AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB-' rating on the following Central Platte Valley Metropolitan District, CO general obligation (GO) bonds:
--$43 million GO refunding bonds, series 2013A.
The Rating Outlook is Stable.
The 2013A bonds are secured by an unlimited annual property tax levy on all property located within the original boundaries of the district.
KEY RATING DRIVERS
HIGH CONCENTRATION; LIMITED BASE: The district's tax base is highly concentrated which is not unusual for limited purpose special districts. Ongoing construction and future development is not projected to reduce concentration due to the small geographic size of the district.
DOWNTOWN DEVELOPMENT BOOM: The district encompasses one of Denver's major redevelopment efforts. Its strategic downtown location is fueling rapid growth in apartments, condominiums, and commercial office buildings, aided by the concurrent development of the Regional Transportation District's (RTD) bus and rail transit hub on adjacent property.
MANAGEABLE TAX INCREASES ASSUMED: While Fitch believes development in the district is likely to continue, its base case includes only the value of existing properties. Tax rate increases needed to meet ascending debt service in this scenario, assuming no substantial further tax base declines, are steep but of a magnitude Fitch believes would be manageable.
MODERATE AV DECLINES: Substantial new construction has enabled the district to more than recoup recessionary assessed value (AV) losses. Recent and ongoing building activity should ensure a positive trajectory for the district's taxable values through 2016.
HIGH DEBT; ASCENDING DEBT SERVICE: Overall debt is high relative to market value and is amortized slowly. The completion of all infrastructure and lack of future debt plans should allow these metrics to improve slowly over time assuming at least modest tax base growth.
SUSTAINED TAX BASE LOSSES: Large and sustained tax base losses could lead to negative rating pressure.
CONCENTRATION LIMITS UPWARD MOVEMENT: The very high tax base concentration limits upward rating potential even with potential significant tax base improvement.
The Central Platte Valley Metropolitan District is located in lower downtown Denver and is in close proximity to Denver Union Station.
RESIDENTIAL DOMINATES ORIGINAL DISTRICT
The original boundaries of the district, encompassing a modest 63 acres, consist primarily of residential apartment buildings and condominiums, totaling 43% of 2014 AV. These properties contain a total of 895 completed and sold condominiums and almost 1,700 apartments that are estimated to be 93% occupied. Commercial office buildings comprise 40% of AV. Most of the remaining AV is composed of vacant land parcels (13% of AV) and nearly all are planned as commercial office properties.
HIGH TAX BASE CONCENTRATION
Although Fitch notes that Colorado metropolitan districts are typically characterized by high tax base concentration, the original district's tax base concentration is notably elevated with the top 10 taxpayers comprising 55% of AV in 2014, up from 46% in 2013. Commons 19 LLC is the largest tax payer, accounting for 26% of fiscal 2014 AV. Commons 19 LLC is the real property owner of the land containing a large apartment building and a commercial office building housing DaVita Healthcare Partners' headquarters (IDR rated 'BB-' by Fitch). Commons 19 LLC's AV accounted for 15% of the district's AV prior to the addition of the DaVita building and the apartment project to the tax rolls in 2014. Legacy Plaza is the second largest taxpayer at 10%. Its commercial property is fully leased as the Gates Rubber Company headquarters.
MIXED GOVERNING BOARD
The district's five-member governing board includes two members affiliated with current developers, East West Partners and Continuum Partners. Other board members are not currently affiliated with current property owners. East West Partners owns the majority of undeveloped property (four parcels) which it plans to sell to third parties for development. Per state statute, only individual property owners or residents are eligible to serve on the board and vote in district elections. As allowed by state law, residential properties have been excluded from the current boundaries of the district although they remain obligated to pay debt service on the bonds issued prior to their exclusion. State law also allows the allocation of administrative parcels of land by property owners to non-residents, making them eligible to serve. All current board members are eligible to serve via this mechanism.
HIGH DEBT BUT NO ANTICIPATED FURTHER NEEDS
Overall debt per market value is high at 9% which is not unusual for a limited purpose special district. Fitch notes that all infrastructure is in place for future development, precluding the need for any future debt. Additionally, the district does not owe the developer for any advances or reimbursements, enhancing its operating flexibility. Payout is structured with ascending debt service and only 22% of aggregate principal is retired in 10 years.
The AV of the operating district, a subset of the original boundaries of the district, secures a non-Fitch-rated variable rate $19.5 million loan (series 2009B), equaling 33% of the district's total debt. The district plans to refund all of the variable rate debt with fixed rate bonds later this summer which Fitch considers positively.
MILLAGE GOAL DEPENDENT ON AGGRESSIVE EXPANSION
It's the district's goal to maintain level mill rates for debt service for the first several years to provide sum sufficient coverage of ascending annual debt service. Such a goal would require continued large AV gains which Fitch considers aggressive. However, substantial development is currently underway throughout the district. Properties completed in time for the 2015 collection year include three large residential apartment complexes (with project costs ranging from $30 million - $65 million) and two commercial projects for a total $148 million in estimated market value. Based on these completed properties and others currently under construction, the district projects 12% and 15% AV gains in 2015 and 2016, respectively. Fitch views the projected 2016 AV gain cautiously given that it is a reassessment year and has the potential for some reappraisal losses.
ANALYSIS DOES NOT ASSUME FUTURE AV GROWTH
Beyond the projects that have been completed, Fitch notes the difficulty in projecting future tax base and development trends. For this reason, Fitch's base case assumes AV remains flat at the fiscal 2014 level. In this scenario, due to an ascending debt service schedule, which increases by a compound annual average of 8% from 2015-2019, the original district's aggregate debt service mill levy would need to increase by a large 79% from the current level of 16 mills to 28.7 mills by fiscal 2019. Although this represents a steep increase, it's below past mill levy rates of over 40 mills. In addition to having an unlimited tax pledge, Fitch notes that the debt service fund balance currently totals $2.3 million in reserves pledged to the bonds, including a cash-funded debt reserve equal to 50% average annual debt service. Also, because the district has no employees, there are no obligations for pension or other post-employment benefits (OPEB).
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, 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