Fitch Affirms Orlando CRA, FL's Tax Increment Revs at 'A'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the following Orlando Community Redevelopment Agency (CRA) Florida tax increment revenue bonds:
--$139.6 million Orlando CRA tax increment revenue bonds (downtown district).
The Rating Outlook is Stable
SECURITY
The bonds are secured by a gross lien on property tax increment revenues within the project area. Pledged revenues include gross tax increment revenues from the city, Orange County, and the Downtown Development Board (DDB), which levies at its maximum one mill limit, and investment income.
KEY RATING DRIVERS
DIVERSE, ACTIVE PROJECT AREA: The project area is sizable at 2.5 square miles and represents the city's downtown core. The area has received significant private and public investment with numerous additional projects planned or under construction.
DEBT SERVICE COVERAGE: Fiscal 2016 coverage of maximum annual debt service (MADS) increased to a solid 1.78x excluding federal subsidies for the CRA's series 2009 and 2010 Build America Bonds (BABS) and 2x assuming full subsidies. Fitch expects coverage levels to continue to improve given extensive development taking place within the downtown district.
TAX BASE RECOVERY: Taxable assessed value (TAV) has experienced three successive years of growth following four years of decline. TAV is expected to continue to expand as the economy recovers and current development projects come on line. The high ratio of incremental value (IV) to total assessed value serves to temper tax increment revenue volatility related to changes in assessed values.
NO COLLECTION RISK: The taxing authorities are required to appropriate 95% of the incremental tax levy, regardless of actual collections.
SOUND LEGAL PROVISONS: The additional bonds test requires historical coverage including the BABs subsidy equal to 1.5 times (x) pro forma MADS. The CRA does not currently plan on issuing additional debt. A debt service reserve fund (DSRF) cash-funded to MADS provides added protection.
RATING SENSITIVITIES
SIZABLE TAX BASE REDUCTIONS: A sustained downturn in downtown district's taxable values could result in negative rating action.
CREDIT PROFILE
The downtown district includes much of Orlando's business core, encompassing 1,620 acres with total TAV of $2.6 billion. As such, economic drivers for the CRA largely mirror those for the city as a whole. The area stands to benefit from significant public and private development in process or planned within its jurisdiction. Projects include Creative Village, a planned mixed use development on the former Orlando Metroplex site which would also be the site for a proposed new campus for the University of Central Florida, a new public school, a major leagues soccer stadium and as well as ongoing residential and commercial development.
TAV GROWTH CONTINUES THROUGH FISCAL 2016
Final TAV for fiscal 2016 is up 14% over the prior fiscal year, which had registered a 6% year over year increase. The downtown district's TAV has now expanded for three successive years for a total gain of 25% following four years of declines. Despite the recent growth, fiscal 2016 TAV remains about 10% below peak levels reached in fiscal 2009. Given the continuing economic recovery experienced by the city in addition to ongoing development activity within the CRA, Fitch believes that taxable valuations will maintain their upward trend over at least the near term.
The tax base is somewhat concentrated with the largest 10 taxpayers constituting 25.7% of total district valuation and 32.4% of incremental value. Most of the large taxpayers own office buildings including the leading taxpayer, which represents about 5% of TAV and 7% of IV. The downtown office occupancy rate for class A office space as of the fourth quarter of 2015 improved to 87.5%, a 1.5% increase from the prior year, according to Colliers International. Municipal office buildings located in the district, while tax-exempt, bring additional activity to the area.
The CRA formed the downtown district in 1981 and was expanded in 1989 so base year values are relatively low compared with present TAV. As a result, the IV to TAV ratio is elevated at 79% or five times that of the base year, which tempers incremental revenue volatility.
STABLE CITY, COUNTY AND DDB TAX RATES
The city increased its tax rate by one mill in fiscal 2015, the first tax rate change among all three taxing jurisdictions since fiscal 2009. Both the city and county rates remain moderate at 6.65 and 4.43 mills respectively, and retain a healthy revenue raising capacity under the 10 mill cap. The DDB tax rate is at the 1 mill maximum. All of the taxing jurisdictions are required by statute to deposit an amount equal to 95% of tax increment revenues generated whether or not the property taxes were actually collected, eliminating collection risk. Revenues remain vulnerable to property tax rate reductions from the taxing jurisdictions.
DEBT SERVICE COVERAGE IMPROVES
MADS coverage continues to expand, reaching 1.78x in fiscal 2016, its second highest level since fiscal 2009. Coverage excludes the federal subsidy associated with the BABs. The BABs subsidy is not pledged under the legal documents but must be applied by the CRA in the same manner as pledged revenues. Coverage assuming the full subsidy tops over 2.0x MADS. Coverage is expected to further widen with continued expansion of the downtown district's tax base projected over the next few years.
Outstanding debt (consisting of series 2009 and 2010 tax increment bonds) financed the CRA's portion of funding for a new performing arts center in downtown Orlando. Debt burden is elevated at 13.2% of TAV and amortization is slow with only 29% of principal retired within the next 10 years. The CRA has no plans to issue additional debt backed by the tax increment pledge.
Subordinate obligations outstanding include internal loans from other city departments and agencies, incentive payments to developers and certain operating and capital costs. The city has some flexibility to adjust or restructure the internal loans if necessary. A CRA failure to pay its subordinate obligations would not affect repayment of its tax increment bond obligations.
CENTRAL FLORIDA ECONOMY CONTINUES TO EXPAND
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 1.7% in December 2015 on a year-over-year basis. The city's December 2015 unemployment rate of 3.9% was lower than the state and national rates of 5%.
The city's TAV experienced robust gains of 7.5% in fiscal 2015 and 14.2% in fiscal 2016. The fiscal 2016 tax base growth represented the third consecutive increase after four years of decline. Median January 2016 home values are up nearly 12% over the prior year according to the Zillow Group, signaling future tax base growth.
The leisure and hospitality sector continues to be a major component of the local economy, making up about 21% of total area employment. Disney is the dominant player, employing about 74,000 or over 10% of the total county workforce. Universal Orlando reports 19,000 employees while SeaWorld of Orlando's employment is approximately 6,000. Both Disney and Universal are making substantial investments in their parks, including new Star Wars themed attractions at Disney and a new hotel and water park at Universal. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
EVOLVING BIOTECH AND LIFE SCIENCE HUB
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master-planned mixed community within Orlando. Lake Nona is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are the recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near-term growth.
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