Standard & Poor’s reviews each item and may
adjust them to account for inconsistency with com-
parable properties, to reflect the project’s track
record, to address aberrations in costs, or to pro-
vide a more stressful cash flow test when needed.
Standard & Poor’s will always assume property
management fees in reviewing for appropriate DSC
levels. Market management fees will be assumed for
owner-managed properties. Standard & Poor’s
allows for underwriting expenses with a fair and
reasonable property management fee above the line
(that is, before debt service), and the trust indenture
should provide for the payment of market rate and
reasonable third-party management fees (which is
usually 4%-5%, depending on the market), in the
flow of funds before debt service.
Although property managers may initially agree
to subordinate some or all of its management fees
to debt service payments in the trust indenture flow
of funds, there is no assurance that future property
management firms will abide by these agreements,
and likely assess a market rate fee. As such, all
management fees should be calculated above the
line. Standard & Poor’s will always assume a prop-
erty reserve for replacements in calculating net cash
flow and will typically rely upon the independent
Property Condition Report to provide guidance on
the adequacy of reserves.
Reserve for replacements will be assumed to be
the higher of, the levels outlined in the property
condition report, or the following minimum levels:
■$250 per unit per year for properties that are less
than 10 years old;
■$250 to $275 per unit per year for properties
that are 10 to 15 years old; or
■$325 to $350 per unit per year for properties
that are 15 to 20 years old or older.
Standard & Poor’s views the loan to value (LTV)
ratio as a secondary risk indicator. The highest
acceptable LTV ratios will be for properties owned by
state and local HFAs or Public Housing Authorities
(PHAs) with experience in affordable housing, or for
Federally subsidized properties. Lower ratios may be
applicable where the public purpose nature of the
ownership is less established, as with a start-up non-
profit or a for-profit entity, or where liquidation of
the property is a factor in the rating.
Depth and strength of subsidies
Rental and interest rate subsidies have a direct
impact on project affordability, tenant characteris-
tics, demand, and quality of real estate, among
other things. The presence of such subsidies
requires an analysis of the depth, duration and
mechanics of the subsidies as well as terminationrisk. The two major subsidy programs, Section 8
and 236 are discussed in Public Finance Criteria:
Federally Subsidized Housing Programs.
Pledges from local municipal entities that subsi-
dize project income and that are used in calculating
DSC (such as tax increment funds) must come from
rated entities in order for the transaction to be con-
sidered for ‘BBB-’ or higher ratings.
Market analysis
Standard & Poor’s analysis of multifamily proper-
ties also takes into consideration economic and
demographic information concerning the market in
which a property is located. Standard & Poor’s
places particular emphasis on information available
from a number of sources, including the market
study or appraisal commissioned for the financing.
The market study or appraisal includes demograph-
ic and economic information in the area of the sub-
ject market, along with vacancy and rent trends.
Standard & Poor’s also utilizes independent market
information, for market information such as vacan-
cy rates and rent trends. These independent reports
also provide Standard & Poor’s with information
on competitive projects in the subject area, allowing
for a comparison of the property’s performance to
the actual sub market. In addition, Standard &
Poor’s obtains independent economic information
to supplement the market study/appraisal.
Standard & Poor’s also analyzes income and
expenses utilizing independent third party infor-
mation. These reports provide information on
income and expense trends by metropolitan area
and multi-family apartment type. This market
information assists Standard & Poor’s in the
analysis of the financial feasibility of the project
and the underwriting.
Property management
Efficient and effective management is necessary to
ensure the financial feasibility of the property. At the
time of the site visit, Standard & Poor’s interviews
the property manager to review experience and
track record, all aspects of day-to-day project opera-
tions, and overall operating strategy, including:
■Handling of day-to-day maintenance and preven-
tive maintenance program;
■Tenant rent collections and procedures to handle
delinquencies and evictions;
■Turnover time for vacant units;
■Marketing plan and maintenance of waiting lists;
■Leasing abilities and lease renewal strategies;
■Accounting procedures to determine cash man-
agement ability;
■Regularity of property inspections;Housing264 Standard & Poor’s Public Finance Criteria 2007