Fitch Rates $22.4MM Vistancia CFD (Peoria, Arizona) GO Bonds 'BBB'.

AUSTIN, Texas -- Fitch has assigned its 'BBB' rating to the $22.4 million general obligation (GO) bonds, series 2006, of the Vistancia Community Facilities District (Peoria, Arizona). Fitch also assigns the 'BBB' rating to the district's $43.3 million in outstanding GO debt. The bonds are scheduled to sell Dec. 13 through RBC Capital Markets. The Rating Outlook is Stable.

The bonds are direct obligations of the district and are payable from an unlimited ad valorem tax levied against all taxable property located within the district. Debt service on the bonds also will be payable from amounts payable pursuant to a standby contribution agreement between the district and the developers of the project, and from an amount held pursuant to a depository agreement between the district and the depository bank. Bond proceeds will be used to finance various infrastructure improvements within the district and pay issuance costs.

The 'BBB' rating is based upon the unlimited ad valorem tax pledged to repay the bonds, the substantial tax base presently within the district, reserve funds in place to make up shortfalls in property tax revenues or developer contributions, and oversight by the City of Peoria.

Offsetting credit considerations include very high direct debt levels (with additional debt planned), the need for developer subsidies to maintain a targeted tax rate, the prospect of a significant property tax rate increase in the event of a developer bankruptcy filing, and a recent slowdown in residential construction activity in greater Phoenix.

The district is located in Peoria, which is in the northwest portion of the Phoenix metropolitan area. The district was formed in 2002 and contains more than 6,900 acres. Peoria's mayor and council serve as chairman and board of the district. Land within the district is being developed as a master planned, mixed-use development known as Vistancia. Approximately two-thirds of Vistancia is planned for residential development, with 14,000 units ultimately projected. The remainder will be developed as commercial projects and golf courses and parks/open spaces. Infrastructure is complete in phases I and II of the project, and roughly 2,400 homes have been constructed.

Tax base growth has accelerated over the past several years as development has progressed. Full cash value (FCV) for fiscal 2007 is $382.5 million, and the preliminary estimate for Jan. 1, 2007 places the FCV at nearly $935 million. Secondary assessed valuation (SAV), which is used for the levy of debt service taxes, is $45.0 million for fiscal 2007 and projected to total $115.8 million for fiscal 2008.

The developer of Vistancia is Vistancia LLC, which was formed by Shea Homes Southwest, Inc. and Sunbelt Pleasant Point Investors, LLC. Shea Homes Southwest is a subsidiary of Shea Homes, Inc. and is a related company of the J.F. Shea Co., Inc. Shea Homes, Inc. develops residential property in California, Colorado, Arizona and Washington.

Property tax payments currently are insufficient to meet annual debt service payments at the target tax rate of $2.10 per $100 of SAV. As a result, the developer has entered into an agreement with the district whereby the developer agrees to contribute amounts twice each year to make up the difference between the annual debt requirement and property tax revenues. The district and developer also entered into similar standby contribution agreements in connection with the series 2002 and series 2005 bond offerings.

Additional sources for debt service include debt service reserve funds that were funded in connection with the series 2002 and series 2005 bonds, and depository agreements between the developer, the district and the depository bank pursuant to which the developer establishes a line of credit (LOC) with the bank at closing in an amount equal to 10% of the par amount of the bonds. Such agreements were executed for the series 2002 and series 2005 bonds and also for these series 2006 bonds. The bank is authorized to draw upon the LOC if developer payments under the standby contribution agreements are insufficient or in other specific circumstances.

Given the status of development in the project and the amount of debt outstanding (including these series 2006 bonds), the direct debt level for district residents is very high. Also, in the event of a developer bankruptcy filing and nonpayment of standby contribution agreement obligations, the district's property tax rate likely would increase significantly. This scenario would have negative implications for home sales within the project. Residential construction activity has slowed considerably in recent months in the Phoenix market, which may slow tax base growth and extend the projected duration of developer tax rate subsidies in the district.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.