competition. However, the two centers offer very different shopping experiences and are potentially complementary given the more high-end restaurant and shopping options at CityPlace.

New developments which are expected to further boost commercial activity at CityPlace include the planned Gateway Towers, a 150,000 square foot office building, and a convention center hotel slated to begin construction in several months with a planned 2015 opening.

MODERATE TAXPAYER CONCENTRATION

The project area which generates most of the tax increment revenues to pay debt service is only 65 acres, or about one tenth of a square mile. While the project area is incorporated into the much larger downtown redevelopment, the effects of unanticipated negative events are magnified by the relative concentration of properties within a limited space. Coverage revenues derived from the larger CCCRA mitigate but do not completely eliminate this risk.

The project area tax base, although somewhat concentrated exhibits more diversity than many developer-owned commercial projects, attributable to significant office and residential components within the development. CityPlace includes over 1,300 residences and 400,000 square feet of office space. The top two taxpayers, the developer and CityPlace Tower, account for over half of total valuations with each representing about 27% of the tax base. The remaining taxpayers are composed of numerous individual taxpayers residing in condominiums within the development.

BOND REPAYMENT CAN WITHSTAND STRINGENT STRESS

Combined special assessment, project area increment revenues and coverage revenues currently provide about 1.5x coverage of MADS. At this level of coverage, debt service can still be met under Fitch's stress models, including the failure of the developer to pay both its assessments and property taxes or a failure of the developer to pay its assessments combined with a 40% drop in project area assessed valuations. While economic and market factors affecting the project area and the CCCRA are highly correlated, the strong financial margins built into the structure enable the transaction to perform under severe economic pressures such as those of the past recession.

AFFLUENT AREA ECONOMY

The city has 100,000 residents and benefits from its role as the county seat for Palm Beach County. Leading employers include the Palm Beach County School Board, the county and state government as well as several large healthcare enterprises. Top county economic drivers include expanding healthcare and education sectors supplemented by tourism and other service industries. Significant new development, including several large mixed use communities are planned or under construction as well as new hotels and multi-family residential units. The county's 2010 population of 1.3 million represents a 1.6% average annual growth rate over the past decade. The county's affluence is indicated by per capita income levels that are 20% or more over the state and national averages.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, 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);

--'Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions' (Sept. 20, 2013).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718468

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825336

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, N.Y. 10004
or
Secondary Analyst
Karen Trebach
Senior Director
+1-212-908-0215
or
Tertiary Analyst
Nicole Markou Wood
Associate Director
+1-212-908-0735
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz
Director
+1-212-908-9174
Fitch Ratings, Inc.
One State Street Plaza
New York, N.Y. 10004
or
Secondary Analyst
Karen Trebach
Senior Director
+1-212-908-0215
or
Tertiary Analyst
Nicole Markou Wood
Associate Director
+1-212-908-0735
or
Committee Chairperson
Karen Ribble
Senior Director
+1-415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com