Fitch Rates Village CDD No. 6 Special Assessment Bonds A; Outlook Stable

Fitch Ratings has assigned an ‘A’ rating to the following Village Community Development District No. 6 (CDD No. 6), FL bonds:

–$46.4 million special assessment revenue refunding bonds, series 2013.

The bonds are scheduled for negotiated sale the week of Dec. 10th. Proceeds will be used to refund outstanding special assessment revenue bonds, series 2004.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by special assessments levied upon and collected from property owners within the phase 1 area of CDD No. 6. Special assessments have an equal lien on property as property taxes. Revenues from owners who have already prepaid their assessments are not included as pledged security. Prepayments following bond issuance must be used to redeem bonds. A cash-funded reserve fund established in the amount of $100,000 provides minimal additional security.

KEY RATING DRIVERS

POPULAR DEVELOPMENT FOR RETIREES: CDD No. 6 is part of the Villages, a large and very successful self-contained retirement community in central Florida with numerous amenities and entertainment venues.

FULLY DEVELOPED HIGHLY OCCUPIED TAX BASE: The phase 1 area, upon which special assessment securing bonds are levied, is fully developed both horizontally and vertically. Only a small number of the 4,640 total homes are still owned by the developer and these are in the process of being sold.

SPECIAL ASSESSMENTS ON PARITY WITH PROPERTY TAXES: Special assessments are levied on the property tax bill and carry the same lien on land as property taxes, ahead of all other liens including mortgage liens. The tax certificate process in Florida helps ensure that cash flow for debt service is maintained in case of tax delinquencies.

SOLID LAND TO LIEN RATIO: The value of the land to direct and overlapping debt for the phase 1 area is elevated at nearly 16x providing a strong economic basis for a robust tax certificate market.

SMALL AREA AND LIMITED TAX FLEXIBILITY: The phase 1 area at a little over one and one half square miles is larger than many CDDs but still smaller than most municipal issuers. The special assessment will be set to provide a 10% margin of coverage which could offset an estimated 500 tax delinquencies/unsold tax certificates out of 4,646 accounts. However, the special assessment levy is capped at the current rate.

WEAK DEBT SERVICE RESERVE FUND (DSRF): The issuer will fund the DSRF to $100,000, which represents slightly over 3% of average annual debt service. This is well below the industry standard and provides little protection should there be a large fall-off in tax collections.

CREDIT PROFILE

HIGHLY SUCCESSFUL RAPIDLY GROWING RETIREMENT DEVELOPMENT

The Villages is a retirement community encompassing over 21,000 acres located primarily in Sumter County (implied GO rated ‘AA-‘) in central Florida. Portions of the Villages spill over into Marion and Lake (implied GO rated ‘AA-‘) counties. Begun in 1960s, the development has experienced extraordinary growth and currently contains over 46,300 homes. At build-out, which management projects will occur in three years, the Villages is expected to have 110,000 residents and over 56,000 homes.

The developer of the Villages is The Village of Lake-Sumter, Inc., a family-owned business established for the single purpose of developing the Villages. While control of most of the residential areas has devolved to residents, the developer still owns and manages most of the commercial properties within the development.

CONSISTENTLY STRONG LEVEL OF HOME SALES

Annual home sales have been consistently strong, never falling below 2,000 since 2001. Demand was hurt by the housing downturn with sales declining from a peak of 4,263 in 2005 to 2,115 in 2009. Sales have picked up in recent years and the developer projects 2,800 home sales for 2012. Final buildout is expected to occur in about three years. Average sales prices peaked in 2006 at $257,000 before dropping modestly and remain affordable at $241,000. Foreclosure activity has been relatively modest.

STRONG EMPHASIS ON AMENITIES

The Villages includes extensive retail, commercial, religious, healthcare and recreational opportunities for the age-restricted population within the development. The development includes 540 holes of golf, 61 swimming pools and many other sports and entertainment venues.

CDD ROLE AND AUTHORITY

CDD No. 6 was established in 2004 and currently encompasses 1,497 acres in Sumter County along the border with Lake County. The district is one of 13 districts within the Villages created to finance and maintain infrastructure within its boundaries. Among other powers, community development districts are authorized to levy and collect special assessments to service bonds as well as maintenance assessments to fund district operations.

