bonds. As a condition of bond closing, cash flows
should be verified by an independent third party. The
third party can be a nationally recognized accounting
firm; an expert in the field; or, in some cases, a quali-
fied officer of the state housing agency if applicable.
On issues with multiple securities collateralizing
several multifamily dwellings, the least desirable
cash flow scenario should be provided. For exam-
ple, if the underlying mortgages have varying rates,
the mortgage with the lowest rate should be able to
support the bonds, assuming that all the other
mortgages prepay immediately. Lastly, it is crucial
that cash flow projections are consistent with repre-
sentations made in the financing documents.
A nondelivery run should be provided. If the secu-
rity is not delivered by the last possible acquisition
date, cash flows must show sufficient funds to
redeem the bonds in whole. The redemption from
nonorigination is usually on the date that is 30 days
after the final acquisition date. To allow flexibility
in the acquisition of the MBS, extensions may beprovided for in the indenture. To ensure that an
extension can be completed properly, Standard &
Poor’s should receive 30 days’ written notification of
the anticipated extension. Along with this extension
notice, updated cash flows should be supplied along
with supplemental documents, including the invest-
ment agreement. The documents should indicate the
extended call date 30 days after the new delivery
date in the event that a nondelivery is to take place.
The same criteria for note amortization extensions
in FHA programs apply to all the MBS programs.
To avoid the final payment being passed through
to the trustee after maturity of the bonds, the
mortgage should mature at least one month prior
to the final bond maturity. Lastly, if a premium is
paid on the bonds to fund any shortfalls created
through the acquisition period, and if any parties
have a residual interest in that premium, the prop-
er legal opinions may be necessary. For cash contri-
butions and LOCs, Standard & Poor’s may request
legal opinions.■Housing262 Standard & Poor’s Public Finance Criteria 2007
S
tandard & Poor’s Ratings Services defines unen-
hanced affordable housing projects (AHPs) as pub-
lic-purpose real estate supported by below-market
rents. While many AHP transactions are structured
with credit enhancements, unenhanced AHPs are
structured and rated based on the strength of the real
estate to support debt service on the bonds. AHP
transactions may receive a variety of public support
and may have varying rent and residency restrictions.
These include Federal subsidies, such as Section 8 and
Section 236, as well as military housing allowances in
privatized military housing transactions.
Many public purpose properties are economically
viable even without Federal subsidies through the
Low-income Housing Tax Credit Program, tax-
exempt bonds, exemption from real estate taxes
and creative financing techniques. The unenhanced
affordable housing project debt criteria, does not
apply to projects that will only be partially public
purpose, or can convert to market rate during the
life of the bond issue. Transactions with these latter
attributes are typically rated by Standard & Poor’s
Commercial Real Estate Group. The analysis of
bonds backed by real estate focuses on real estate
quality, legal structure, bond structure and reserves,
and construction and lease up risk.Real Estate Quality
Standard & Poor’s assesses the quality of the real
estate to judge its ability to attract targeted tenancy,
compete with nearby properties, maintain structural
soundness and remain financially feasible. The
analysis is based on:
■A site review;
■Measures of financial feasibility;
■Depth and strength of subsidies, if any;
■Market Analysis
■Property management;
■Ownership;
■Insurance, and environmental concerns.
Site review
The site review focuses on the attractiveness and
condition of the property, and its comparability
and competitiveness within the market. 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” indicat-
ing housing in bad physical condition, with
physical obsolescence. A ranking of at least “3” is
typically necessary for investment grade ratings.
The review consists of the following: