Fitch Rates East Palo Alto Public Financing Auth, CA $18.4MM Rev Bnds 'BBB'; Positive Outlook

Business Wire, July 22, 2005

SAN FRANCISCO -- Fitch Ratings assigns a 'BBB' rating to the East Palo Alto Public Financing Authority, CA's $18.4 million revenue bonds, 2005 series A (University Circle-Gateway/101 Corridor Merged Redevelopment Project Areas). The bonds are scheduled for sale during the week of Aug. 1 via negotiation with E.J. De La Rosa & Co., Inc. The Rating Outlook is Positive. In addition, Fitch affirms the 'BBB' rating on $26 million East Palo Alto Redevelopment Agency outstanding tax allocation bonds. The Rating Outlook is revised to Positive from Stable.

The East Palo Alto Public Financing Authority (the authority) will issue its revenue bonds as a cross-over refunding of the East Palo Alto Redevelopment Agency's (the agency) outstanding tax allocation bonds, series 1999. The authority's bonds are secured by agency tax increment revenues on par with its outstanding tax allocation bonds. The issue includes approximately $1.1 million for new capital projects, resulting in debt service remaining at the current level.

The rating reflects the adequate debt service coverage provided by pledged tax increment revenue, the project area's rapidly growing base, and minimal taxpayer appeals. These factors are somewhat offset by high taxpayer concentration. Legal protections are sound, including stringent limitations on additional bond issuance in the near future.

The Rating Outlook change reflects projected gains in incremental assessed values associated with soon-to-be completed projects and manageable future debt issuance. Evidence and continuation of such outcomes will be instrumental in a possible rating upgrade.

Debt service coverage is strong at 1.64 times (x) based on maximum annual debt service (MADS) and 2005's tax increment revenues. Fitch views this high coverage level as partially offsetting significant taxpayer concentration. Coverage remains sufficient under stress cases, including the full loss of the largest taxpayer. Further, issuance of parity bonds requires 1.35x debt service coverage by current revenue until the top taxpayer's portion of total incremental value falls below 20%, at which point the threshold for additional issuance falls to a still-adequate 1.25x.

The merged project area is small, encompassing 154 acres in two sub-areas. The area's taxable value represents a good mix of commercial and residential properties, with substantial development underway in both sectors. Development in the last several years has been substantial, as evidenced by strong assessed value gains, rising 44% per year on average over the 2000-2006 period.

New developments in the merged project area include 16,000 square feet of retail space and a 30-unit residential development. In addition, a Four Seasons hotel is expected to begin operations by the end of calendar year 2005. However, the tax base is concentrated, resulting from the area's small size and the size of many of the completed projects. The top 10 taxpayers make up 64% of the incremental value. The top taxpayer, University Circle Investors, owns the largest office building in the project area and accounts for a high 24%.

East Palo Alto is on the outskirts of San Mateo County along the Highway 101 corridor. The city benefits from affordable housing relative to the surrounding area and proximity to regional labor markets, but also is characterized by below-average income levels and high unemployment rates. Though the city has exhibited solid assessed value over the past three years, the area also has been affected by the recent economic downturn in the Silicon Valley.

Fitch's rating definitions are available on the agency's public web site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.