2009-11-09 23:05:01 -

In the course of routine surveillance, Fitch Ratings has affirmed the 'BBB+' rating on East Palo Alto Redevelopment Agency, CA's (the agency) $43 million of outstanding tax allocation bonds (TABs). The Rating Outlook is Stable.

The 'BBB+' rating reflects the project area's draw from the large and relatively economically resilient Peninsula of the San Francisco Bay Area, as well as high

coverage levels and a mature project area. The rating further incorporates very high taxpayer concentration of largely commercial real estate, a weak local economy, and slow debt amortization. The Stable Outlook reflects the project area's commercial success to date and the seemingly low correlation between the performance of the project area and the city's deteriorating economy as the project draws from the more stable and diverse regional area.

East Palo Alto is on the outskirts of San Mateo County along the Highway 101 corridor. Although the city's economic indicators are stressed, the project area's commercial base predominantly caters to regional consumers. Because the regional economy has held up better than the city's, commercial performance has remained relatively strong, exhibited by very low vacancy rates, and only a modest assessed valuation (AV) reduction in fiscal 2010. Due to the project area's low exposure to residential properties, AV has held up well in the current downturn.

Commercial properties make up a significantly larger share of the project area's total AV and the seasoned nature of the project area should help provide some stability. It is important to note, however, that the city's economic performance is markedly weak. Unemployment is high and rose to 20.7% in September, versus 12.2% the year prior. The city is also affected by a softening housing market and very low per capita income levels.

Despite recent slowing, incremental value (IV) has risen at a brisk average annual rate of 41% for 10 years. Fiscal 2010 IV dropped a modest 1.6% due to the county assessor's proactive use of Prop. 8 AV reductions. Because the project area is largely built out, Fitch expects that future development and IV growth will be quite subdued compared to historical growth.

Based on AV for fiscal 2010, Fitch estimates that maximum annual debt service coverage (MADS) before subordinate pass-throughs will be a solid 2.44 times (x). Coverage remains sufficient, bottoming out at 1.14x in 2018, under two Fitch-designed stress tests, with the most severe test modeling annual 5% AV declines through 2018, the loss of 40% of taxpayers by AV, and 50% of outstanding appeals granted. Future issuance is protected by a 1.25x additional bonds test, and the agency indicated that it has no plans to issue parity bonds in the near future.

High taxpayer concentration offsets credit strengths, with the largest taxpayer, Wells REIT University Circle Investors, making up 44% of total IV for fiscal 2008. The largest ten taxpayers make up 79% of IV.

Outstanding appeals increased to $81 million from $41 million the year prior. However, coverage levels would remain strong if all appeals were granted. The agency is exposed to $3.3 million and $671,000 of ERAF shifts in fiscal years 2010 and 2011, respectively. The shifts are being challenged in court, and the agency has sufficient fund balances to cover the payments, if necessary.

Additional information is available at ' www.fitchratings.com : '


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Fitch RatingsScott Monroe, +1-415-732-5618 (San Francisco)Karen
Ribble, +1-415-732-5611 (San Francisco)Media Relations:Cindy
Stoller, +1-212-908-0526 (New York) cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com