Rating Action: Moody's assigns initial Baa3 to Maryland Economic Development Corporation's Federal Lease Revenue Bonds (USCIS Headquarters Project), Federally Taxable Series 2022; outlook stableGlobal Credit Research - 09 Mar 2022New York, March 09, 2022 -- Moody's Investors Service has assigned an initial Baa3 rating to One Town Center, LLC (USCIS HQ Project)'s $305 million Federal Lease Revenue Bonds (USCIS Headquarters Project), Federally Taxable Series 2022, issued by the Maryland Economic Development Corporation's (MEDCO). The outlook is stable. The bonds are expected to price during or after the week of March 21.RATINGS RATIONALEThe initial Baa3 rating reflects several factors including the credit strength of the United States government (Aaa stable) to make timely lease payments and the essentiality of the facility to the mission of the United States Citizenship and Immigration Services (USCIS) within the Department of Homeland Security. Those strengths are counterbalanced by high leverage on the project and the need for lease renewal and refinancing to fully service the debt.In Moody's opinion it is very likely the lease with the General Services Administration, on behalf of USCIS, will be renewed on or before expiration in January 2035. The bonds mature after the lease term ends and very high leverage will remain but we expect that the lease renewal terms will support a refinancing and repayment of amounts outstanding at that time. In Moody's opinion the financed project, a Class A office building in Camp Springs, MD that is the USCIS's new headquarters, is essential, supporting our view of lease renewal. This is somewhat offset by the risk that future technology advancements, the increased availability of online services and/or downsizing of the federal workforce could reduce the government's need for a facility of this size. Absent lease renewal, recovery for bondholders will be limited. While the facility likely would find solid demand for reuse given its age, quality and location, it would be challenging to find a new tenant or owner to pay an adequate amount relative to the high amount of debt outstanding.Like most federal lease transactions with renewal risk, this project benefits from a satisfactory legal and cash flow structure, which includes a strong US federal government tenant through January 2035, a mortgage lien on the facility and the assignment and direct payment of all lease payments to the trustee, that reduces bondholders' exposure to operating risk of the borrower and property manager, as well as a debt service reserve fund.The ability of the property manager/borrower to maintain the facility and meet the terms of the various agreements, including the lease with the federal government, is a material governance consideration, and a key driver of this initial rating.RATING OUTLOOKThe stable outlook reflects our expectation that monthly lease payments will continue to flow uninterrupted to the trustee during the current term of the lease, owing to the strong legal and cash flow structure, and that the tenant, the United States of America, acting through the General Services Administration, will maintain its strong credit quality.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Reduction in debt levels or final bullet payment that reduces overall leverage and refinancing risk- Strong indications that the lease with the GSA will be renewed with terms that enable all bond payments to be serviced with revenue from leases currently in force- A large increase in the market value of the project, that would provide high bondholder recovery in the event the lease is not renewedFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Material credit weakening of the United States- Increased leverage on the project- Difficulty or delays redeeming the preferred equity contribution by August 1, 2025, which could increase uncertainty for bond refinancing- Interruption or delay in monthly lease payments- Nonperformance of its obligations under the lease by the borrower- Increased risk of non-renewal of the lease, due to deterioration in asset condition, weakened lessor/lessee relationship and/or change in federal policiesLEGAL SECURITYInterest on the bonds is paid with monthly lease payments from the GSA, made to the borrower, One Town Center, LLC. The bonds are also secured by a mortgage lien on the leased facility, the USCIS headquarters facility, and a debt service reserve fund funded at one twelfth of maximum annual debt service. All security interests in the property, and rights to the leases, rents and property management agreements have been assigned from the respective parties to the trustee.Principal is intended to be repaid with proceeds of a bond refinancing prior to maturity.As the conduit issuer, MEDCO will service the debt using proceeds received under the terms of a loan agreement with One Town Center, LLC. In turn One Town Center, LLC will repay the loan solely using revenue received under its lease agreement with the GSA. The bonds are also secured by a mortgage lien on the leased facility and a debt service reserve fund funded at one month's maximum annual debt service.USE OF PROCEEDSBond proceeds and a $60 million preferred equity contribution will finance the acquisition of the project, issuance costs and fund various reserves.PROFILEThe United States has the world's largest economy and is the center of global trade and finance, with a gross domestic product of $20.9 trillion in 2020. Its population of 328 million is third-largest.The Maryland Economic Development Corporation (MEDCO) is a public instrumentality of the state of Maryland (Aaa stable) and an economic development entity that is tasked with developing businesses inside the state.The borrower, One Town Center, LLC, is a single-purpose, limited liability company formed as the owner and lessor of the property. The entity that is acquiring the borrower, GSA CIS Camp Springs LLC, is an affiliate of Net Lease Capital Advisors, LLC (NLCA). The principal owners and parent company of NLCA specialize in single tenant net lease properties, particularly with federal government agencies. After closing, the borrower may be converted to a Delaware statutory trust in advance of selling equity interests in the project to investors.METHODOLOGYThe principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments Methodology published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1298498. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Baye Larsen Lead Analyst State Ratings Moody's Investors Service, Inc. 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