virtually nonexistent, but still a factor. Even though
the IRP revenue stream is not subject to appropria-
tion risk, expected ratings are at the ‘A’ rating level
due to the risks of HUD’s contract termination or
subsidy reduction. The termination events involve
elements of real estate risk that are generally not
consistent with higher rating levels. Higher ratings
may be possible only with very strong participants,
if certain other risks can be fully covered, or for
pooled financings.
Primary credit considerations include:
■Sufficient legal or other protections to mitigate
any potential termination or reduction of the IRP
by HUD;
■Proper regulatory oversight to ensure the pro-
ject’s continued eligibility for IRP;
■An experienced, capable oversight agency able
and willing to provide this oversight;
■Appropriately sized reserves to cover any funding
delays; and
■Debt service coverage to provide reserve replen-
ishment, if necessary.
IRP Assistance
IRP assistance, by statute, is paid to mortgagees on
behalf of mortgagors to maintain the viability of a
low-income housing resource. These payments are
not, and may not be paid directly to project own-
ers. HUD wants to be sure that assistance goes to
projects that provide habitable low-income housing
for qualified tenants, so they require an “accept-
able” public agency to provide regulatory oversight
for the project. The amount the project receives is
not tied to occupancy; the requirement is only that
the units are in habitable condition and rented to
qualified tenants. The key is the oversight, which
ensures the project’s eligibility to receive the IRP.
The assistance is calculated based on basic and
market rents. The amounts are set forth in the
amortization schedule in the original Section 236
mortgage and are fixed for the life of the mortgage.
The total amount to be received is the “budget
authority,” and the amount scheduled to be
received in any particular federal fiscal year is the
“contract authority.” Section 236 budget authority
is not subject to annual appropriation. Bonds sup-
ported by the IRP should have maturity no later
than the maturity of the IRP subsidy.
Assistance is paid in arrears after the filing of
form HUD-3111 “Mortgagee’s Certification and
Application for Interest Reduction Payments.” The
expectation is that the mortgagee would legally
pledge the IRP to the bond trustee for payment to
bondholders. The bond trustee would be instructed
to file this form in a timely fashion under the bond
documents, with payment coming directly to the
trustee. If payment goes to the mortgagee, proper
protections would need to be in place to ensure
timely and full remittance to the trustee. If the
request is received by the 20th of a month, payment
is wired usually by the first of the following month
(and ordinarily not later than the fifth). No precise
history exists about late payment from HUD, but
since HUD Central and not the regional offices pay
the subsidy, there are not the delays sometimes seen
in the payment of Section 8 subsidies.
Debt service coverage and reserves
In order to cover for any potential delays in payment
by HUD, a debt service reserve fund (DSRF) sized at
three months of IRP payments is recommended for
investment grade. Debt service coverage can be lower
than would be needed under a project-based financ-
ing. This is due to the fact that the Section 236
bondholder is not subject to the risks of project rev-
enues and expenses. Since the IRP revenues will be
accessed each month, excess coverage is necessary
only as a cushion and to be available to replenish the
DSRF if needed. A coverage level of at least 1.05x
for ratings at the investment-grade level is recom-
mended. This coverage also provides a needed cush-
ion in the event the number of units available for
rental decreases, in which case HUD would reduce
proportionately the IRP. Higher debt service cover-
age would be needed above the ‘A’ category.
Oversight
The lender (mortgagee) on these financings can be
any entity if a public agency agrees to be the over-
sight entity (i.e., party to the IRP agreement) to
assure compliance. If no public agency is involved,
the mortgagee must be HUD-approved and the
project must be FHA-insured, with HUD providing
the oversight. Public agency responsibilities accord-
ing to the HUD notice are:
■Monthly requests for the IRP;
■The processing of periodic rent increases;
■Physical inspections of the property to ensure
habitability; and
■Monitoring to assure owner compliance with the
terms of the IRP agreement and HUD rules gov-
erning the project.
In many cases, Standard & Poor’s expects that
the public agency will be an HFA. Most, if not
all, HFAs have extensive experience with Section
236 mortgage loans and the administrative and
asset management requirements listed above are
well within most HFAs’ core competencies. It is
expected that having HFAs as signatories on IRP
agreements will be considered acceptable over-
sight, especially if the HFA has significant experi-
ence with subsidized multifamily housing. An
HFA should be prepared to detail its track recordFederally Subsidized Housing Programshttp://www.standardandpoors.com 283