keep a certain number of units on-line during the
initial development period. Military tenants are typi-
cally moved out of old housing upon completion of
new housing. Construction delays can be handled by
delaying the movement of tenants out of the older
housing. In the event units are not on line during the
initial development period, Standard & Poor’s may
use an independent consulting engineer to determine
the level of construction risk and potential miti-
gants. There are a number of other factors, which
are important in the construction analysis of mili-
tary housing privatization transactions. (Please see
“Public Finance Criteria: Assessing Construction
Risk In Public Finance”).
Lease-up risk
Standard & Poor’s considers lease up risk low in
family military housing transactions. The fact that
units are on line throughout the development peri-
od is a major mitigant to lease up risk. Often the
tenants that are moved to the newly constructed or
renovated units are tenants relocating from other
units on base. There is strong demand from military
personnel to live on base due to base amenities,
support networks, schools and high security. As a
result, there are frequently long waiting lists for
housing on base. In addition, the rents for the units
on base are usually below what service-members
would pay in the general market and the newly
constructed housing stock is typically more attrac-
tive than off base housing.Analyzing The Project As Military Housing
In evaluating the rental income stream coming
from the military housing allowances, Standard &
Poor’s will use the current BAH in effect for that
particular military housing area (MHA) and the
pay grade mix of the units as established by the
DoD request for proposal (RFP) for the military
housing project. Standard & Poor’s will review the
BAH history in the MHA to ensure the revenue
projections at the project are justified by the BAH
history. If the pay grade mix of the units may
change or if there are provisions for lower-ranking
pay grades occupying units reserved for higher pay
grades, Standard & Poor’s will review stress cash
flows to determine what reserves are needed for
differentials in pay grade mix from the pro forma
rental income assumptions.
There also will be a review of the pay grade mix
of the units in comparison to the mix of pay
grades in units stationed at the base and to the
pay grades of families on the housing waiting list.
In some instances, the DoD requires that, in the
event of a shortage of eligible military families,
housing units must be held vacant for other cate-
gories of DoD employees. In these instances,Standard & Poor’s may opt to use a higher vacan-
cy rate in analyzing the project or look for addi-
tional leasing reserves. In addition, Standard &
Poor’s will look for reserves to cover delays in any
mortgage payments made by the DoD under the
DoD guarantee. For instance, if the DoD guaran-
tee has a 120-day lag between the mortgage pay-
ment default date and payment date, then
Standard & Poor’s will look for a 120-day addi-
tional debt service reserve. In the event that rental
payments by tenants are tied directly to the BAH
payments, which are structured as a component of
military pay to be made in arrears, then
Standard & Poor’s will look for an additional 30-
day rental reserve in addition to the normal 30-
day lag. Mortgage reserves may be provided in the
form of cash reserve funds or servicing advances.
Adequate replacement reserves should be initially
set up and maintained in accordance with the ongo-
ing preventative maintenance and replacement
schedule as outlined in the contract between the
owner and DoD and confirmed with a structural
engineering report. Standard & Poor’s will analyze
replacement reserves in accordance with industry
standards to determine their sufficiency and if con-
trols over disbursement are adequate. Additional
reserves may be necessary to bring the property up
to environmental standards.
Reserves
Generally, Standard & Poor’s will look for debt
service reserve funds (DSRFs) equal to six months
maximum debt service on the bonds, which may be
funded with bond proceeds. Exceptions would be
where the base is not deemed to be moderate to
highly essential, and a transition to non-military
personnel is assumed. In these instances, a DSRF
equal to maximum annual debt service on the
bonds will be necessary. Monies for the debt service
reserve fund should be invested in investment grade
securities (‘BBB-’ or higher), and be available to pay
debt service in the event of a shortfall.
Military housing project ground leases
Standard & Poor’s experience is that most military
housing transactions in which the housing is locat-
ed on base will be structured such that the DoD
will use a ground lease in order to retain control of
the land. Standard & Poor’s can assign investment
grade ratings to transactions using ground lease
structures as long as the ground leases meet
Standard & Poor’s ground lease criteria as delineat-
ed in the criteria for CMBS transactions.
Asset management
Standard & Poor’s will review the oversight role and
capacity of issuers, outside third-party asset man-
agers, and DoD in each transaction to assess theHousing278 Standard & Poor’s Public Finance Criteria 2007