The district is governed by a five member board of supervisors elected by qualified district residents for four year staggered terms. The board employs a district manager to operate and maintain district assets. Initially the only landowner in the district, the developer currently has minimal voice in district affairs.

Fitch believes the district’s independent governance structure insulates it from a recent tentative IRS finding that Village Center Community Development District (VCCDD) is not a ‘political subdivision’ of the state. Therefore, bonds issued by VCCDD are not tax exempt, because a controlling portion of the VCCDD governing board was elected by a single property owner. CDD No. 6 is an independent municipal entity with a representative board elect by residents.

CDD 6 IS FULLY DEVELOPED AND NEARLY 100% OCCUPIED

The district is entirely residential and fully developed with both infrastructure and homes. Development occurred in two phases. Phase 1 was financed by the series 2004 bonds which are being refunded with the current issue. Special assessments from property owners within the phase 1 area are the primary source of payment for the series 2004 bonds and the refunding issue.

The phase 1 area consists of 1,008 acres and includes 3,093 standard homes, 246 premier homes and 1,301 villas or 4,640 units in total. In addition, there are six recreational tracts within the phase 1 area, five of which are owned by the developer. All of the homes have been sold to residents except 14 which are owned by the developer. The developer is in the process of selling those homes to end-users at the rate of two or three per month, according to officials.

SOLID LAND TO LIEN RATIO, SOUND TAX COLLECTIONS STRENGTHEN CREDIT

Assessed values for the phase 1 property total a substantial $870 million. Modest leverage is indicated by a solid land to lien ratio of nearly 16x, including overlapping tax-supported debt of the county and school board. Given that development is complete, the district board has no plans for additional debt.

Property tax collections for phase 1 area residents have been strong, averaging close to 100% net of the allowance for early prepayment discount. The district levies taxes and assessments assuming that all property taxpayers will take advantage of the state’s 4% early payment discount. Historically, prepayment discounts have resulted in a 3.7% reduction annually in gross assessment collected.

EXCESS LEVY WILL PROVIDE ADDITIONAL DEBT SERVICE COVERAGE

Special assessments are generally sized in aggregate to provide narrow coverage of annual debt service with any excess due mostly to some portion of taxpayers failing to take advantage of the 4% prepayment discount. However, the district intends to levy assessments at a level equivalent to an interest rate that is 1% above the interest rate on the bonds as allowed by Florida statutes. At historical rates of collections, the district projects that the higher level will produce excess coverage of debt service from gross revenues net of modest administrative fees beginning in fiscal 2014 ranging from 1.14x to 1.08x. With an average annual debt service assessment per unit of about $814, the estimated excess revenues would provide coverage for over 500 delinquencies and no tax certificate sales in all years except the last two years when the excess would still provide funding for nearly 290 delinquencies. Bond provisions do not mandate that the district levy special assessments above the amount required for debt service. However, district officials indicate that they plan on using excess assessment revenues to fund capital projects, providing an incentive to maintain the levy at the higher level. Fitch believes that this structure is a positive credit feature relative to other CDD financings.

MINIMALLY SIZED DEBT SERVICE RESERVE FUND

The excess coverage of approximately 10% of debt service partially mitigates the minimal debt service reserve fund (DSRF) of $100,000 provided in the bond resolution. The DSRF size represents about 3% of a typical DSRF affording little protection against a significant interruption in collections.

AREA ECONOMY BOLSTERED BY THE VILLAGES

The presence of the Villages has been the catalyst for economic expansion in Sumter County and surrounding areas. Prior to the Villages, the economy was based on agriculture and corrections. At present, Village residents comprise over half of the county’s population and were primarily responsible the county’s 5.8% average annual population growth between 2000 and 2010. The Villages and the Villages Regional Medical Center are the county’s largest and third largest employers.

Employment levels within Sumter County increased an average of 7.3% between 2003 and 2012 attributable as the growing population fuelled demand for construction and services. Unemployment rates did shoot up to nearly 10% in 2010, but have come down since. The September 2012 unemployment rate of 6.9% was well below the state and national averages. Wealth indices are below the state and national averages; per capita income for Sumter County is 91% and 89% of the state and national benchmarks. This is most likely due to the large number of older residents on fixed incomes.

In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight and National Association of Realtors.

Applicable Criteria and Related Research:

–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);

–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

U.S. Local Government Tax-Supported Rating Criteria