■Management reporting and control procedures to
determine ability to recognize and correct poten-
tial problems quickly;
■Past performance reviews for subject property, as
well as for other properties under management;
■Annual operations and long-range capital
improvement plan;
■Budgeting process and rent increase strategy;
■Communications with owner and tenants;
■Maintenance of social services appropriate for
tenant population; and
■Ability to analyze changing market conditions
and diagnose problems and implement solutions
as needed.
Ongoing financial and management reviews by a
qualified asset manager are a critical aspect of the
continuing financial viability of property-specific
bond transactions. The nature of the oversight
varies, depending on the relationship between the
owner, issuer, and property manager, as well as the
organizational structure and experience of each of
the parties involved.
Some local HFAs or PHAs are well equipped to
manage the properties they own without additional
oversight. Where the owner is relatively inexperi-
enced, an experienced state or local HFA or PHAs
could provide an acceptable level of oversight.
Local HFAs or PHAs that own properties managed
by a professional management company should
have systems in place for ongoing reviews.
The following minimum oversight responsibilities
reflect an effective level of extra protection for
AHPs. Oversight responsibilities should be clearly
outlined in a written plan that is part of the legal
documentation:
■Regular basement-to-roof site visits, no less than
annually, including unit-by-unit inspections;
■Annual in-depth reviews of management proce-
dures;
■Monthly budget checks, occupancy reports, and
delinquency checks;
■Review of audited financial statements;
■Control over release of excess funds;
■Ongoing monitoring of reserve funds and
required sign-offs for use of funds; and
■Review of preventive maintenance program and
adequacy of capital expenditures plan.
Ownership
The nature of the project’s ownership is an impor-
tant element in rating AHPs for several reasons.
First, since the rating approach gives credit to the
public-purpose nature of the financing, it is impor-
tant to establish the public-purpose nature of the
ownership. What is the owner’s commitment to
maintaining the project at affordable rent levels?
Generally, PHAs, HFAs, and nonprofits most easily
fit the description of public purpose. For-profit
ownership is less likely to make the same type of
representations regarding the future of the project.
However, for-profit ownership could be acceptable
from a rating standpoint if the public purpose was
firmly established through legal documentation,
such as a regulatory agreement. In addition to pub-
lic-purpose dedication by the owner, Standard &
Poor’s looks for asset management and debt com-
pliance capacity. Multifamily ownership and experi-
ence and financial strength are the two easiest ways
to demonstrate affordable housing ownership
capacity. With regard to real estate ownership
structures, fee ownership and leasehold positions
are both acceptable; however, transactions with
ground leases must meet Standard & Poor’s real
estate ground lease criteria.
The second rating concern in reviewing the own-
ership of the project (as well as the issuer of the
bonds) relates to the potential for bankruptcy.
Where the owner and the issuer are unrated, or
rated lower than the bonds, Standard & Poor’s ana-
lyzes the legal structure of the ownership, as well as
the structure of the bond issue, to evaluate the
potential for bankruptcy. Three entities that typical-
ly meet Standard & Poor’s standards for bankrupt-
cy remoteness are municipalities, certain nonprofit
or eleemosynary institutions, and special-purpose
corporations.
The potential for voluntary and involuntary
bankruptcy will be assessed through an analysis of
the legal organization of the ownership, the essen-
tiality of its services, its need to access capital mar-
kets and the purpose of its business, as well as legal
opinions and the legal structure of the bond trans-
action.
Insurance, and environmental concerns
Since the collateral in a mortgage-backed debt
transaction is tangible, it is subject to physical
impairment or loss. Standard & Poor’s will review
all potential hazard, special hazard, casualty, and
environmental risks to the property through its site
inspection, and through structural engineering, spe-
cial hazard, and environmental reports, as described
previously. All potential exposures should be cov-
ered through reserves or insurance policies. Typical
insurance policies on rated transactions include fire
and casualty, boiler and machinery, business inter-
ruption, earthquake, flood, liability, condemnation,
and environmental insurance.
A title update also should be provided as part of
the rating package, as well as the certificate of title
or the title policy. Exclusions are reviewed carefully
to determine the impact, if any, on the rated debt.Unenhanced Affordable Housing Project Debthttp://www.standardandpoors.com 265