OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the following outstanding bonds of CityPlace Community Development District, Florida (the district):

--$35 million special assessment and revenue refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by special assessments levied within the 25-acre district and 80% of tax increment revenues from the surrounding 65-acre CityPlace Project Area (project area). The West Palm Beach Community Redevelopment Agency (CRA) has agreed pursuant to an interlocal agreement to advance to the trustee the coverage revenues, which consist of the remaining 20% of the project area tax increment revenue plus up to $2 million from the CRA's 980-acre City Center Community Redevelopment Area (CCCRA). Bondholders also benefit from a debt service reserve fund (DSRF) cash-funded to maximum annual debt service (MADS).

KEY RATING DRIVERS

SOLID COVERAGE: Fiscal 2016 pledged revenues (including coverage revenues) provide healthy MADS coverage of 1.65 times (x) based on preliminary fiscal 2016 assessed values (AV) and can withstand significant tax base stress.

COVERAGE REVENUES FROM WIDER BASE: Tax increment from the much larger and diverse 980-acre CCCRA (Fitch rated 'AA-') is available to cover any shortfalls in pledged revenues up to $2 million or the equivalent of nearly 48% of MADS. Coverage revenues have not been drawn upon to pay debt service on the bonds to date.

ESTABLISHED DEVELOPMENT: CityPlace is a prominent mixed use development whose project area includes a mid to upscale mall, 1,300 residences and 400,000 square feet of office space. CityPlace is a leading visitor destination in the affluent Palm Beach area.

IMPROVED TAX INCREMENT COVERAGE: Strong project area AV growth since fiscal 2011 results in nearly full coverage of debt service by increment revenues, minimizing the use of developer-paid special assessments.

DECLINING MALL PERFORMANCE: The mall has experienced a drop in occupancy and cash flow recently due to increased competition. As a result, the developer is currently in negotiation with the mortgage loan servicer to modify the underlying mortgage loan. Concerns regarding a potential default on the mortgage are offset by the priority claim of property taxes composing the pledged tax increment, the elevated value to lien ratio on the bonds, and solid prospects for improved mall occupancy.

PROJECT AREA TAX BASE CONCENTRATION: The two leading taxpayers in the project area constitute over 50% of total values. This concentration risk is partly offset by the project area's high stress threshold bolstered by the availability of coverage revenue from the CCCRA combined with a cash-funded DSRF.

RATING SENSITIVITIES

DOWNTURN IN CRA VALUATIONS: Significant declines in either project area AV or the CCCRA's AV leading to narrowing debt service coverage could have a negative impact on the rating.

CREDIT PROFILE

MIX OF PLEDGED REVENUES
Pledged revenues consist of special assessments levied on the 25-acre district, representing the commercial core of the development, and the tax increment revenues generated within the larger 65 acre project area, which incorporates the district and surrounding residential and office properties.

The project area tax increment revenues are derived from property taxes levied by the city of West Palm Beach, Palm Beach County and the West Palm Beach Downtown Development Authority (DDA). Almost all project area tax increments are generated from the city and county levies, the DDA tax levy generating less than 1% of tax increment revenues in fiscal 2016. Tax increment revenues are vulnerable to decreases in city or county millage rates although both rely on property taxes to fund their operations. Property taxes within the project area are largely paid by tenants through tenant lease agreements.

Each of the taxing entities is required to deposit 95% of the tax increment from their levy to the CRA, regardless of taxes actually collected, thereby eliminating collection risk. The CRA then deposits 80% of the tax increment revenues and the special assessments into the revenue fund for debt service.

Special assessments are primarily collected from the CityPlace developer and constitute a lien on the project on parity with ad valorem property taxes and superior to mortgage liens. Pursuant to an interlocal agreement between the CRA, the city, and the district, special assessments are only imposed to the extent needed to pay debt service if the 80% project area tax increment is insufficient.

Revenue flows are timed so that project area increment revenues are deposited with the bond trustee before the special assessment levy is determined; allowing the district to set the levy amount at a level sufficient with project area increment revenues to produce 1.0x coverage of debt service each year.

COVERAGE REVENUES PROVIDE STRONG BACK-UP
To provide further credit support and mitigate risks from the modest size of the project area the interlocal agreement requires the CRA to transfers to the trustee annually the coverage revenues. These consist of the remaining 20% of project area increment revenues ($989 thousand in fiscal 2016) and tax increment revenues generated within the CCCRA but outside of the project area, up to a maximum of $2 million. The obligation to transfer the $2 million is a senior lien of CCCRA tax increment and represents less than 10% of fiscal 2015 tax increment. Coverage revenues are available to pay debt service, should project area tax increment and assessment revenues fall short. Fiscal 2016 coverage revenues accounted for 82% of debt service requirements on the series 2012 bonds or 71% of MADS.

