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

Unenhanced Affordable Housing Project Debt■ Management reporting and control procedures todetermine ability to recognize and correct potentialproblems quickly;■ Past performance reviews for subject property, aswell as for other properties under management;■ Annual operations and long-range capitalimprovement plan;■ Budgeting process and rent increase strategy;■ Communications with owner and tenants;■ Maintenance of social services appropriate fortenant population; and■ Ability to analyze changing market conditionsand diagnose problems and implement solutionsas needed.Ongoing financial and management reviews by aqualified asset manager are a critical aspect of thecontinuing financial viability of property-specificbond transactions. The nature of the oversightvaries, depending on the relationship between theowner, issuer, and property manager, as well as theorganizational structure and experience of each ofthe parties involved.Some local HFAs or PHAs are well equipped tomanage the properties they own without additionaloversight. Where the owner is relatively inexperienced,an experienced state or local HFA or PHAscould provide an acceptable level of oversight.Local HFAs or PHAs that own properties managedby a professional management company shouldhave systems in place for ongoing reviews.The following minimum oversight responsibilitiesreflect an effective level of extra protection forAHPs. Oversight responsibilities should be clearlyoutlined in a written plan that is part of the legaldocumentation:■ Regular basement-to-roof site visits, no less thanannually, including unit-by-unit inspections;■ Annual in-depth reviews of management procedures;■ Monthly budget checks, occupancy reports, anddelinquency checks;■ Review of audited financial statements;■ Control over release of excess funds;■ Ongoing monitoring of reserve funds andrequired sign-offs for use of funds; and■ Review of preventive maintenance program andadequacy of capital expenditures plan.OwnershipThe nature of the project’s ownership is an importantelement in rating AHPs for several reasons.First, since the rating approach gives credit to thepublic-purpose nature of the financing, it is importantto establish the public-purpose nature of theownership. What is the owner’s commitment tomaintaining the project at affordable rent levels?Generally, PHAs, HFAs, and nonprofits most easilyfit the description of public purpose. For-profitownership is less likely to make the same type ofrepresentations regarding the future of the project.However, for-profit ownership could be acceptablefrom a rating standpoint if the public purpose wasfirmly established through legal documentation,such as a regulatory agreement. In addition to public-purposededication by the owner, Standard &Poor’s looks for asset management and debt compliancecapacity. Multifamily ownership and experienceand financial strength are the two easiest waysto demonstrate affordable housing ownershipcapacity. With regard to real estate ownershipstructures, fee ownership and leasehold positionsare both acceptable; however, transactions withground leases must meet Standard & Poor’s realestate ground lease criteria.The second rating concern in reviewing the ownershipof the project (as well as the issuer of thebonds) relates to the potential for bankruptcy.Where the owner and the issuer are unrated, orrated lower than the bonds, Standard & Poor’s analyzesthe legal structure of the ownership, as well asthe structure of the bond issue, to evaluate thepotential for bankruptcy. Three entities that typicallymeet Standard & Poor’s standards for bankruptcyremoteness are municipalities, certain nonprofitor eleemosynary institutions, and special-purposecorporations.The potential for voluntary and involuntarybankruptcy will be assessed through an analysis ofthe legal organization of the ownership, the essentialityof its services, its need to access capital marketsand the purpose of its business, as well as legalopinions and the legal structure of the bond transaction.Insurance, and environmental concernsSince the collateral in a mortgage-backed debttransaction is tangible, it is subject to physicalimpairment or loss. Standard & Poor’s will reviewall potential hazard, special hazard, casualty, andenvironmental risks to the property through its siteinspection, and through structural engineering, specialhazard, and environmental reports, as describedpreviously. All potential exposures should be coveredthrough reserves or insurance policies. Typicalinsurance policies on rated transactions include fireand casualty, boiler and machinery, business interruption,earthquake, flood, liability, condemnation,and environmental insurance.A title update also should be provided as part ofthe rating package, as well as the certificate of titleor the title policy. Exclusions are reviewed carefullyto determine the impact, if any, on the rated debt.www.standardandpoors.com265