non-tax exempt issuers using some other form of
pass through legal structure.
Construction risk in conduit pools is more variable
than for HFAs due to varying degrees of experience
and track record of sponsors, as well as the number
of markets involved (transactions are multi-state as
opposed to state-specific). However, if management
is strong and has a local presence in all project loca-
tions, conduits can be strong sponsors of multifamily
housing. This is especially true for LIHTC pools,
where the investor has a vested interest in ensuring
the health of the properties in order to maintain the
tax credits. Standard & Poor’s will assess construc-
tion risk to determine whether it is low, medium or
high, and has employed a conservative approach to
assessing this risk. Standard & Poor’s may engage an
independent construction consultant to assist in
determining the risk of construction loans in the
pool. (See “Public Finance Criteria: Assessing
Construction Risk”). To date, conduit issuers have
obtained credit enhancement to cover construction
risk, for investment grade transactions. Projects that
have rated letters of credit providing credit supportfor loans until stabilization will be given full value in
the pool, as long as the rating of the credit support
provider, is as high as the rating on the bonds. It is
unlikely that a pool heavily weighted with construc-
tion loans will achieve an investment grade rating.
Loans for projects that have completed construc-
tion but have not yet stabilized with the project
reaching 90% occupancy and underwritten NOI
for a minimum of six months will be assigned stan-
dard recovery values, but Standard & Poor’s will
haircut project NOI resulting in a reduction of the
project’s collateral value in the pool. Recovery
credit for projects during stabilization will only be
given in those circumstances where the sponsors
can demonstrate to Standard & Poor’ that they
have a long history of successfully overseeing mul-
tifamily lease up of new construction projects and
have the staff and systems in place to do so.
Experience in FHA, Fannie Mae or Freddie Mac
new construction programs will be considered
strong indicators of ability to oversee conventional
multifamily construction and lease up, but will not
be the ultimate determinant.■Housing276 Standard & Poor’s Public Finance Criteria 2007
M
ilitary housing projects are built on or near
military bases and are structured so that mili-
tary personnel have preference in renting the units.
The rent is paid by the military tenants and is set at
the service members’ basic allowance for housing
(BAH), an allowance legislated by Congress as part
of military service members’ compensation. These
privatized military housing projects may have vari-
ous types of Department of Defense (DoD) subsi-
dies, such as donated or leased land at nominal
cost, donated housing units, cash equity invest-
ments in the joint ventures that own the housing,
subsidized utilities or infrastructure, and below-
market-rate subordinate debt. The DoD has the leg-
islative authority to and may make available loan
guarantees for these projects in the event of mort-
gage defaults due to base closures, base realign-
ments, or Armed Forces deployments.
Bonds financing housing projects under the MHPI
are eligible to achieve high investment-grade ratings
for three reasons: Rental income from the project
comes from a military housing allowance system,
which, although subject to annual appropriations, has
a long history of congressional support with no fund-
ing delays. Monies are typically transferred directlyfrom the DoD to the trustee to pay bondholders.
Military housing privatizations are project-specific and
are tied to specific bases, but the BAH as a component
of service members’ pay is not appropriated for indi-
vidual bases. Rather, military pay is a federal expense
incurred on behalf of the members of the military.
Second, the MHPI is a strong program consisting
of quality housing with strong demand at most mil-
itary bases with DoD contributions that enhance
project feasibility while offering below market
rents. Third, the program authorizes the use of
appropriate protections, as needed, for lenders
against base closure, realignment, or deployment.
The analysis of bonds secured by military hous-
ing projects will focus on four key areas:
■A review of the essentiality of the military base as
an indicator of future demand for military hous-
ing on base and related military base closure,
realignment and deployment issues, and related
loan guarantees;
■The military housing aspects, including housing
allowance payment history and mechanisms,
DoD subsidies, ground leases, and any other
operating agreements with the DoD related to
the housing;