S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Tax-Secured Debtquality could be vastly improved. Even relativelyundeveloped land could receive a favorable initialrating if the area is characterized by numerous taxpayers,good loan-to-value ratios, and flexibility tocover taxpayer defaults by raising tax rates.Generally, investment grade Mello-Roos districtswill show at least close to 1x cash flow coverage ofdebt service from parcels within the district thathave an assessed valuation to debt ratio of at least5:1, with no major taxpayer concentration amongthese higher value to lien taxpayers.Easy to implementMello-Roos financing is attractive for two reasons.First, unlike special assessment bonds, it allows thefinancing of general-purpose projects, such as policestations, which may be outside Mello-Roos districtboundaries. A second attraction is Mello-Roos districts’easy implementation in undeveloped areas.The Mello-Roos Act declares district landowners tobe the voters when 12 or fewer voters reside in aMello-Roos district, an interpretation that could besubject to future legal challenge if there are actualresidents present.Because districts may be formed in any size orshape, even from noncontiguous parcels, it is relativelyeasy to form and obtain ‘voter’ approval of a Mello-Roos district in undeveloped or industrial areas.Different governments, such as school districts orcities, may form separate overlapping Mello-Roos districtsas long as each governmental entity is authorizedto perform the different service being provided.Practically speaking, district boundaries can be drawnto guarantee that fewer than 12 voters reside in a districtor that residents support district formation.Any type of tax may be imposed in a Mello-Roosdistrict, as long as the tax burden can be evaluatedat the time of voter approval and is not leviedagainst property values. Taxes can be designed tomimic property taxes closely, even though by lawthey can’t be imposed solely on the value of a property.For example, a district could tax the numberof homes, street frontage, or number of acres. Evena per capita tax can be imposed, using taxes thatare fixed or fluctuate up to a cap. An acreage taxor an equivalent dwelling unit tax, are the mostpopular form of taxation. Taxes may kick in on differentdates, and maximum permitted tax ratesoften escalate 2% per year to accommodate anincreasing debt service schedule. Generally, undevelopedland (usually owned by developers) is nottaxed, or taxed very little, while future homeownerssupport actual debt service. As long as bonds areoutstanding, the tax cannot be repealed.The many possible Mello-Roos tax structures createdifferent risks depending on their structure.However, all districts have some features in common.The strongest districts have economic diversity,with numerous taxpayers and high value-to-loanratios, and levy a well-designed tax that covers abroad tax base. Such a district could receive afavorable credit rating if the existing tax base canproduce favorable coverage of future maximumannual debt service, and an additional bonds testlocks in the coverage.The best additional bonds tests use the maximumpermitted tax rate on the existing tax base to calculatea minimum coverage requirement on future maximumannual debt service. Weak additional bondstests may require only an appraiser’s report, subjectto possible error, estimating a certain minimum valueto-lienratio. Additional bonds tests based on buildingpermits granted, while stronger than a wholly projectedtest, are weaker than tests based solely on revenuesfrom owner occupied homes as determined by a certificateof occupancy or the county assessor, due tothe time lag between receiving a permit and actuallycompleting a structure.Concentration of district taxpayers is a particularrisk for small or start-up districts. If payment ofdebt service depends on payments from a few taxpayers,there are obvious vulnerabilities. Apartfrom the normal cash flow problems caused bydelinquency of a major taxpayer, a federal bankruptcylaw filing by a taxpayer can indefinitelyforestall local foreclosure action. Taxpayer concentrationis particularly important, because most districtswere originally formed by a few developersholding undeveloped land. The ability to raise taxrates may mitigate concentration risk if additionallevies could cover delinquencies by major taxpayers.Sometimes maximum tax rates are designed toincrease a certain percent every year to match anincreasing debt service schedule. If so, inflationassumptions should be carefully scrutinized in sucha case to ensure that homeowners would not besubject to possibly onerous taxes in later yearsMany types of taxes can be imposed and pledgedto debt service; therefore, Standard & Poor’s willexamine each Mello-Roos bond issue on a case-bycasebasis. Major rating considerations include:■ Surrounding economic characteristics;■ The nature of the development and the developer’strack record;■ Tax-to-property value relationships, with emphasison the percentage of the tax generated byparcels with value to lien ratios above 5:1;■ Restrictions on additional parity debt;■ Existence of overlapping districts;■ Project feasibility;■ Nature and diversity of items taxed and thetax structure;84 Standard & Poor’s Public Finance Criteria 2007