Fitch Ratings has upgraded the following Syracuse Industrial Development Agency, New York (SIDA) bonds to 'CC' from 'C'.

Approximately $198.8 million payments in lieu of taxes (PILOT) revenue refunding bonds, series 2016A (Carousel Center Project);

Approximately $10.6 million PILOT revenue refunding bonds, taxable series 2016B (Carousel Center Project);

Approximately $54 million PILOT revenue bonds, taxable series 2007B (Carousel Center Project).

RATING ACTIONS

Entity / Debt

Rating

Prior

Syracuse Industrial Development Agency (NY) [Carousel Center PILOT]

Syracuse Industrial Development Agency (NY) /Property Assessment - PILOT/1 LT

LT

CC

Upgrade

C

Page

of 1

VIEW ADDITIONAL RATING DETAILS

The upgrade reflects Fitch's assessment that an eventual default is probable, though not immediately forthcoming. The rating is based on Fitch's view that that the PILOT bonds will continue to be paid from net operating income (NOI) of the Carousel Center mall in Syracuse, NY, which Fitch estimates provided 1.1x coverage of maximum annual debt service on the PILOT revenue bonds for the year ended fiscal , 2023.

Fitch anticipates that the NOI will continue to experience pressures due to the overall decline in the performance of non-trophy malls, which is attributed to slower revenue growth and rising expenses. This situation is exacerbated by declining consumer demand in the retail sector, inflationary costs, and a shift in spending from goods to services, which is anticipated to further impact weaker malls. Retailers are expected to adjust their space requirements, with some closing stores and others expanding, resulting in minimal net change in total occupancy.

The 'CC' rating also considers the significant 81% drop in the Carousel Center's appraisal values since 2014, which reflects reduced mall activity. The value of the mall experienced a 17% decrease in July 2023 (to $133 million) compared to May 2022, which remains well below the subordinate mortgage loans securitized as commercial mortgage pass-through certificates (CMBS).

The rating also considers the credit risks tied to the subordinate CMBS loans, which are now subject to a CMBS modification agreement with Wells Fargo (A+/Stable). The agreement stipulates that the mall must achieve increasing annual NOI targets through 2027. Failure to meet these targets could result in the CMBS loan not being extended past its current expiration date of June 6, 2024, which could ultimately result in the property entering receivership. Fitch believes the PILOT bond debt service will continue to be paid from property taxes in the near term even if the loan is not extended beyond June 6.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A decline in NOI and inability to cover debt service on the PILOT revenue bonds.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The ongoing recovery of the mall, which may be reflected in an improving NOI and increased debt service coverage on the bonds;

A solid indication of the mall's value increasing relative to all of the debt outstanding.

Dedicated Tax Security

The bonds are secured by PILOTs on the original or 'legacy' Carousel Center mall payable to SIDA by the Carousel Center Company LP (the Carousel Owner) pursuant to a PILOT agreement as well as by interest earnings on debt service reserves. The debt service reserve funds total 125% of average annual debt service.

Dedicated Tax Key Rating Drivers

Mall operations have weakened, which is evidenced by a compound average growth rate of -8.2% in net operating income since 2014. NOI increased by 1.9% in 2023 compared to 2022, but the results are well below pre-pandemic NOI in 2019 by -46%.

NOI in 2023 covers the maximum annual PILOT debt service by 1.1 times or 1.7x annual debt service. . Fitch believes that MADs coverage could fall below 1.1x coverage in the near term given the flat to declining NOI trend.

SIDA has no material exposure to mall's operating risks. As such, Fitch has not assigned an Issuer Default Rating (IDR), and there is no related cap on the PILOT bond rating.

PROFILE

Destiny USA is a roughly 2 million square foot regional shopping center in Syracuse, NY. The mall opened in 1990 as the Carousel Center. It is owned by a subsidiary of Pyramid Company of Onondaga, which is part of the Pyramid Companies established in 1969.

Pyramid has a senior obligation to pay PILOTs equal to debt service on the PILOT revenue bonds. Mall tenants are obligated to pay their share of PILOTs to Pyramid, an obligation that is absolute and unconditional. Pyramid's PILOT payment is secured by PILOT mortgages granted by both Pyramid and the SIDA on the original mall (the PILOT mortgages do not extend to the mall expansion project completed in 2012).

The lien provided by the PILOT mortgages is similar to those by taxing authorities, offering foreclosure as a remedy. The senior obligation of the PILOTs, on par with property taxes, ensures that support funding and any proceeds from foreclosure will be allocated first to the PILOTs before the excess is utilized for underlying mortgage claims.

The Carousel Center carries a $300 million mortgage loan and a $130 million mortgage on the expansion project, securitized as CMBS. The special servicer of the CMBS is Wells Fargo & Co (IDR A+/Stable). The presence of a CMBS servicer remains an important rating consideration, given its role in advancing the PILOT payments in the event of a NOI deficiency, and the PILOT's strong lien position in the mall's debt structure.

Pyramid entered into a standstill agreement, which included a moratorium on monthly debt service payments and an extension of the loan until June 6, 2022. Before the expiry, the borrower secured two one-year loan extensions through June 6, 2024 with options for further extensions through June 6, 2027. Pyramid is in the process of confirming an extension for the loan through June 6, 2025. Each loan extension is subject to achieving certain financial hurdles including the required NOI thresholds, which are expected to increase each year through 2027.

The servicer for the CMBS loans for the mall reported that the appraisal value as of July 2023 of the Carousel Center was $133 million, about 31% of the outstanding CMBS loans (Carousel and Expansion projects).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.

(C) 2024 Electronic News Publishing, source ENP Newswire