2009-11-09 20:02:02 -

In the course of routine surveillance Fitch Ratings affirms the Cotati Community Redevelopment Agency, Sonoma County, CA's subordinate 2001 tax allocation bonds (TABs), series A (Cotati Redevelopment Project) 'A-' rating and assigns a Stable Rating Outlook.

The 'A-' rating reflects the sound project area characteristics, including an established and diverse tax base encompassing a majority of Cotati's (the city) existing commercial

and retail development. Debt service coverage has remained good for the 2001 series of subordinated bonds despite a restructuring of senior bond debt service, due to strong development and subordination agreements with overlapping taxing entities. The project area has a good mix of residential, commercial, and industrial taxpayers, including the city's central business district. Nonetheless, the current economic climate has slowed growth.
Offsetting credit factors include an atypical legal construct that encourages the agency to keep debt outstanding. While the agency no longer has the ability to issue new debt, refundings that extend final debt repayment are permitted. Legal provisions are good including a 1.25 times (x) additional bonds test (ABT) and a restriction on outstanding debt to $45 million. The agency is considering a plan amendment to remove the annual limit on the amount of tax increment revenues collected. The affirmation of the rating assumes that no change other than this one provision is made.

The series 2001 bonds were originally sold with a subordinate lien on tax increment revenue from the existing tax base, net of senior bond debt service from series 1993 bonds and the housing set-aside. In 2004 the agency sold senior lien refunding bonds that restructured the 1993 and subordinate lien 2001B debt service payments along with a developer loan, increasing MADS and extending the final maturity of the agency's outstanding debt. The 2001A bonds are now on parity with 2004 bonds only to the extent of payment of debt service from non-housing tax increment revenues.

Fiscal 2008 net tax increment revenues now cover MADS a solid 4.0x.

However, this figure is below projected MADS coverage at the time of Fitch's 2001 rating despite the strong incremental value growth because of the 2004 restructuring which diluted coverage. The agency operates with an atypical revenue limit, which restricts retained tax increment revenue to 1.75x MADS on all debt. Fitch notes that while this limit provides sufficient bondholder protection, it also creates an incentive for the agency to extend its final debt maturity as long as legally possible. The agency is considering amending the redevelopment plan to remove this provision.

Assessed and incremental value growth in the project has slowed recently following several years of rapid gains. Incremental valuation growth averaged a healthy 13.9% between fiscals 2000-2009. This includes a 5.5% decline for fiscal 2009 and over 20% in each of fiscals 2006 and fiscal 2007. The project area is large, encompassing 429 acres, nearly 34% of the city's land area, and over one half of the city's assessed value.
Cotati is located 47 miles north of San Francisco in Sonoma County and is largely a bedroom community for nearby labor markets although it includes a small, diverse labor base of its own. The project area's tax base is 63% residential, 28% is commercial and retail.

The agency will use residual tax increment revenue and/or accumulated fund balance to make the non-recurring payments to the state for fiscal 2010 and fiscal 2011, as required as part of the state's budget solutions.

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Fitch RatingsJanet H. Martin, 212-908-0507, New YorkAmy S.
Doppelt, 415-732-5612, San FranciscoorMedia Relations:Cindy
Stoller, 212-908-0526, New YorkEmail: cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com