SAN FRANCISCO — Standard & Poor’s downgraded the San Jose Redevelopment Agency’s non-housing tax-allocation bonds to BBB from BBB-plus due to financial and legal stress.

The rating agency Monday also assigned a negative outlook to the issuer’s long-term and underlying ratings due to lower debt service coverage stemming from falling property values.

“The agency has had less room to maneuver in the past year as a result of falling tax-increment revenues and the new state laws and lawsuit,” analyst Matthew Reining said in the report.

At the same time, Standard & Poor’s removed the San Jose RDA’s A-rated housing tax-allocation bonds from negative CreditWatch and assigned a stable outlook. S&P said the stable outlook reflects the expectation that the housing TABs will maintain good debt-service coverage over the next two years.

“The good news is that the negative CreditWatch was lifted,” said Richard Keit, managing director of the San Jose RDA. “I think future tax increment looks at least to stabilize, so we expect revenue to stay flat or increase in the next year.”

Reining said both credits were removed from negative watch because the agency extended its letter of credit for the non-housing TABs with JPMorgan. If the letter had not been extended by Nov. 25, the RDA would have had to pay the full principal and interest to the bank.

California’s redevelopment agencies are banned from entering into financial agreements until the state Supreme Court rules on a lawsuit that attempts to block new legislation. The San Jose RDA was able to get the LOC extended through an agreement between the trustee and the bank.

The state’s high court is weighing a challenge by the agencies and their advocates to two laws passed this year. One eliminates the state’s 400 RDAs, while the second gives them the option of coming back to life if they pay $1.7 billion this year to fill a gap in the current budget.

A decision by the court is due by Jan. 15.

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