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

HousingQualified insurers For investment grade ratings,the rating of the insurance providers typically havea rating by Standard & Poor’s of not less than‘BBB-’. All insurance requirements are to be maintainedfor the life of the financing and the trustindenture should incorporate language outlininginsurance guidelines.In addition, the trustee should be named as themortgagee on all insurance policies relating to themortgaged property and the policies must have acancellation endorsement that the policy cannot becanceled or materially altered without giving 30days notice to the trustee.Property casualty coverage The property insurancecoverage provided must be at least equivalentto the “Special Cause of Loss” form, including coveragefor steam pressure explosion, flood and earthquakelosses, with valuation of the mortgageproperty based on replacement cost. The replacementcost option must include the additional costsassociated with “civil or ordinance of law” requirements.The amount of coverage provided might notbe less than the actual amount required to replacethe mortgage property in the event of a maximumpossible loss. It is the Borrower’s responsibility toprovide evidence of the maximum possible loss thatmay result from catastrophic perils insured against.The insurance may not be subject to restrictions orlimitations in coverage of any kind, which resultfrom the mortgage property being insured togetherwith mortgaged property not securitized. All insurancepolicies must include an agreed amountendorsement and co-insurance must be waived. Allexclusions not standard and customary to theindustry are subject to Standard & Poor’s review.Business interruption insurance This insurancemust provide loss of income protection resultingfrom direct physical loss to the mortgaged propertyand indirect loss which may significantly jeopardizerevenue, with limits of liability sufficient to sustainexpected income in respect of the mortgage propertyhad the loss not occurred In no event should therental loss provision be in an amount less than theannual rental income of the project. Co-insurancepenalties must be waived or completely avoided.Liability coverage The Borrower should maintaincommercial general liability and umbrella coverageand limits of liability that are customary to multifamilyreal estate and which adequately protects theinterest of the borrower and trustee, on behalf ofthe holders of the rated securities.Workers compensation and statutory coveragesThe Borrower must carry worker’s compensationinsurance as required by law, along with adequatelimits of employer’s liability, if applicable. In addition,all other insurance coverages that the borroweris or may be required to carry by law should beprovided.Boiler and machinery Comprehensive boiler andmachinery coverage is required on all mechanicalequipment that would cause a disruption in revenueif rendered nonoperational. The coverage providedshould cover direct losses and consequential lossesthat could materially jeopardize revenue.Legal StructureThe legal structure of the bond transaction is subjectto the Standard & Poor’s U.S. CMBS Legal andStructured Finance Criteria located on www.standardandpoors.com.Some highlights pertaining to real estate transactionsare:■ Security must include a mortgage, with first-lienposition in favor of the trustee and a net revenuepledge;■ Open flow of funds from the indenture will beevaluated on a case-by-case basis. Transactionswith strong properties and very strong ownersmay be rated investment grade with a open flowof funds with no release test or a release test thathas a lower debt service coverage level than thepro forma debt service coverage. Transactionswith weaker properties and/or weaker ownershipstructures should open flow tests at the proforma debt service coverage levels in order to beconsidered for investment grade ratings. Paymentof subordinate debt also is subject to open flowrequirements; Standard & Poor’s should receivenotice of the following events; extension ofacquisition period, partial mortgage prepayment,defeasance or discharge of the indenture, newinvestment agreement provider, impending sale ofcollateral or transfer of control of the single purposeentity, appointment of successor trustee, andsupplements or amendments to the bond &mortgage documents;■ Subordinate debt is acceptable, only if it is a nonforeclosablecash flow mortgage, which prohibitsany remedial action; and■ Investments should not adversely affect the ratingon the bonds.Ground leasesTransactions with ground leases must meetStandard & Poor’s real estate ground lease criteria.Under a ground lease, the lessor continues to ownthe land on which the improvements are locatedand leases it to a tenant, which is the borrower orowner. Standard & Poor’s will review the groundlease to assess whether adequate lender protectionsexist. In addition, the landlord should grant the266 Standard & Poor’s Public Finance Criteria 2007