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

Housing■A presentation by developer/owner on how propertyasset management including debt complianceis to be handled.Unaccompanied Housing Privatization CriteriaThe MHPI, which allows for the privatization offamily housing, also allows for the privatization ofhousing for unaccompanied personnel. The unaccompaniedhousing program poses unique risksthat distinguish it from the family housing program.Most importantly, is the risk of deployment.Deployment would terminate the lease for a certainclass of (lower-ranked) personnel, causing cash flowto cease.In family housing, this risk is mitigated by thecontinuation of BAH payments following deploymentas long as the family of the deployed servicemember continues to occupy the home, which istypically the case. Second, construction risk ispotentially different than family housing, as thesetransactions may not involve the conveyance ofexisting units and the generation of cash flow fromexisting units, during the initial development period.As a result, Standard & Poor’s may use an outsideconsultant to review the construction of thesedevelopments, and determine if the mitigants topotential construction and lease up delays are sufficientin the structure of the transactions.Finally, in the event of a base closure, the alternateuse of the real estate is not clear as the existingand proposed units appear like student housing somay not be marketable to the general public, regardlessof the strength of the local housing market anddepth of demand, in the event of a base closure.Key Credit Considerations And Major Risks■ Standard & Poor’s will analyze military essentialityusing the same methodology as for the familyhousing program.■ Deployment history for each base will be analyzedto determine the potential impact of futuredeployment on the occupancy.■ Construction risk can potentially be differentthan family housing, as units may not be on lineduring the initial development period. In thesecases it is important to determine the level of riskEvaluating The Basic Allowance For HousingOn Jan. 1, 1998, the Department of Defense (DOD) initiated a new housing allowance system for all members of the Armed Forces.The new system, entitled the Basic Allowance for Housing (BAH), replaced the previous system that combined the Basic Allowancefor Quarters, plus Variable Housing Allowance. Implementation of the new system provides for much fairer housing allowances forservice members stationed in high cost areas but can result in lower overall housing allowances in areas with lower housing costs.The BAH is a single, price-based system that establishes housing allowances based on local housing costs by paygrade and familystatus. Growth in the DOD overall housing allowance budget is tied to the growth in a weighted average of national housing costs.The BAH allowance is computed by outside contractors who will perform surveys of housing costs in areas where military personnelare stationed. The consultants base their studies on one-two bedroom apartments, two-three bedroom townhouses, and three-fourbedroom detached houses within zip codes near bases where 80% of off-base service members live, and which have a mean familyincome of within a certain band. The BAH system incorporates a “save pay” provision that ensures that no service member will incur areduction in housing allowances until they move to a new station and are paid according to the BAH rate at that new location.The BAH is paid monthly in cash to service members with families only if they do not live in military housing. Any Armed Forcesmembers who live in military provided housing generally forfeit their housing allowance on a monthly basis and do not receive thehousing allowance in cash. Service members have the right to have their BAH sent directly to a third party via DOD direct depositor allotment.The housing allowance is considered a major component of the compensation of members of the Armed Forces. The CurrentStructure of U.S. Armed Forces military pay originated centuries ago when countries and individuals temporarily raised armies to wagewar. When raising an army, the sponsor had to provide not just pay, but food and shelter for the soldiers. This food and shelter graduallyevolved into a system of non-taxable food and housing allowances. These allowances were provided in cash to the Armed Forcesmember if the government did not supply food and shelter. The allowance was withheld from the Armed Forces member’s payif the government did not provide food and shelter.The legal authority to pay housing allowances to service members is subject to annual appropriation by Congress just as is militarybase pay. The legislative history for paying Armed Forces members on a timely basis is excellent. The rationale for paying ArmedForces members pay and allowances on a timely basis is strengthened by the fact that all enlisted members or the Armed Forcesand many officers serve under enlistment contracts that can be terminated early only subject to special congressional legislation ordisciplinary action. In addition, now that the military is an all-volunteer force, the DOD must structure adequate pay and allowancesto be attractive for recruiting and the retention of existing Armed Forces members.While the payment of housing allowances is subject to annual congressional appropriation, the essential function of nationaldefense, the long legislative history of paying military personnel pay and allowances on a timely basis, and the need to attract andretain Armed Forces members makes the housing allowance a strong ratable income stream.280 Standard & Poor’s Public Finance Criteria 2007