trustee a right to cure the borrower’s default under
the ground lease. This gives the trustee the ability
to prevent a termination of the ground lease. The
real estate ground lease criteria, can be found in the
Standard & Poor’s U.S. CMBS Legal and
Structured Finance Criteria located on http://www.stan-
dardandpoors.com.Bond Structure And Reserves
Bond structures typically incorporate fully amortiz-
ing debt In addition, this debt can have bond matu-
rities of up to 30 years, as long as the engineering
report and site review indicate the structural sound-
ness of the property for the bond term, and appro-
priate reserves are set aside for ongoing preventive
maintenance and capital improvements.
Generally, Standard & Poor’s will look for a debt
service reserve fund (DSRF) equal to maximum
annual debt service on the bonds, which may be
funded with bond proceeds. Exceptions would be
where an acceptable servicer agrees to make servic-
ing advances in the event of temporary debt service
shortfalls. Extremely high DSC may also provide
sufficient liquidity to obviate the need for a sepa-
rate reserve. Monies for the debt service reserve
fund should be invested in investment grade securi-
ties (‘BBB-’ or higher), and be available to pay debt
service in the event of a shortfall.
The cash flows should incorporate a 30-day lag
on mortgage payments. Adequate reserves should
be initially set up and maintained in accordance
with the ongoing preventive maintenance and
replacement schedule indicated by management and
confirmed with a structural engineering report.
Additional reserves may be necessary to bring the
property up to environmental standards. Mortgagereserves may be provided in the form of cash
reserve funds or servicing advances.
Subordinate debt
Subordinate debt is frequently needed to make the
projects financially feasible. Standard & Poor’s may
exclude subordinate debt in its calculation of LTV.
For example, if the debt is public purpose in nature,
comes from governmental or municipal entities, and
is a cash flow mortgage that is nonforeclosable.
Standard & Poor’s will need to review the terms
of the subordinate debt to ensure that it does not
impair the financial feasibility of the project.
Standard & Poor’s will look for intercreditor agree-
ments between the trustee on behalf of the holders
of the rated securities and the subordinate lender to
ensure that the rights of the holders of the rated
securities to receive timely payments of principal
and interest are not impaired.Construction And Lease-Up Risk
Multifamily housing construction projects contain
some degree of construction risk; that is, the possi-
bility that the project will not be completed on time
or in accordance with specifications, thus causing a
delay in debt service payments. For construction
transactions, the level of construction risk the proj-
ect entails will be evaluated, and will be determined
to be low, moderate or high. If the level of con-
struction risk is moderate to high, further analysis
will be undertaken, and could include the use of an
outside construction consultant. (See Public Finance
Criteria: Assessing Construction Risk)
The more significant credit risk in new housing
construction transactions is lease-up risk. New proj-
ects may fail to achieve projected income levels
because they cannot rent up properties to projected
occupancy levels for market reasons such as excess
supply due to new construction, reduced demand
due to recession or the relative attractiveness of sin-
gle-family home purchases compared to renting.
Failure to achieve projected rents can occur for the
same reasons. While multifamily rehabilitation
transactions have the advantage of prior occupancy
and established rental rates, loss of tenants during
rehabilitation can cause delays in achieving targeted
occupancy after completion of construction.
History shows however, that in the affordable hous-
ing sector additional resources, such as soft second
loans from municipalities, developer, syndicator and
not-for-profit equity in tax credit transactions, and
HFA funds, can help projects over these difficulties.
In addition, capitalized interest and liquidity
reserves can help tide a project over until lease up
and stabilization are reached. Lease up risk must be
adequately addressed for affordable housing trans-
actions to be rated investment grade or higher.Unenhanced Affordable Housing Project Debthttp://www.standardandpoors.com 267Standard & Poor’s evaluates the property and the management and assigns a
project ranking from “poor” to “excellent. This ranking is a major determinant in
the final rating. Standard & Poor’s project evaluations are based on information in
the rating process, as well as the on-site property and management review.
The guidelines for project evaluations focus on the following factors:
■The evaluation assigned to the project owner.
■Capacity, experience, and track record of on-site manager
■Historical vacancy.
■Market conditions in the project area, including a review of the overall
competitiveness of project in the real estate market, including existing and
competing projects planned for completion in the next few years.
■Overall project design and condition.
■Adequacy and condition of amenities.
■Local, regional, and state economy.Project Evaluations