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

Housingwith the Section 236 program, its asset managementprocedures, and to discuss its understandingof its responsibilities under the IRPagreement. Section 236 bond issues without anHFA as the public agency will be examined on acase-by-case basis.Termination eventsIn the IRP agreement, HUD has the ability to terminateor reduce the IRP payments for the followingevents, and Standard & Poor’s will look for the followingremedies:■ The Section 236 mortgage is extinguished. Inmost instances, this will only occur with provisionsfor the full payment or redemption of theIRP bonds. In case of a foreclosure on the mortgageloan, the IRP should continue uninterruptedto the lender.■ The project ceases to be owned by an eligibleowner. Eligible ownership entities are outlined inthe HUD notice. To avoid this risk, the lendershould covenant not to allow transfer of ownershipto a non-eligible owner. In addition, the currentowner should covenant to always remaineligible under HUD requirements.■ The lender is no longer mortgagee of record andthe HUD secretary has not approved the lender’ssuccessor as mortgagee of record. The lendershould covenant to always remain mortgagee ofrecord through expiration of the IRP or receiveprior written HUD approval of a successor.■ The public agency does not meet its obligation tomonitor the operation and condition of the projector does not certify, in a manner acceptable to theHUD secretary, that it is satisfying this requirement.The public agency must meet the requirementsof HUD as detailed in the “Oversight”section. Standard & Poor’s will need to gain theBond/Mortgage DocumentationInformation requirements will include at least the following:■ A Trust indenture. which must require that a default on revenue bonds cannotcause default on Section 236 bonds;■ A loan agreement;■ Cash flows;■ An IRP agreement;■ A use agreement;■ The original Section 236 mortgage with amortization amounts; and■ The new Section 236 mortgage.Other documentation may be requested on an as-needed basis.necessary comfort that the HFA (or other oversightentity) is capable of performing this monitoringand certification on an ongoing basis.■ The borrower or the lender defaults under anyprovision of the IRP agreement. Standard &Poor’s will rely on the oversight of the publicagency to mitigate the risks that any ongoing violationunder the IRP agreement could cause a terminationof the subsidy. Most of the provisionsof the IRP agreement entail normal operatingprocedures for Section 236 properties, and HFAshave excellent track records regarding continuationof the subsidy.■ An action of foreclosure is instituted by the lender,except in the event the lender gives to the secretaryadvance written notice of its intention to institutesuch foreclosure, and submits to the secretary inadvance a plan, acceptable to the secretary, providingfor continued eligibility of the development forreceiving the benefits of Section 236.Foreclosure should be handled through covenantsin the bond documents that necessitate followingHUD’s requirements. The senior lender must agreein a document such as an inter-creditor agreementor subordination agreement that the senior lenderwill obtain the approval of HUD before initiating aforeclosure action.The HUD secretary shall have the discretion todecrease the amount of the monthly IRP payment ifthe number of units in the project available forrental also decreases. Any such decrease in the IRPpayment shall be, to the extent possible, in proportionto the decrease in the available units.Reduction in units could be through a voluntarydecrease by the owner, units rendered uninhabitable,or the casualty/condemnation of the units. Theowner must covenant to maintain all units for rentalthrough expiration of the IRP. HFA oversight limitsthe possibility of units becoming uninhabitable.For casualty/condemnation events, propertyinsurance that fully covers all bonds including theIRP bonds with a provider rated at least investmentgrade should be in place at closing. If the borrowerdecides to rebuild, insurance proceeds will be used(with public agency oversight) to reconstruct, andthe IRP subsidy should continue uninterrupted.Standard & Poor’s will look to covenants in thedocuments to assess the potential success ofrebuilding on time and within cost.If the borrower decides not to rebuild, IRP bondswill be redeemed either in full or pro rata in accordancewith the reduction in the IRP. In order toensure that there will be no shortfalls, businessinterruption insurance covering at least nine monthsof rental payments with a provider rated at least at284 Standard & Poor’s Public Finance Criteria 2007