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

Federally Subsidized Housing Programs■posed by the proposed construction. This analysismay include Standard & Poor’s using a consultingengineer to determine these risk andpotential mitigants.The demand analysis should include how manyunaccompanied permanent party personnel areassigned to the base and/or are eligible for theprivatized housing, a description of the housingfor unaccompanied personnel currently available,and occupancy statistics. In addition, the marketstudy should include information on the housing■■■alternatives for these personnel available in themarketplace.Local housing market and alternate use for thereal estate (layout, amenities, and location).The revenue and BAH structure will be analyzedto determine future rental stream.The bond and legal structure for these transactionsis expected to be similar to family housing,including the level of reserves, and legal documentationsuch as the ground leases, operatingagreements, and trust indentures. ■Federally Subsidized Housing ProgramsStandard & Poor’s Ratings Services rates singleassetand pooled financings of properties supportedby federal subsidies, such as HUD Sections 8and 236. Ratings range from low to high investmentgrade, with lower ratings assigned to singleassettransactions and higher ratings assigned tostate housing finance agency (HFA) pools.Most federally subsidized properties are includedin HFA loan pools, often in conjunction withunsubsidized, credit-enhanced and even single-familyloans. HFAs have a strong record of managingthese asset pools, closely monitoring loan performanceand proactively taking steps to ensure financialstability. Single-asset financings are typicallydone through local authorities, municipalities andnot-for-profits. Strong properties with strong ownersand managers assisted by project-based federalsubsidies can achieve investment-grade ratings, evenwhen the contract is not coterminous with bonds.The rating criteria for federally subsidized projectfinancings is similar to unenhanced affordable multifamilyhousing criteria with refinements as indicatedbelow. Standard & Poor’s analysis focuses onreal estate quality, legal structure, bond structureand reserves. Real estate quality includes a sitereview, measures of financial feasibility, marketanalysis, property management, ownership, insurancecoverage and environmental concerns.Analysis of the federal subsidy is an importantaspect of analyzing real estate quality, and focuseson two key factors:■ Depth of the subsidy and how it affects the relativeaffordability of the project. The deeper thesubsidy, the greater the affordability, whichargues for lower debt service coverage levels thanneeded to support unsubsidized properties; and■ Subsidy mechanics, including the federal appropriationsprocess, contract provisions, such astermination events and regulations affecting keyfinancial aspects, such as rent increases.For a full discussion, refer to the criteria,“Unenhanced Affordable Housing Project Debt”.Project-Based Section 8There are key differences that affect ratings onbonds supported by historical Section 8 contractsand the contracts HUD is entering into today,specifically appropriation risk, contract term andthe rent increase mechanism. In the original program,Section 8 funding was typically set-aside atthe outset of the contract for its entire term, significantlyreducing appropriation risk. The term of thecontract was often equal to bond maturity and terminationrisk was restricted to poor owner performance.Rents were originally increasedaccording to an annual adjustment factor. In lateryears, HUD instituted rent ceilings, which had theimpact of severely restricting, and even freezing,rent increases.More recent financings are for developmentswith contracts that have expired and been extendedunder the Multifamily Assisted Housing Reformand Affordability Act of 1997 (MAHRA). Thesecontracts are subject to annual appropriation andtend to be for shorter terms, intensifying terminationrisk. While appropriations need to be madefor this type of contract each year, appropriationrisk is not a limiting factor to low to mid-invest-www.standardandpoors.com281