The CCCRA from which the $2 million of coverage revenue is derived encompasses 980 acres incorporating much of the downtown portion of the city, including the project area and district. The CCCRA's taxable value approaches $2 billion or nearly 5.0x the project area valuation. The CRA is required to annually deposit coverage revenues with the trustee at the same time as project area increment revenues and both are 'taken off the top' before the payment of all other CCCRA obligations. Once sufficient funds are on deposit in the bond fund to pay debt service, unused coverage revenues are then transferred back to the CRA for other uses.

PROJECT AREA INCREMENT REVENUES EXPAND
Project area increment revenues have grown rapidly over the past 10 years fueled by tax base expansion and a recent uptick in property tax rates. Taxable values grew by 54% between fiscals 2006 and 2016, despite two years of significant recession-led declines as major new developments came on line. More recent valuation growth reflects an improving economy and a higher revaluation of a large office building following sales in 2012 and 2014. The base year value is relatively negligible so assessed value trends are closely reflected in the tax increment. Property tax rates of the city and county increased by 2% in fiscal 2013 but have stabilized since.

For fiscal 2016 the 80% project area tax increment will generate about $4 million which, if not substantially reduced due to appeals, should cover the $3.6 million in fiscal 2016 debt service without the need for special assessments. The coverage revenues provide an additional $3 million in available resources to pay debt service. Debt service does rise to $4.2 million in 2017 and remains flat through final maturity in 2026. No additional parity bonds are permitted.

ESTABLISHED MIXED-USE DEVELOPMENT
The CityPlace project area is part of a mixed use development located in the downtown area of West Palm Beach that opened in 2000. The project area offers approximately 600,000 square feet of upscale shopping, dining and entertainment and is one of the leading destination sites in Palm Beach County. Anchor stores include Macy's, an IMAX cinema complex and a Publix Supermarket. Residential and office properties are also situated throughout the development. Strategic advantages include accessibility to Interstate 95 and the Palm Beach County airport as well as its downtown location across from the Palm Beach County Convention Center and the Kravis Center for the Performing Arts.

MODERATE TAXPAYER CONCENTRATION
The project area which generates most of the tax increment revenues to pay debt service is only 65 acres, or about one tenth of a square mile. While the project area is incorporated into the much larger downtown redevelopment, the effects of unanticipated negative events are magnified by the relative concentration of properties within a limited space. Coverage revenues derived from the larger CCCRA mitigate but do not completely eliminate this risk.

Despite the concentration, the project area includes over 1,300 residences and 400,000 square feet of office space. The top two taxpayers, the developer and CityPlace Tower, account for 24% and 29%, respectively of total valuations or a combined 53%. The remaining taxpayers are composed of numerous individual taxpayers residing in condominiums within the development.

BOND REPAYMENT CAN WITHSTAND STRINGENT STRESS
Combined special assessment, project area increment revenues and coverage revenues currently provide about 1.65x coverage of MADS. At this level of coverage debt service can still be met under Fitch's stress models, including the failure of the developer to pay both its assessments and property taxes. While economic and market factors affecting the project area and the CCCRA are highly correlated, the strong financial margins built into the structure enable the transaction to perform under severe economic pressures such as those of the past recession.

RECENT DECLINE IN PERFORMANCE
According to the developer CityPlace received about 7.2 million visitors last year, down from a peak of over 7.9 million visitors between 2011 and 2013. Retail occupancy rates had typically ranged from 96% - 97%. However, with recent significant turnover, retail occupancy rates have fluctuated in the 80% range and were reported at 88.9% at the end of 2015. Reasons for the drop-off cited by the developer include competition from the nearby Palm Beach Outlet Mall, which opened two years ago, an oversaturated retail environment, and possibly rising online sales.

Increased competition and lower occupancy have led to a decline in mall rents, pressuring the developer's ability to service its underlying mortgage obligations. In February, the loan was transferred to special servicing due to imminent monetary default. According to the developer, net revenues of the development cover loan principal and interest but are insufficient to fund loan-required reserve contributions. The developer is currently in negotiations with the special servicer for a possible re-modification.

Fitch considers the first priority lien of property taxes, which constitute the tax increment, to be a primary mitigant to a potential default on the mortgage. The developer and/or special servicer's incentive to pay property taxes on the property are further enhanced by the elevated value to lien ratio on the bonds equivalent to 11.4x based on fiscal 2016 valuations.

The developer has indicated that it is refocusing its strategy towards attracting retail tenants which are unique to the area as well as converting some retail areas to other types of uses such as entertainment. The recent opening of a 400-room hotel attached to the adjacent Palm Beach County Convention Center is expected to bring additional visitor activity to the area. Furthermore, new tenant leases representing nearly 50,000 square feet of mall space (8% of total retail space) are coming on line over the next several months.

Nevertheless, Fitch will continue to monitor the situation as further deterioration in mall performance could lead to future contraction in property valuations.