NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the following Village Community Development District No. 5 (CDD No. 5 or the district), FL bonds:
--$14.8 million special assessment revenue refunding bonds, series 2013 (Phase I);
--$22.9 million special assessment revenue refunding bonds, series 2013 (Phase II).
The Rating Outlook is Stable.
The phase I and phase II bonds are secured by special assessments levied upon and collected from property owners within the phase I and phase II areas, respectively of CDD No. 5. Together, the phase I and phase II areas comprise the entirety of the district. Revenues from owners who have already prepaid their assessments prior to issuance are not included as pledged security. Prepayments following bond issuance must be used to redeem bonds. Each series of bonds provide for a debt service reserve fund (DSRF) to be funded from excess special assessments up to approximately 10% of debt service.
KEY RATING DRIVERS
POPULAR DEVELOPMENT FOR RETIREES: CDD No. 5 is part of the Villages, a large and very successful self-contained retirement community in central Florida with numerous amenities and entertainment venues.
FULLY DEVELOPED HIGHLY OCCUPIED TAX BASES: The phase I and phase II areas upon which special assessment securing bonds are levied are 100% residential, fully built out and occupied with over 3,000 homes each.
SPECIAL ASSESSMENTS ON PARITY WITH PROPERTY TAXES: Special assessments are levied on the property tax bill and carry the same lien on land as property taxes, ahead of all other liens including mortgage liens. The timely tax certificate process in Florida helps ensure that cash flow for debt service is maintained in case of tax delinquencies.
SOLID LAND TO LIEN RATIOS: The value of the land represented by assessed value to overall debt (land to lien) for the phase I and phase II areas are high at nearly 27x and 19x, respectively providing a strong economic basis for continued demand for tax certificates.
LIMITED TAX FLEXIBILITY: Special assessments are capped at a rate to provide a 10% margin of coverage which could offset delinquencies/unsold tax certificates totalling 6.7% of total accounts.
DELAYED FUNDING OF DSRF: The issuer intends to fund the DSRFs from excess revenues generated primarily by levying special assessments at 1% over the bond interest rate. The uncertainty of funding is mitigated by projected excess revenues which will be sufficient to fully fund both reserves within 12 to 18 months after issuance.
Community development district No. 5 was established in 2002 and encompasses 1,497 acres in Sumter County. The district is one of 13 districts within the Villages created to finance and maintain infrastructure within its boundaries.
HIGHLY SUCCESSFUL RAPIDLY GROWING RETIREMENT DEVELOPMENT
The Villages is a retirement community encompassing over 21,000 acres located primarily in Sumter County (implied GO rated 'AA-') in central Florida. A portion of the Villages spills over into Marion County as well as Lake County (implied GO rating of 'AA-'). Begun in the 1960s, the development has experienced extraordinary growth and currently contains over 46,300 homes. At build-out, which management projects will occur in three years, the Villages is expected to have 110,000 residents and over 56,000 homes.
The developer of the Villages is The Village of Lake-Sumter, Inc., a family-owned business established for the single purpose of developing the Villages. While control of most of the residential areas has devolved to residential owners, the developer still owns and manages most of the commercial properties within the development overall.
CDD ROLE AND AUTHORITY
Community development districts are authorized to levy and collect special assessments to service bonds and maintenance assessments to fund district operations, among other powers.
The district is governed by a five member board of supervisors elected by qualified district residents for four year staggered terms. The board employs a district manager to operate and maintain district assets.
CDD No. 5 is an independent municipal entity with a representative board elected by residents. Fitch believes the district's independent governance structure insulates it from a recent tentative IRS finding that the commercial Village Center Community Development District (VCCDD) is not a 'political subdivision' of the state. The ruling indicates that bonds issued by VCCDD are therefore not tax exempt, because a controlling portion of the VCCDD governing board was elected by a single property owner.
