with the Section 236 program, its asset manage-
ment procedures, and to discuss its understand-
ing of its responsibilities under the IRP
agreement. Section 236 bond issues without an
HFA as the public agency will be examined on a
case-by-case basis.
Termination events
In the IRP agreement, HUD has the ability to termi-
nate or reduce the IRP payments for the following
events, and Standard & Poor’s will look for the fol-
lowing remedies:
■The Section 236 mortgage is extinguished. In
most instances, this will only occur with provi-
sions for the full payment or redemption of the
IRP bonds. In case of a foreclosure on the mort-
gage loan, the IRP should continue uninterrupted
to the lender.
■The project ceases to be owned by an eligible
owner. Eligible ownership entities are outlined in
the HUD notice. To avoid this risk, the lender
should covenant not to allow transfer of owner-
ship to a non-eligible owner. In addition, the cur-
rent owner should covenant to always remain
eligible under HUD requirements.
■The lender is no longer mortgagee of record and
the HUD secretary has not approved the lender’s
successor as mortgagee of record. The lender
should covenant to always remain mortgagee of
record through expiration of the IRP or receive
prior written HUD approval of a successor.
■The public agency does not meet its obligation to
monitor the operation and condition of the project
or does not certify, in a manner acceptable to the
HUD secretary, that it is satisfying this require-
ment. The public agency must meet the require-
ments of HUD as detailed in the “Oversight”
section. Standard & Poor’s will need to gain thenecessary comfort that the HFA (or other over-
sight entity) is capable of performing this monitor-
ing and certification on an ongoing basis.
■The borrower or the lender defaults under any
provision of the IRP agreement. Standard &
Poor’s will rely on the oversight of the public
agency to mitigate the risks that any ongoing vio-
lation under the IRP agreement could cause a ter-
mination of the subsidy. Most of the provisions
of the IRP agreement entail normal operating
procedures for Section 236 properties, and HFAs
have excellent track records regarding continua-
tion of the subsidy.
■An action of foreclosure is instituted by the lender,
except in the event the lender gives to the secretary
advance written notice of its intention to institute
such foreclosure, and submits to the secretary in
advance a plan, acceptable to the secretary, provid-
ing for continued eligibility of the development for
receiving the benefits of Section 236.
Foreclosure should be handled through covenants
in the bond documents that necessitate following
HUD’s requirements. The senior lender must agree
in a document such as an inter-creditor agreement
or subordination agreement that the senior lender
will obtain the approval of HUD before initiating a
foreclosure action.
The HUD secretary shall have the discretion to
decrease the amount of the monthly IRP payment if
the number of units in the project available for
rental also decreases. Any such decrease in the IRP
payment shall be, to the extent possible, in propor-
tion to the decrease in the available units.
Reduction in units could be through a voluntary
decrease by the owner, units rendered uninhabitable,
or the casualty/condemnation of the units. The
owner must covenant to maintain all units for rental
through expiration of the IRP. HFA oversight limits
the possibility of units becoming uninhabitable.
For casualty/condemnation events, property
insurance that fully covers all bonds including the
IRP bonds with a provider rated at least investment
grade should be in place at closing. If the borrower
decides to rebuild, insurance proceeds will be used
(with public agency oversight) to reconstruct, and
the IRP subsidy should continue uninterrupted.
Standard & Poor’s will look to covenants in the
documents to assess the potential success of
rebuilding on time and within cost.
If the borrower decides not to rebuild, IRP bonds
will be redeemed either in full or pro rata in accor-
dance with the reduction in the IRP. In order to
ensure that there will be no shortfalls, business
interruption insurance covering at least nine months
of rental payments with a provider rated at least atHousing284 Standard & Poor’s Public Finance Criteria 2007Information requirements will include at least the following:
■A Trust indenture. which must require that a default on revenue bonds cannot
cause default on Section 236 bonds;
■A loan agreement;
■Cash flows;
■An IRP agreement;
■A use agreement;
■The original Section 236 mortgage with amortization amounts; and
■The new Section 236 mortgage.Other documentation may be requested on an as-needed basis.
Bond/Mortgage Documentation