Qualified insurersFor investment grade ratings,
the rating of the insurance providers typically have
a rating by Standard & Poor’s of not less than
‘BBB-’. All insurance requirements are to be main-
tained for the life of the financing and the trust
indenture should incorporate language outlining
insurance guidelines.
In addition, the trustee should be named as the
mortgagee on all insurance policies relating to the
mortgaged property and the policies must have a
cancellation endorsement that the policy cannot be
canceled or materially altered without giving 30
days notice to the trustee.
Property casualty coverageThe property insur-
ance coverage provided must be at least equivalent
to the “Special Cause of Loss” form, including cov-
erage for steam pressure explosion, flood and earth-
quake losses, with valuation of the mortgage
property based on replacement cost. The replace-
ment cost option must include the additional costs
associated with “civil or ordinance of law” require-
ments. The amount of coverage provided might not
be less than the actual amount required to replace
the mortgage property in the event of a maximum
possible loss. It is the Borrower’s responsibility to
provide evidence of the maximum possible loss that
may result from catastrophic perils insured against.
The insurance may not be subject to restrictions or
limitations in coverage of any kind, which result
from the mortgage property being insured together
with mortgaged property not securitized. All insur-
ance policies must include an agreed amount
endorsement and co-insurance must be waived. All
exclusions not standard and customary to the
industry are subject to Standard & Poor’s review.
Business interruption insuranceThis insurance
must provide loss of income protection resulting
from direct physical loss to the mortgaged property
and indirect loss which may significantly jeopardize
revenue, with limits of liability sufficient to sustain
expected income in respect of the mortgage proper-
ty had the loss not occurred In no event should the
rental loss provision be in an amount less than the
annual rental income of the project. Co-insurance
penalties must be waived or completely avoided.
Liability coverageThe Borrower should maintain
commercial general liability and umbrella coverage
and limits of liability that are customary to multi-
family real estate and which adequately protects the
interest of the borrower and trustee, on behalf of
the holders of the rated securities.
Workers compensation and statutory coverages
The Borrower must carry worker’s compensation
insurance as required by law, along with adequate
limits of employer’s liability, if applicable. In addi-
tion, all other insurance coverages that the borrow-er is or may be required to carry by law should be
provided.
Boiler and machineryComprehensive boiler and
machinery coverage is required on all mechanical
equipment that would cause a disruption in revenue
if rendered nonoperational. The coverage provided
should cover direct losses and consequential losses
that could materially jeopardize revenue.Legal Structure
The legal structure of the bond transaction is sub-
ject to the Standard & Poor’s U.S. CMBS Legal and
Structured Finance Criteria located on http://www.stan-
dardandpoors.com.
Some highlights pertaining to real estate transac-
tions are:
■Security must include a mortgage, with first-lien
position in favor of the trustee and a net revenue
pledge;
■Open flow of funds from the indenture will be
evaluated on a case-by-case basis. Transactions
with strong properties and very strong owners
may be rated investment grade with a open flow
of funds with no release test or a release test that
has a lower debt service coverage level than the
pro forma debt service coverage. Transactions
with weaker properties and/or weaker ownership
structures should open flow tests at the pro
forma debt service coverage levels in order to be
considered for investment grade ratings. Payment
of subordinate debt also is subject to open flow
requirements; Standard & Poor’s should receive
notice of the following events; extension of
acquisition period, partial mortgage prepayment,
defeasance or discharge of the indenture, new
investment agreement provider, impending sale of
collateral or transfer of control of the single pur-
pose entity, appointment of successor trustee, and
supplements or amendments to the bond &
mortgage documents;
■Subordinate debt is acceptable, only if it is a non-
foreclosable cash flow mortgage, which prohibits
any remedial action; and
■Investments should not adversely affect the rating
on the bonds.
Ground leases
Transactions with ground leases must meet
Standard & Poor’s real estate ground lease criteria.
Under a ground lease, the lessor continues to own
the land on which the improvements are located
and leases it to a tenant, which is the borrower or
owner. Standard & Poor’s will review the ground
lease to assess whether adequate lender protections
exist. In addition, the landlord should grant theHousing266 Standard & Poor’s Public Finance Criteria 2007