Fitch Affirms District of Columbia's Deed Tax Revs at 'A-'; Outlook Stable.
The underlying 'A-' rating reflects satisfactory debt service coverage provided by pledged deed recording and real property transfer tax revenues, as well as adequate legal provisions which call for debt service funding from prior year revenues and an additional bonds test (ABT) that incorporates a three-year historical element to offsets risks due to rapid increases in District real estate values. The rating also considers that the pledged revenue stream is narrow and dependent on the value and volume of real property transfers and deed recordation activity in the district.
While the revenue stream had generally exhibited positive growth over the past two decades, it has in the past sustained significant year-over-year declines; the largest decrease was 42% realized in FY 1991. Performance since the issuance of the bonds in 2007 has been negative given recent housing market deterioration, with total deed recordation and transfer collections declining by 4% in fiscal 2007, and 16.2% in fiscal 2008. Further declines are projected in fiscal 2009 and 2010 of 44.5% and 19.9%, respectively. Additional revenue deterioration which lowers projected coverage to levels approaching the ABT level may place downward pressure on the rating.
The bonds were issued by the District to finance a portion of the Northwest One New Communities project. The District plans to develop nearly 1,700 primarily low income housing units on publicly owned and privately held property in the project area, which sits approximately one mile north of the Capitol. The area is also expected to benefit from additional investments in project area schools, parks, and other infrastructure and nearly 100,000 square feet of new retail space will be part of the project. Bond security derives from a 15% pro rata share of the district's real property transfer and deed recordation taxes dedicated to the Housing Production Trust Fund. The act creating the HPTF allows the District to issue debt with annual debt service requirements not exceeding $6 million annually for the Northwest One Communities Project or $16 million annually in total for other like projects. While initial expectations had called for the full leveraging of this security by FY 2010, only $31 million in additional bonds are presently contemplated in fiscal 2010. The ABT requires 1.5 times (x) coverage of the lesser of pledged revenues for the prior fiscal year or the average amount of pledged revenues for the past three fiscal years.
The District levies its real property transfer tax upon the conveyance of real property or interests therein at 1.45%, except on transactions involving residential property being conveyed for consideration of less than $400,000, in which case the transfer tax rate is 1.1%. The Deed Recordation Tax is a tax of 1.45% imposed upon recordation of deeds, including those concerning a lease or ground rent for a term (with renewals) of at least 30 years. Exceptions are also made in the case of recordation surrounding residential property with consideration of less than $400,000, for which the tax rate is 1.1%. Prior to FY 2002, the tax rates for both real property transfers and deed recordations were 1.1% for all properties, regardless of consideration. A temporary, unqualified increase of 1.5% was instituted for FYs 2003 and 2004, and the 1.45% noted herein is the result of a FY 2007 increase with the exceptions noted.
Projected fiscal 2009 pledged revenues provided coverage of outstanding debt service of nearly 19 times (x), and projected fiscal 2010 coverage, reflective of continued revenue deterioration, will still be strong at 10.4x. Assuming the additional debt issuance previously noted before the completion of FY 2010, fiscal 2011 revenues are expected to cover debt service by 3.7x. A debt service reserve fund is funded at MADS. However, replenishment of the debt service reserve fund, if it is tapped, is limited by the $16 million transfer cap for debt service.
Additional information is available at 'www.fitchratings.com'.
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|Comment:||Fitch Affirms District of Columbia's Deed Tax Revs at 'A-'; Outlook Stable.|
|Date:||Nov 19, 2009|
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