CDD 5 IS FULLY DEVELOPED AND NEARLY 100% OCCUPIED
The district is entirely residential and fully built out. Development occurred in two phases; phase I financed with series 2002 bonds while phase II infrastructure was funded with the proceeds of bonds issued in 2003. Each series is separately secured by special assessments levied within their respective areas serviced by the completed project. Both series will be refunded with the proposed issue.
Both development areas are much smaller than most municipal issuers at a square mile each, but relatively large in comparison with many other CDDs. The phase I area consists of 696 acres and 3,158 units in total. The phase II area incorporates approximately 712 acres and 3,241 homes.
Each area also contains recreational tracts, subject to a reduced special assessment rate, with revenue yields of no more than 1.5% of total assessments in either phase. Typical of residential-only subdivisions, both assessment bases are diverse with the top ten payers accounting for only 1.3% and 2.1% of total assessments in phase I and phase II, respectively.
SOLID LAND TO LIEN RATIO, SOUND TAX COLLECTIONS STRENGTHEN CREDIT
Assessed values for both the phase I and phase II areas are substantial due to their advanced state of development with taxable assessed value of $536 million in phase I and $541 million in phase II. Modest leverage for both areas is indicated by solid land to lien ratios of nearly 27x and 19x for phase I and phase II, respectively, including overlapping tax-supported debt of the county and school board. Given that development is complete, the district board has no plans for additional debt.
Property tax collections for CDD No. 5 residents have been strong, averaging close to 100% net of the allowance for early prepayment discount. The district levies taxes and assessments assuming that all property taxpayers will take advantage of the state's 4% early payment discount. Historically, prepayment discounts have resulted in a 3.7% reduction annually in gross assessment collected.
EXCESS LEVY WILL PROVIDE ADDITIONAL DEBT SERVICE COVERAGE
Special assessments are generally sized in aggregate to provide narrow coverage of annual debt service with any excess due mostly to some portion of taxpayers failing to take advantage of the 4% prepayment discount. However, the district intends to levy assessments at a level equivalent to an interest rate that is about 1% above the interest rate on the bonds as allowed by Florida statutes.
At historical rates of collections, the district projects that the higher level will produce average excess coverage of debt service of about 1.10x or higher for each series over at least the first 13 years of the 20 year bond term before gradually decreasing. Based on the average annual debt service assessment per unit, excess revenues would provide sufficient coverage for property tax delinquencies (absent tax certificate sales), well above the level of historical delinquencies.
Bond provisions do not mandate that the district levy special assessments above the amount required for debt service. However, district officials indicate that they plan on using excess assessment revenues to fund capital projects.
DELAYED FUNDING OF DSRF; LOW FUNDING REQUIREMENT
The DSRFs will not be funded with bond proceeds but from excess revenues generated by the over levy of special assessments. Fitch does not consider this to be a major risk as the projected 10% excess coverage should be sufficient to fulfil the reserve requirement during the first full year of the levy in fiscal 2014. Fitch notes that the DSRF does not enhance long-term credit quality as the funding level is minimal and provides little protection should there be a large fall-off in tax collections.
AREA ECONOMY BOLSTERED BY THE VILLAGES
The presence of the Villages has been the catalyst for economic expansion in Sumter County and surrounding areas. Prior to the Villages, the economy was based on agriculture and corrections. At present, Village residents comprise over half of the county's population and were primarily responsible the county's 5.8% average annual population growth between 2000 and 2010. The Villages and the Villages Regional Medical Center are the county's largest and third largest employers.
Employment levels within Sumter County increased an average of 7.2% between 2003 and 2012 attributable as the growing population fuelled demand for construction and services. Unemployment rates did shoot up to nearly 10% in 2010, but have come down since. The October 2012 unemployment rate of 6.4% was well below the state and national averages. Wealth indices are below the state and national averages; per capita income for Sumter County is 94% and 90% of the state and national benchmarks. This is most likely due to the large number of older residents on fixed incomes which Fitch views as a relative risk to future economic growth.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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, Zillow.com, National Association of Realtors
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria