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

Housingnon-tax exempt issuers using some other form ofpass through legal structure.Construction risk in conduit pools is more variablethan for HFAs due to varying degrees of experienceand track record of sponsors, as well as the numberof markets involved (transactions are multi-state asopposed to state-specific). However, if managementis strong and has a local presence in all project locations,conduits can be strong sponsors of multifamilyhousing. This is especially true for LIHTC pools,where the investor has a vested interest in ensuringthe health of the properties in order to maintain thetax credits. Standard & Poor’s will assess constructionrisk to determine whether it is low, medium orhigh, and has employed a conservative approach toassessing this risk. Standard & Poor’s may engage anindependent construction consultant to assist indetermining the risk of construction loans in thepool. (See “Public Finance Criteria: AssessingConstruction Risk”). To date, conduit issuers haveobtained credit enhancement to cover constructionrisk, for investment grade transactions. Projects thathave rated letters of credit providing credit supportfor loans until stabilization will be given full value inthe pool, as long as the rating of the credit supportprovider, is as high as the rating on the bonds. It isunlikely that a pool heavily weighted with constructionloans will achieve an investment grade rating.Loans for projects that have completed constructionbut have not yet stabilized with the projectreaching 90% occupancy and underwritten NOIfor a minimum of six months will be assigned standardrecovery values, but Standard & Poor’s willhaircut project NOI resulting in a reduction of theproject’s collateral value in the pool. Recoverycredit for projects during stabilization will only begiven in those circumstances where the sponsorscan demonstrate to Standard & Poor’ that theyhave a long history of successfully overseeing multifamilylease up of new construction projects andhave the staff and systems in place to do so.Experience in FHA, Fannie Mae or Freddie Macnew construction programs will be consideredstrong indicators of ability to oversee conventionalmultifamily construction and lease up, but will notbe the ultimate determinant. ■Military Housing PrivatizationsMilitary housing projects are built on or nearmilitary bases and are structured so that militarypersonnel have preference in renting the units.The rent is paid by the military tenants and is set atthe service members’ basic allowance for housing(BAH), an allowance legislated by Congress as partof military service members’ compensation. Theseprivatized military housing projects may have varioustypes of Department of Defense (DoD) subsidies,such as donated or leased land at nominalcost, donated housing units, cash equity investmentsin the joint ventures that own the housing,subsidized utilities or infrastructure, and belowmarket-ratesubordinate debt. The DoD has the legislativeauthority to and may make available loanguarantees for these projects in the event of mortgagedefaults due to base closures, base realignments,or Armed Forces deployments.Bonds financing housing projects under the MHPIare eligible to achieve high investment-grade ratingsfor three reasons: Rental income from the projectcomes from a military housing allowance system,which, although subject to annual appropriations, hasa long history of congressional support with no fundingdelays. Monies are typically transferred directlyfrom the DoD to the trustee to pay bondholders.Military housing privatizations are project-specific andare tied to specific bases, but the BAH as a componentof service members’ pay is not appropriated for individualbases. Rather, military pay is a federal expenseincurred on behalf of the members of the military.Second, the MHPI is a strong program consistingof quality housing with strong demand at most militarybases with DoD contributions that enhanceproject feasibility while offering below marketrents. Third, the program authorizes the use ofappropriate protections, as needed, for lendersagainst base closure, realignment, or deployment.The analysis of bonds secured by military housingprojects will focus on four key areas:■ A review of the essentiality of the military base asan indicator of future demand for military housingon base and related military base closure,realignment and deployment issues, and relatedloan guarantees;■ The military housing aspects, including housingallowance payment history and mechanisms,DoD subsidies, ground leases, and any otheroperating agreements with the DoD related tothe housing;276 Standard & Poor’s Public Finance Criteria 2007