S&P - Public Finance Criteria (2007). - The Global Clearinghouse

HousingStandard & Poor’s reviews each item and mayadjust them to account for inconsistency with comparableproperties, to reflect the project’s trackrecord, to address aberrations in costs, or to providea more stressful cash flow test when needed.Standard & Poor’s will always assume propertymanagement fees in reviewing for appropriate DSClevels. Market management fees will be assumed forowner-managed properties. Standard & Poor’sallows for underwriting expenses with a fair andreasonable property management fee above the line(that is, before debt service), and the trust indentureshould provide for the payment of market rate andreasonable third-party management fees (which isusually 4%-5%, depending on the market), in theflow of funds before debt service.Although property managers may initially agreeto subordinate some or all of its management feesto debt service payments in the trust indenture flowof funds, there is no assurance that future propertymanagement firms will abide by these agreements,and likely assess a market rate fee. As such, allmanagement fees should be calculated above theline. Standard & Poor’s will always assume a propertyreserve for replacements in calculating net cashflow and will typically rely upon the independentProperty Condition Report to provide guidance onthe adequacy of reserves.Reserve for replacements will be assumed to bethe higher of, the levels outlined in the propertycondition report, or the following minimum levels:■ $250 per unit per year for properties that are lessthan 10 years old;■ $250 to $275 per unit per year for propertiesthat are 10 to 15 years old; or■ $325 to $350 per unit per year for propertiesthat are 15 to 20 years old or older.Standard & Poor’s views the loan to value (LTV)ratio as a secondary risk indicator. The highestacceptable LTV ratios will be for properties owned bystate and local HFAs or Public Housing Authorities(PHAs) with experience in affordable housing, or forFederally subsidized properties. Lower ratios may beapplicable where the public purpose nature of theownership is less established, as with a start-up nonprofitor a for-profit entity, or where liquidation ofthe property is a factor in the rating.Depth and strength of subsidiesRental and interest rate subsidies have a directimpact on project affordability, tenant characteristics,demand, and quality of real estate, amongother things. The presence of such subsidiesrequires an analysis of the depth, duration andmechanics of the subsidies as well as terminationrisk. The two major subsidy programs, Section 8and 236 are discussed in Public Finance Criteria:Federally Subsidized Housing Programs.Pledges from local municipal entities that subsidizeproject income and that are used in calculatingDSC (such as tax increment funds) must come fromrated entities in order for the transaction to be consideredfor ‘BBB-’ or higher ratings.Market analysisStandard & Poor’s analysis of multifamily propertiesalso takes into consideration economic anddemographic information concerning the market inwhich a property is located. Standard & Poor’splaces particular emphasis on information availablefrom a number of sources, including the marketstudy or appraisal commissioned for the financing.The market study or appraisal includes demographicand economic information in the area of the subjectmarket, along with vacancy and rent trends.Standard & Poor’s also utilizes independent marketinformation, for market information such as vacancyrates and rent trends. These independent reportsalso provide Standard & Poor’s with informationon competitive projects in the subject area, allowingfor a comparison of the property’s performance tothe actual sub market. In addition, Standard &Poor’s obtains independent economic informationto supplement the market study/appraisal.Standard & Poor’s also analyzes income andexpenses utilizing independent third party information.These reports provide information onincome and expense trends by metropolitan areaand multi-family apartment type. This marketinformation assists Standard & Poor’s in theanalysis of the financial feasibility of the projectand the underwriting.Property managementEfficient and effective management is necessary toensure the financial feasibility of the property. At thetime of the site visit, Standard & Poor’s interviewsthe property manager to review experience andtrack record, all aspects of day-to-day project operations,and overall operating strategy, including:■ Handling of day-to-day maintenance and preventivemaintenance program;■ Tenant rent collections and procedures to handledelinquencies and evictions;■ Turnover time for vacant units;■ Marketing plan and maintenance of waiting lists;■ Leasing abilities and lease renewal strategies;■ Accounting procedures to determine cash managementability;■ Regularity of property inspections;264 Standard & Poor’s Public Finance Criteria 2007