PubFinCriteria_2006_part1_final1.qxp

posed by the proposed construction. This analy-

sis may include Standard & Poor’s using a con-

sulting engineer to determine these risk and

potential mitigants.

■The demand analysis should include how many

unaccompanied permanent party personnel are

assigned to the base and/or are eligible for the

privatized housing, a description of the housing

for unaccompanied personnel currently available,

and occupancy statistics. In addition, the market

study should include information on the housing

alternatives for these personnel available in the

marketplace.

■Local housing market and alternate use for the

real estate (layout, amenities, and location).

■The revenue and BAH structure will be analyzed

to determine future rental stream.

■The bond and legal structure for these transac-

tions is expected to be similar to family housing,

including the level of reserves, and legal docu-

mentation such as the ground leases, operating

agreements, and trust indentures.■

Federally Subsidized Housing Programs ..........................................................................

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S

tandard & Poor’s Ratings Services rates single-

asset and pooled financings of properties sup-

ported by federal subsidies, such as HUD Sections 8

and 236. Ratings range from low to high invest-

ment grade, with lower ratings assigned to single-

asset transactions and higher ratings assigned to

state housing finance agency (HFA) pools.

Most federally subsidized properties are included

in HFA loan pools, often in conjunction with

unsubsidized, credit-enhanced and even single-fami-

ly loans. HFAs have a strong record of managing

these asset pools, closely monitoring loan perform-

ance and proactively taking steps to ensure finan-

cial stability. Single-asset financings are typically

done through local authorities, municipalities and

not-for-profits. Strong properties with strong own-

ers and managers assisted by project-based federal

subsidies can achieve investment-grade ratings, even

when the contract is not coterminous with bonds.

The rating criteria for federally subsidized project

financings is similar to unenhanced affordable mul-

tifamily housing criteria with refinements as indi-

cated below. Standard & Poor’s analysis focuses on

real estate quality, legal structure, bond structure

and reserves. Real estate quality includes a site

review, measures of financial feasibility, market

analysis, property management, ownership, insur-

ance coverage and environmental concerns.

Analysis of the federal subsidy is an important

aspect of analyzing real estate quality, and focuses

on two key factors:

■Depth of the subsidy and how it affects the rela-

tive affordability of the project. The deeper the

subsidy, the greater the affordability, which

argues for lower debt service coverage levels than

needed to support unsubsidized properties; and

■Subsidy mechanics, including the federal appro-

priations process, contract provisions, such as

termination events and regulations affecting key

financial aspects, such as rent increases.

For a full discussion, refer to the criteria,

“Unenhanced Affordable Housing Project Debt”.

Project-Based Section 8

There are key differences that affect ratings on

bonds supported by historical Section 8 contracts

and the contracts HUD is entering into today,

specifically appropriation risk, contract term and

the rent increase mechanism. In the original pro-

gram, Section 8 funding was typically set-aside at

the outset of the contract for its entire term, signifi-

cantly reducing appropriation risk. The term of the

contract was often equal to bond maturity and ter-

mination risk was restricted to poor owner per-

formance. Rents were originally increased

according to an annual adjustment factor. In later

years, HUD instituted rent ceilings, which had the

impact of severely restricting, and even freezing,

rent increases.

More recent financings are for developments

with contracts that have expired and been extend-

ed under the Multifamily Assisted Housing Reform

and Affordability Act of 1997 (MAHRA). These

contracts are subject to annual appropriation and

tend to be for shorter terms, intensifying termina-

tion risk. While appropriations need to be made

for this type of contract each year, appropriation

risk is not a limiting factor to low to mid-invest-

Federally Subsidized Housing Programs