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

Affordable Multifamily Housing Pooled Financingsrate at the property or the prevailing vacancy rate inthe market. The assumed vacancy rate will alwaysbe a minimum of 5% but in the case of elderlyhousing a lower minimum vacancy rate may beused, if appropriate. Standard & Poor’s will payparticular attention to rent restrictions on propertyunits to determine if the rents in the propertyincome reflect any legal rent restrictions on theproperty. Standard & Poor’s will compare assumedproperty expenses to historical property expensetrends, expenses from comparable properties inStandard & Poor’s rated property database andindependent third party information.Expense underwriting without real estate propertytaxes is acceptable in the event that the propertycan document statutory or specific property taxexemption. Capital expenditures are incorporatedin multifamily underwriting by estimating futurecapital expenditures and providing for an annualreserve for replacement which funds the capitalexpenditures over time. The capital expenditureprojections should be consistent with the thirdparty reports provided to Standard & Poor’s andwith our analysis of the property upon physicalinspection. Standard & Poor’s will include thisannual reserve for replacement in the computationof net cash flow of each property. The annualreserve for replacement will be the higher ofStandard & Poor’s minimum reserves for replacementsor the actual number recommended by theproperty condition survey. (See “Public FinanceCriteria: Unenhanced Affordable Housing ProjectDebt” for Standard & Poor’s minimum reserves forreplacements.) Standard & Poor’s typically seesmultifamily expense ratios in the 35% to 50%range although the ratio may be higher with projectswith restricted rents.Standard & Poor’s typically will do site visits toprojects comprising a minimum of 50% of the poolprincipal loan/bond balance. Based on a site visit,Standard & Poor’s assigns a ranking from “1” to“5”, with “1” indicating new high-end market ratehousing quality, and “5” indicating housing in badphysical condition, with physical obsolescence. Aranking of at least “3” is typically necessary forinvestment grade ratings. A weighted average rankingof property quality for the pool will be determinedand used to adjust pool subordination levels,if necessary.Standard & Poor’s will derive a value for eachproperty in the pool using an appropriate capitalizationrate, based on per property type. The analyticalteam will review appraisals for each propertyin the pool but does not use appraisal values forloss coverage computation purposes. Typically a9.25% cap rate will be used for older multifamilyprojects but higher or lower cap rates may be usedin certain instances. For instance, cap rates in the8.25%-8.75% range may be used for newer lowincomehousing projects due to the rent restrictionson the properties, the newness of the properties andthe additional oversight provided by various partiessuch as the low-income housing tax credit investor.Overall Review Of Quality AndDiversification Of Pool AssetsOnce the reviews for individual assets in the poolare complete, Standard & Poor’s will compile andreview statistics on the overall pool with regard toowner diversification, geographic diversification,affordable housing program termination risk, loanseasoning and mortgage payment delinquencies.Owner and geographic diversificationPools with a greater than 10% exposure to oneowner will not qualify for large pool treatment.Pools of such properties will be analyzed as smallpools and the rating on senior debt obligations willusually receive lower ratings than more diversifiedpools, (see “Public Finance Criteria: UnenhancedAffordable Housing Project Debt”). Typically,Standard & Poor’s measures geographic risk at thestate level. However, concentration risk within astate, or even a large county or city, does not precludeinvestment grade ratings on pools. All HFApools are concentrated in one city, county or stateand can obtain investment grade ratings. The morenarrow the geographic concentration, the higher therisk, however. Standard & Poor’s looks for mitigatingfactors, such as the depth of rent restrictions,historical performance, asset management, andpotential for ongoing financial support.Affordable housing program termination riskMany affordable housing projects have programtermination risk which may affect the ability of theprojects to pay debt service on a timely basis.Termination risk affects such programs as Section 8projects with Housing Assistance Program (HAP)contracts (either long-term or annually renewablecontracts) and LIHTC transactions (where mostpartnership agreements require a sale of the propertyafter the 15th year compliance period).While the Federal government has been extendingSection 8 contracts, it is difficult to say that projectsin a pool will have the HAP contracts extendedover the term of the bonds. It is possible that projectswith elderly tenancy, for instance, or withstrong ownership and oversight may stand a greaterchance to achieve contract extensions over the longterm.For projects where the HAP contract expiresprior to bond maturity and the Section 8 sponsorindicates that the project should be underwritten asa continuing Section 8 subsidized project,Standard & Poor’s will make an assessmentwww.standardandpoors.com271