■A real estate analysis including real estate quality,
location, market demand, construction issues, net
cash flow and real estate program administration;
and
■Bond structure, reserves, and investments.
Military Essentiality Analysis
Privatized military housing transactions must be
financially feasible in the event of a military-related
event such as base closure, base realignment, or
long-term military deployment. Military bases are
national assets, and most will not be closed because
of their necessity for national defense. However, the
DoD is under pressure to find savings in the defense
budget to finance military modernization. Therefore,
savings through base closures that eliminate redun-
dant DoD operations are periodically considered.
In the event that there are further rounds of base
closures, some bases are more likely to close than
others, and although there may be political consid-
erations in the decisions over which bases to close,
the potential for some types of bases to be selected
for closure is able to be analyzed based on current
and future projections of military force structure,
base capabilities, geographic location and the
results of rankings from previous BRAC rounds.
The results of the latest BRAC round in 2005 are a
good indicator of the military’s view of essentiality.
Standard & Poor’s designates military bases as
highly essential, moderately essential, and essential.
If the base is not deemed to be moderately or highly
essential, and is located in an area where the eco-
nomic impact of such a closing on a local economy
would be very negative, then the military housing
transactions may need to have some form of DoD
debt guarantee in order to be investment-grade.
Exceptions to this case might be where the base
is in a large metropolitan area of at least one mil-
lion population and the combined military, mili-
tary-dependent, and DoD civilian employee
population in the area from all military-related
activities is less than 5% of the total population
and the base housing is of good quality (e.g. loca-
tion, design, physical condition, among others).
The DoD may desire to have any military-related
debt guarantees drop off in the event of a base clo-
sure and the project successfully transition to civil-
ian housing. In this case, Standard & Poor’s will
review the transaction to ensure that the project
meets an appropriate DSC test for an adequate time
period before the guarantee can drop off.
Despite the existence of the DoD base closure
guarantees, Standard & Poor’s will evaluate the
project to determine its feasibility as civilian hous-
ing in the event of a base closure or realignment.
Consequently, Standard & Poor’s will review a fea-
sibility study of the military housing project as mili-
tary and civilian affordable housing. The developer
should complete a transition plan and stress tests
addressing the project transitioning to civilian
affordable housing. The transition plan must cover:
■Property management;
■Marketing to civilians;
■Transition to local taxation;
■Utility conversion;
■Provisions for local government services, includ-
ing police and fire coverage;
■Access to schools and transportation; and
■Permanent base access.
The mechanics of base closure guarantees
For investment grade ratings, mortgage loan debt
service guarantees from the DoD should embody
the following concepts:
■The guarantee should cover base closure or
realignment and a temporary deployment from
the base of a significant portion of military per-
sonnel assigned to the base;
■The guarantee should be specific relating to iden-
tification and calculation of triggers driven by the
number of personnel affected by a military-relat-
ed event; and
■The guarantee should be a full faith and credit
obligation of the U.S.
With regard to the mechanics of payments under
such a guarantee, the guarantee should meet
Standard & Poor’s criteria for payment guarantees.
(See “Legal Criteria for U.S. Structured Finance
Transactions-Guarantee Criteria”)Real Estate Analysis/Construction Risk
Real estate analysis
Standard & Poor’s Ratings Services rating criteria for
bond issues that are secured by privatized military
housing projects constructed or rehabilitated under
the MHPI is a combination of rating approaches for
subsidized and unenhanced affordable housing trans-
actions and federally appropriated debt. The real
estate analysis includes a site visit as discussed below,
a review of the ownership entity, and a review of
third party environmental and physical needs
reports. A full description of the real estate analysis
is described in the “Public Finance Criteria:
Unenhanced Affordable Housing Project Debt”.
Construction risk
Construction risk is inherent in military housing pri-
vatization transactions due to the program consist-
ing of renovation and new construction of military
housing. Construction risk is typically mitigated in
these transactions, by the fact that the owner takes
title to occupied units of military housing upon clos-
ing. In addition, the owner represents that they willMilitary Housing Privatizationshttp://www.standardandpoors.com 277