rate at the property or the prevailing vacancy rate in
the market. The assumed vacancy rate will always
be a minimum of 5% but in the case of elderly
housing a lower minimum vacancy rate may be
used, if appropriate. Standard & Poor’s will pay
particular attention to rent restrictions on property
units to determine if the rents in the property
income reflect any legal rent restrictions on the
property. Standard & Poor’s will compare assumed
property expenses to historical property expense
trends, expenses from comparable properties in
Standard & Poor’s rated property database and
independent third party information.
Expense underwriting without real estate proper-
ty taxes is acceptable in the event that the property
can document statutory or specific property tax
exemption. Capital expenditures are incorporated
in multifamily underwriting by estimating future
capital expenditures and providing for an annual
reserve for replacement which funds the capital
expenditures over time. The capital expenditure
projections should be consistent with the third
party reports provided to Standard & Poor’s and
with our analysis of the property upon physical
inspection. Standard & Poor’s will include this
annual reserve for replacement in the computation
of net cash flow of each property. The annual
reserve for replacement will be the higher of
Standard & Poor’s minimum reserves for replace-
ments or the actual number recommended by the
property condition survey. (See “Public Finance
Criteria: Unenhanced Affordable Housing Project
Debt” for Standard & Poor’s minimum reserves for
replacements.) Standard & Poor’s typically sees
multifamily expense ratios in the 35% to 50%
range although the ratio may be higher with proj-
ects with restricted rents.
Standard & Poor’s typically will do site visits to
projects comprising a minimum of 50% of the pool
principal loan/bond balance. Based on a site visit,
Standard & Poor’s assigns a ranking from “1” to
“5”, with “1” indicating new high-end market rate
housing quality, and “5” indicating housing in bad
physical condition, with physical obsolescence. A
ranking of at least “3” is typically necessary for
investment grade ratings. A weighted average rank-
ing of property quality for the pool will be deter-
mined and used to adjust pool subordination levels,
if necessary.
Standard & Poor’s will derive a value for each
property in the pool using an appropriate capital-
ization rate, based on per property type. The ana-
lytical team will review appraisals for each property
in the pool but does not use appraisal values for
loss coverage computation purposes. Typically a
9.25% cap rate will be used for older multifamily
projects but higher or lower cap rates may be used
in certain instances. For instance, cap rates in the
8.25%-8.75% range may be used for newer low-
income housing projects due to the rent restrictions
on the properties, the newness of the properties and
the additional oversight provided by various parties
such as the low-income housing tax credit investor.Overall Review Of Quality And
Diversification Of Pool Assets
Once the reviews for individual assets in the pool
are complete, Standard & Poor’s will compile and
review statistics on the overall pool with regard to
owner diversification, geographic diversification,
affordable housing program termination risk, loan
seasoning and mortgage payment delinquencies.
Owner and geographic diversification
Pools with a greater than 10% exposure to one
owner will not qualify for large pool treatment.
Pools of such properties will be analyzed as small
pools and the rating on senior debt obligations will
usually receive lower ratings than more diversified
pools, (see “Public Finance Criteria: Unenhanced
Affordable Housing Project Debt”). Typically,
Standard & Poor’s measures geographic risk at the
state level. However, concentration risk within a
state, or even a large county or city, does not pre-
clude investment grade ratings on pools. All HFA
pools are concentrated in one city, county or state
and can obtain investment grade ratings. The more
narrow the geographic concentration, the higher the
risk, however. Standard & Poor’s looks for mitigat-
ing factors, such as the depth of rent restrictions,
historical performance, asset management, and
potential for ongoing financial support.
Affordable housing program termination risk
Many affordable housing projects have program
termination risk which may affect the ability of the
projects to pay debt service on a timely basis.
Termination risk affects such programs as Section 8
projects with Housing Assistance Program (HAP)
contracts (either long-term or annually renewable
contracts) and LIHTC transactions (where most
partnership agreements require a sale of the proper-
ty after the 15th year compliance period).
While the Federal government has been extending
Section 8 contracts, it is difficult to say that proj-
ects in a pool will have the HAP contracts extended
over the term of the bonds. It is possible that proj-
ects with elderly tenancy, for instance, or with
strong ownership and oversight may stand a greater
chance to achieve contract extensions over the long-
term. For projects where the HAP contract expires
prior to bond maturity and the Section 8 sponsor
indicates that the project should be underwritten as
a continuing Section 8 subsidized project,
Standard & Poor’s will make an assessmentAffordable Multifamily Housing Pooled Financingshttp://www.standardandpoors.com 271