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Fitch Rates District of Columbia's $39MM Deed Tax Revs 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to the following District of Columbia (Washington, D.C.) deed tax revenue bonds:

--$21.9 million series 2012A;

--$16.6 million series 2012B.

The bonds are expected to price through negotiation on Nov. 15, 2012.

Additionally, Fitch affirms the 'A' rating on $83 million in outstanding series 2007 and 2010 deed tax revenue bonds of the District.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by 15% allocations of real property transfer taxes and deed recordation taxes levied by the District.

KEY RATING DRIVERS

VOLATILE PLEDGED REVENUE STREAM: Pledged revenues, which are derived from the economically sensitive housing market, have exhibited significant volatility, both recently and historically.

SOUND LEGAL PROVISIONS: Debt service is funded one year in advance of when due and has first priority with respect to annual disbursements from the allocated fund. A debt service reserve funded at MADS provides additional bondholder protection.

SOLID DEBT SERVICE COVERAGE: Pledged revenues are expected to provide more than 5x coverage of maximum annual debt service after the current sale.

CREDIT PROFILE

The pledged revenue stream is narrow and dependent on the value and volume of real property transfers and deed recordation activity in the District. The 'A' rating reflects the satisfactory debt service coverage provided by the pledged revenues, as well as solid legal protections that require debt service funding one year in advance and an additional bonds test (ABT) that incorporates a three-year historical element to offset the risk of over-leveraging after a rapid increase in District real estate values.

Bond security is derived from a 15% pro rata share of the district's real property transfer and deed recordation taxes dedicated to the Housing Production Trust Fund (HPTF). The District can reduce the percentage allocation if needed to balance its budget but covenants not to reduce the 15% unless aggregate debt service for the current and ensuing fiscal years and any amounts necessary to replenish the reserve fund to its required level have been provided for.

While the pledged revenue stream has generally exhibited positive growth over the past two decades, it has in the past, and recently, also sustained significant declines.

Driven by the weakening housing market, total deed recordation and transfer tax collections in fiscal 2008 declined by 29% and fiscal 2009 collections were down by an additional 33%. Revenue performance improved considerably for fiscal years 2010 and 2011 with growth of 14% and 49% respectively, reflective of the improving housing market in the District. A more modest decline of 9% in gross revenues is expected when fiscal 2012 results are finalized, and the District currently expects growth of a like amount for the current fiscal 2013. Deed recordation and transfer tax revenues are estimated as part of the District's quarterly revenue estimation process

Projected fiscal 2012 pledged revenues provide 5.1 times (x) coverage of expected MADS following the current sale ($8 million). In addition, a debt service reserve fund is funded at MADS. Reserve replenishment is included in the flow of funds; however, replenishment is limited by a $16 million transfer cap for debt service.

The act creating the HPTF allows the District to issue deed tax debt with aggregate annual debt service up to $16 million. The ABT requires 1.5 times (x) coverage of MADS by the lesser of pledged revenues for the prior fiscal year or the average amount of pledged revenues for the past three fiscal years.

Initial expectations had called for the full leveraging of the deed tax security by fiscal 2010. However, issuance was slowed to match project funding needs. The deed tax debt is managed by the Office of the Chief Financial Officer and is subject to the District's debt ceiling act.

The current issuance will fund a portion of the District's new communities initiative.

The District levies its real property transfer tax upon the conveyance of real property or interests therein at 1.45%, except on transactions involving residential property being conveyed for consideration of less than $400,000, in which case the transfer tax rate is 1.1%. The deed recordation tax is a tax of 1.45% imposed upon recordation of deeds, including those concerning a lease or ground rent for a term (with renewals) of at least 30 years. Exceptions are also made in the case of recordation surrounding residential property with consideration of less than $400,000, for which the tax rate is 1.1%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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Fitch Ratings
Primary Analyst
Kenneth T. Weinstein, +1-212-908-0571
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Karen Krop, +1-212-908-0661
Senior Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings