Fitch Affirms Syracuse Industrial Devel. Agency (NY) 2007A&B PILOT Revs at 'A+'; Outlook Stable

Fitch Ratings takes the following rating actions on Syracuse Industrial Development Agency, New York's (SIDA) PILOT revenue bonds as part of its continuous surveillance efforts:

--Pilot Revenue Bonds, Series 2007 A&B, affirmed at 'A+'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by Payments in Lieu of Taxes (PILOTS) on the existing Carousel Center (mall) payable to the Syracuse Industrial Development Agency (SIDA) by the Carousel Center Company LP (the 'Carousel owner') pursuant to a PILOT agreement and interest earnings on the debt service reserves.

KEY RATING DRIVERS

STRONG TENANCY, OPERATIONS, AND MARKET POSITION: With limited competition and easy access, the Carousel Center continues to be the premier shopping destination in the Syracuse, New York region. Mall occupancy rates and sales per square foot are strong and occupancy costs are low to moderate.

ADEQUATE BONDHOLDER PROTECTION: The tight legal structure includes a base level of revenues protected from declines in assessments, not dependent on future site expansion. PILOT payments are on parity with all governmental fees and charges, all of which are senior to other payment obligations.

SUFFICIENT DEBT SERVICE COVERAGE: Fixed sum-sufficient debt service coverage is derived from the formula-driven PILOT payment and future interest earning from a guaranteed investment contract (GIC) securing the debt service reserve fund.

CONCENTRATED REVENUE STREAM: Fitch notes dependence on revenues from a single site securing debt service payments as a credit concern.

WHAT COULD TRIGGER A RATING ACTION

DETERIORATION IN PROJECT ECONOMICS: Increased occupancy costs beyond a manageable amount and/or a stagnation or decrease in sales per square foot could negatively impact occupancy rates. A decline in mall operations would exacerbate Fitch's concern regarding the potential gap between the ascending PILOT payment and debt service schedules and property taxes that would be generated under a traditional valuation method. This concern is further highlighted by the statewide 2% property tax increase cap.

GIC PROVIDER EVENT RISK: A decline in interest earnings available for debt service coverage due to a downgrade or other trigger affecting the GIC provider could pressure the current rating.

CHANGE IN DEBT PROFILE: The mall remains highly levered although debt has declined in recent years. While the issuer has no plans for additional debt on the existing property, an increase in the debt profile could bring carrying costs above levels consistent with the current rating.

CREDIT PROFILE

PROJECT OVERVIEW

Opened in 1990 in Syracuse, New York, the existing mall is a 1.5 million square foot super-regional shopping center with easy access from Interstate 81, a major north-south road that runs from Tennessee to the Canada/New York border.

The 2007 bonds were issued by SIDA for an expansion project that will increase the size of the mall by approximately 850,000 square feet of gross leasing area (GLA), to be fully integrated with the existing mall. The expansion is the first phase of a larger development plan to transform the mall into a destination resort known as DestiNY USA.

The expansion is expected to open in spring 2012. The expansion was delayed by litigation with the construction lender, Citigroup, Inc., which was settled earlier this year. The GLA with the expansion will total 2.4 million square feet, making the mall the sixth largest mall in the country.

STRONG PROPERTY FUNDAMENTALS

Fitch also notes as a positive the strong operating performance and market position of the mall and its broad geographic area from which mall customers are derived. Historically, occupancy rates have been strong and currently total 93.5%. The mall is anchored by nationally recognized anchor stores - Macy's, JCPenney, Lord & Taylor, Bon-Ton, a 17-screen Regal Carousel movie theater, Forever 21, Sports Authority and Best Buy. Of the 83.5 acre site, 44.4 acres are subject to the PILOT agreement. With approximately 20 million in annual customer visits, the mall enjoys a strong competitive position and is the dominant shopping center in the area as well as drawing 12% of its annual visitors from Canada and approximately 45% from outside of Onondaga County.

The Carousel owner is a wholly owned subsidiary of the Pyramid Company of Onondaga, which is part of the Pyramid Companies. The Pyramid Companies was established in 1969 and is one of the largest developers and operators of shopping centers in the country. The Pyramid Companies' portfolio currently includes 17 retail properties in the Northeast, with a combined 20 million square feet of GLA and $4.5 billion in annual sales.

SUM SUFFICIENT COVERAGE STRUCTURE

Annual debt service on the bonds is set to equal the amount of the annual PILOT and guaranteed interest earnings on the reserve funds. Debt service on the bonds totaled $16.8 million in 2011, increasing to $39.4 million in 2036.

SIDA receives earnings guaranteed at 3.59% from Royal Bank of Canada (GIC provider) on balances in the debt service reserve fund. Given the reliance on earnings under the GIC to cover debt service, any event on the GIC provider that could potentially reduce or interrupt investment returns would likely cause a downgrade to the rating.

The PILOT amount will increase by 4% annually through the final maturity of the bonds in 2036 based on the 44-year average annual tax rate growth in Syracuse. One of Fitch's key credit concerns is the fact that recent property tax rate increases have been significantly lower than past history and, when combined with the state implementation of a 2% property tax cap, PILOTs growing at 4% annually could result in mall tenants potentially facing a higher PILOT burden than if they were paying taxes. This concern becomes even more acute if the overall strength of the mall starts to deteriorate.

ADEQUATE BONDHOLDER PROTECTIONS

The obligation of the Carousel owner to pay the PILOT is on par only with governmental charges and fees, all of which are senior to any other payment obligations. The requirement of the Carousel owner to make PILOTs is evidenced by a PILOT note, payable to SIDA. The bonds are further secured by a PILOT mortgage granted by SIDA and the Carousel owner, encumbering their interests in the existing mall to the PILOT trustee. The mortgage does not extend to the expansion property. The PILOT mortgages impose a lien similar to liens imposed by taxing authorities, and provide for similar remedies, i.e., foreclosure of property and tax lien sale, providing a strong incentive to pay.

Mall tenants are contractually obligated to pay the Carousel owner as additional rent their pro rata portions of PILOTS, and payment of the PILOT by the Carousel owner is absolute and unconditional, notwithstanding the inability of the Carousel owner to recover this payment from its tenants. Tenant leases generally have 5-10 year expirations.

A non-impairment covenant by the city of Syracuse and NY State prohibits the city and state from altering the rights of the issuer to undertake the expansion project or to establish and collect PILOTs.

CHANGE IN DEBT PROFILE COULD ADD PRESSURE

The issuer has no plans at this time for additional borrowing against the existing property and any future expansions will be separately secured by PILOTs on other portions of the mall; separate tax parcels not owned by the Carousel owner. Fitch is concerned that the total amount of leverage could exceed the existing mall's current value as the last appraisal was performed in 2006 and valued at $550 million. Any additional borrowing for the existing property could raise carrying costs to levels no longer consistent with the current rating.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated Aug. 15, 2011.

'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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