SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Cotati Community Redevelopment Agency (CRA), California's tax allocation bonds (TABs):
--$6.4 million 2001 subordinate TABs series A (Cotati Redevelopment Project) to 'A+' from 'A'.
The Rating Outlook is Stable.
The subordinate 2001 TABs, series A (2001A) are secured by gross tax increment revenues, less certain fees, senior pass-throughs and the 20% housing set-aside. The 2001 subordinate TABs are on parity with the issuer's series 2004 TABs.
The 2001A TABs were originally secured by a subordinate lien on tax increment revenues after the payment of 1993 series bonds. When the 2004 TABs refunded the series 1993 and 2001B subordinate bonds, the series 2004 and 2001A became parity, secured by gross tax increment revenues net of certain fees, senior pass-throughs and the housing set-aside.
KEY RATING DRIVERS
SURPLUS HOUSING REVENUES BOOST COVERAGE: The upgrade reflects Fitch's refined analysis of surplus housing revenues, which Fitch now considers to be available to pay non-housing TAB debt service. The availability of these revenues materially improves the bonds' debt service coverage.
SOLID COVERAGE, AMPLE AV CUSHION: Maximum annual debt service (MADS) is a solid 4x, and is highly resilient to potential assessed value (AV) declines, partly due to a high incremental value (IV)-to-base year ratio of nearly 5x.
MATURE, RECOVERING AND DIVERSE TAX BASE: The project area tax base benefits from recent recoveries and low taxpayer concentration, but is weighed down by its small size despite encompassing the city's downtown area and the civic center.
SATISFACTORY AB 1X26 IMPLEMENTATION: The rating incorporates the expectation that the successor agency (SA) will continue its satisfactory implementation of AB 1x26 (dissolution legislation) procedures and prioritize the rated debt service payments.
AV STABILIZATION: The rating is sensitive primarily to large shifts in AV and tax base concentration. However, given recent AV stabilization, such shifts are unlikely.
SMALL, TOURISM-DRIVEN CITY, SATISFACTORY ECONOMIC INDICATORS
The city of Cotati (population 7,200 in 2010) is located in Sonoma County, approximately 45 miles north of San Francisco. Highway 101 runs through the city and residents have good access to employment centers in the county. The local economy is mainly driven by agriculture and tourism, with average to above-average socioeconomic characteristics. The median household income is 103% of the state level and 121% of the national level. The unemployment rate was 6.2% in March 2014, comparing favorably with 8.4% in California and 6.8% nationwide.
The Cotati redevelopment area (project area), formed in 1986, encompasses a total of 429 acres (36% of the city's acreage) of residential (56%), commercial (23%) and industrial (17%) areas in the downtown area including the civic center, and is mostly built-out.
The incremental property tax revenue collections from the project area are part of the county's guarantee of property taxes (teeter plan) and therefore delinquencies are not a credit concern.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
On May 1 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. The SA has no outstanding housing bonds, and the availability of housing revenues for non-housing TAB debt service resulted in a material improvement of debt service coverage and AV cushion (defined by the percentage of one-time AV decline that the tax base is able to withstand while maintaining 1x MADS coverage). The inclusion of the additional revenues materially improves the TABs' credit quality, bringing MADS coverage to 4.0x and the AV cushion to 62%.
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Two-and-a-half years and six recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
MATURE, DIVERSE, RECOVERING TAX BASE, BUT SMALL PROJECT AREA
Project area AV rebounded for the first time since the recession by 3.7% in fiscal 2014, but is still 16% below the previous peak. Continued AV stabilization is likely. Zillow house price indices for Cotati and its neighboring cities indicate a year-over-year increase of around 20%, after reaching the trough in 2012.
The maturity of the tax base is reflected in the high ratio of IV-to-base year value. Development projects led to a 50% expansion in the project area's tax base between fiscal 2004 and fiscal 2008. Despite more recent AV declines, IV remains sizeable at $367 million, or 493% of the base-year value of $74 million, making tax increment revenues less volatile to potential AV declines.
Top 10 taxpayers represent a low 16% of total IV, led by Lowe's home improvement (5%) and other commercial and industrial properties. Although the project area encompasses a significant portion of the city overall and the most economically active part, its size is limited compared to other Fitch-rated project areas.
No real estate appeals data is available. In Fitch-conducted stress tests, appeal loss is assumed to be 10% of total AV value. Other stress scenarios include the loss of top 10 taxpayers, and the worst two consecutive years of AV declines as experienced during the recent recession. MADS coverage stays well above 1x under these stress scenarios.
AB 1X26 IMPLEMENTATION
The SA has recently and successfully completed the July to December 2014 ROPS with the state Department of Finance (DOF). The SA receives sufficient revenues to pay for all obligations including subordinate pass-through agreements. Due to high debt service coverage, the SA does not experience temporary cash shortfalls caused by the timing difference in receiving incremental property tax revenues and paying for debt service.
The SA is in the process of completing the due diligence review for all other funds, and the receipt of finding of completion letter is therefore pending.
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, and Zillow.
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:
U.S. Local Government Tax-Supported Rating Criteria