NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A+' rating on the following Cherry Creek North Business Improvement District No. 1, CO (the district) bonds:
--$17.25 million unlimited tax general obligation bonds series 2008 and 2009.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited property tax levied on non-residential property, buildings, facilities, and improvements within the district.
KEY RATING DRIVERS
SMALL, DEVELOPED DISTRICT IN A DESIRABLE LOCATION: The district is a small, mature mixed-use development with high occupancy rates and a long history as a preferred shopping destination and corporate office location. It is well situated near downtown Denver and adjacent to a major shopping center and high-end residential neighborhoods, thereby benefiting from strong demographics.
TAXABLE VALUE DECLINES EXPECTED TO STABILIZE: After surging over the past decade, taxable values declined significantly in the recent reassessment. However, continued favorable occupancy levels and recently announced new development plans should help stabilize future taxable value trends. Additionally, sales tax revenues are rebounding solidly after posting recent declines, improving the prospects for occupants' continued viability.
SOUND FINANCIAL PROFILE DESPITE RECENT WEAKNESS: After a series of positive results over the past five years, the decline in taxable values resulted in a moderate operating loss in fiscal 2012 and another loss is projected for fiscal 2013; however, ample financial reserves mitigate Fitch's credit concerns in the near term.
HIGH DEBT AND TAXPAYER CONCENTRATION: Taxpayer concentration and debt levels are high, common characteristics for this type of district.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics, such as the district's underlying tax base and economy, and sound financial position. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The district is small and well-established, created in 1988 and encompassing 27 acres (16 city blocks) in the southeastern portion of the City of Denver (ULTGO bonds rated 'AAA' by Fitch).
The district was created to provide public infrastructure and amenities within its boundaries. Under Colorado law, business improvement districts can only tax non-residential property, buildings, facilities, and improvements. Governance is provided by a 14-member board of directors appointed by the mayor of Denver and approved by city council.
SMALL BUT DEVELOPED TAX BASE
The district is a high-end mixed use area with retail, office, hotel, and residential development in proximity to high-income residential neighborhoods, downtown Denver, and adjacent to the popular Cherry Creek Shopping Center. As of May 2013, the occupancy rate for office space (which comprises 80% of the district's assessed value (AV)) was 87%, evident of the district's stability and mature status. Retail stores are diversified and recent vacancy rates were also low at only 7% in 2012.
TAXPAYER CONCENTRATION
Typical of most single-purpose issuers, the district's tax base concentration is high with its top 10 tax payers accounting for 47.5% of total AV in fiscal 2013. District AV grew at an average annual rate of nearly 10% for the five years ending fiscal 2010; however, the recessionary impact was evidenced in the fiscal 2012 reassessment which reduced AV by 18%. AV for fiscal 2013 is flat, and future AV growth is expected to come from several recently announced development projects.
MAINTENANCE OF STRONG FINANCIAL RESERVES
The district's financial profile improved significantly in recent years, as evidenced by annual additions to the general fund balance in fiscal years 2006-2011. The unreserved fund balance grew to a high 77% of spending in fiscal 2011, well in excess of the district's 25% fund balance policy, although the dollar amount remained modest at $1.6 million. Notably, reserves trended up despite a planned shift in the millage from operations to debt service to support GO debt payments. The overall levy millage has remained stable for the past six years.
The recent decline in taxable values resulted in lower property tax revenues and a planned moderate operating loss ($193,000) in fiscal 2012 with a similar loss projected for 2013. Ample financial reserves mitigate Fitch's credit concerns in the near term. The district has maintained flat expenditure levels with some flexibility for additional cuts. Fitch expects the district to maintain satisfactory reserves as AV stabilizes and eventually expands over the medium to longer term as recently announced development occurs.
HIGH BUT MANAGEABLE DEBT
The district's outstanding GO bonds were issued pursuant to an $18.5 million authorization approved by district property owners and lessees in November 2006. Bond proceeds were used to continue a modernization and beautification program, with projects comprised of lighting, signage intersection enhancements, and streetscaping.
Including Denver's and Denver School District No. 1's notable amount of outstanding debt, the overall debt level for the district is high at more than 10% of estimated market value. This characteristic is not atypical for single-purpose entities.
Annual carrying charges for debt service are also high at approximately 33% of fiscal 2012 combined general and debt service fund expenditures. Amortization is slow with only 28% of GO debt retired in 10 years. Annual debt service payments increase modestly through final maturity in 2032. No additional debt issuances are expected and the district has no pension or other post-employment benefit obligations. Fitch expects debt levels to remain high but manageable.
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 and IHS Global Insight.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791588
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