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Guidance | Criteria | Governments | U.S. Public Finance: Methodology For Rating U.S. Public Finance Rental Housing Bonds

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Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities

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U.S. Local Government Mid-Year Sector View: Unprecedented And Unpredictable


Guidance | Criteria | Governments | U.S. Public Finance: Methodology For Rating U.S. Public Finance Rental Housing Bonds

OVERVIEW AND SCOPE

1. This document provides additional information and guidance related to our criteria, "Methodology For Rating U.S. Public Finance Rental Housing Bonds," published April 15, 2020. It is intended to be read in conjunction with those criteria. For a further explanation of guidance documents, please see the description at the end of this article.

2. The first section includes general guidance applicable across all transaction types in scope of the criteria. Subsequent sections provide further detail on the specific application of the methodology to each property or transaction type. In particular, we detail the application of the adjustment in our coverage and liquidity reserves assessment to reflect our expectation of stability or volatility of net cash flows (hereinafter, the "volatility adjustment"). We also explain the relative importance of different sub-factors in our management and governance and market position assessments.

Key Publication Information

  • This article is related to "Methodology For Rating U.S. Public Finance Rental Housing Bonds," published April 15, 2020.
  • We may revise our rental housing bonds guidance from time to time when market dynamics warrant reevaluating the variables and assumptions we generally use in our analysis.

GUIDANCE APPLICABLE TO ALL TRANSACTION TYPES

Coverage and Liquidity Reserves

3. The methodology contemplates that we may incorporate adjustments to audited financial statements to arrive at our S&P Global Ratings adjusted net cash flow (NCF), which is used to calculate the debt service coverage (DSC) ratio and determine the initial coverage factor assessment for stand-alone transactions.

4. Examples of adjustments to revenues include, but are not limited to:

  • Reporting of bad debt as a contra-revenue in the calculation of effective gross income (EGI), rather than as an expense.
  • Increase in vacancy loss based on forecast occupancy rates derived from the development's occupancy trend, competing facilities, or certain macroeconomic demand factors relevant to the asset type.
  • Exclusion of interest income from operating revenues from pro forma financials for new sale transactions.
  • The reduction or elimination of one-time or extraordinary revenues that are not related to ongoing revenue streams and could misrepresent performance.

5. Examples of adjustments to operating expenses typically include, but are not limited to:

  • Expenses that are, in our view, necessary to the operation of the property are included for the purposes of calculating NCF and DSC, even if the expense is reported as non-operating or subordinate to debt service payment. For example, even if a transaction is structured where the flow of funds indicates insurance expense is paid after debt service, we will nonetheless include the expense as part of our adjusted NCF because insurance is an ongoing and required operating expense.
  • Property tax expense is included as an operating expense, unless documentation has been provided showing exemption from property tax has been awarded.
  • Management fees are included at the higher of the actual management fee or the industry standard management fee percentage of EGI for the asset type. If the management fee includes a subordinate incentive portion, we could exclude the incentive portion in excess of the industry standard from the net cash flow calculation.
  • Other fees or discretionary expenses, such as asset management fees or oversight agent expenses, are included as operating expenses if the benefit derived from the expense is determined to be critical to operations, even if the expense is structured as subordinate to debt service. For example, if an owner relies heavily on the duties of a third-party asset manager for oversight in addition to the management teams at the property level, it would generally be determined that the asset management role, and related expense, is essential to ongoing performance and would therefore be included as an expense in the S&P Global Ratings adjusted NCF calculation.
  • Approved withdrawals from the repair and replacement reserve are generally considered a reduction of that year's maintenance and repair expense because the NCF was stressed in the year the reserve was funded. We would not apply this credit to expenses if the repair and replacement reserve has not been fully funded as required.
  • We generally do not credit operating expenses paid from any reserve other than the repair and replacement reserve unless our NCF includes the annual funding of the reserve as a reduction to net operating income.
  • We generally reduce expenses in the amount of received insurance proceeds during the reporting period.
  • We generally reduce or eliminate one-time or extraordinary expenses that are not related to, or indicative of, ongoing operating expenses and could misrepresent performance.

6. Examples of cash adjustments to net operating income, after above adjustments to revenue and expense, to arrive at S&P Global Ratings adjusted NCF typically include, but are not limited to:

  • Funding of a repair and replacement reserve at the higher of the annual per-unit amount according to the most recent physical needs report, the required annual per-unit amount indicated in transaction documents, or the industry standard annual per-unit amount for the asset type.
  • Funding of other annual reserve(s) and mandatory accounts required in transaction documents or according to industry standards for the asset type.

7. The DSC calculation is usually based on three years of historical data. In selecting these years, we take into account: availability and timeliness of audited statements; and the financial trend over the selected period. Specifically, while we usually would base the calculation on the most recent three years of audited data, if audited information is lagging and the unaudited information meets our quality standard, we may use those data as well. Separately, in combining three years of data, we may weigh more heavily the year which best corresponds to an expected future trend. If the performance is stable, a simple average calculation is common.

8. Finally, for all stand-alone transaction types, table 1 in the criteria includes positive or negative adjustments that may affect the coverage factor assessment, allowing us to reflect a more positive or more negative forward-looking view of the coverage compared with historical results.

9. The methodology includes an analysis of liquidity reserves and applies a negative adjustment to the initial coverage factor assessment if liquidity available for debt service is less than MADS. In stand-alone transactions, this analysis typically focuses on the amount of the debt service reserve fund (DSRF). The availability of a DSRF may be subject to the counterparty risk of a surety provider, or of a bank providing the account where the DSRF is held. Where applicable, such counterparty risk exposures are analyzed under "Counterparty Risk Framework: Methodology And Assumptions," published March 8, 2019. The application of the counterparty criteria does not constrain the rating if the analysis addresses the potential default of the counterparty. In this context, this means that if we do not consider the DSRF as available in our liquidity reserves analysis, there is no further rating constraint on account of these counterparty risks.

10. Furthermore, if a transaction is structured so the final debt service payment equals MADS plus the DSRF, where the DSRF will be required to make the final debt payment, we will not consider this reserve to be available to cover liquidity risks that may arise earlier in the life of the transaction. We will therefore not consider this reserve amount in our liquidity analysis.

11. The methodology allows for adjustments to the initial coverage factor assessment for stand-alone transactions that include, but are not limited to, expected high stability or volatility of net cash flows and expected substantial or limited financial flexibility to meet debt service payments. Examples of factors that can lead to expected high stability or volatility include situations such as the property's level of deferred maintenance and projected economic environment factors that can materially affect fixed costs, such as labor and utility rates. Considerations related to financial flexibility include the ability or inability to increase rent, manage expenses, and headroom between actual and breakeven occupancy. Also, if MADS occurs in the current year and future period's debt service requirements are materially less, we could apply a positive adjustment to the coverage score to capture forward-looking coverage levels.

12. For transactions with multiple debt tranches of varied seniority, the calculated DSC (for stand-alone transactions) or parity ratio (for pool transactions) and available liquid reserves differentiates the credit quality between the tranches. However, in cases where the coverage and liquidity assessment, and therefore the anchor rating, for more than one tranche are the same, we may differentiate the tranches' stand-alone credit profile (SACP) through our holistic analysis, by applying a downward notching adjustment to the rating on subordinate bonds.

13. In certain cases, transactions with multiple tranches of varied seniority include provisions where the benefits typically associated with senior classes of debt are compromised. For example, a "springing-lien" provision, which results in a pro rata distribution of recovery proceeds following a default of the most senior tranche and/or a foreclosure on the property (whereas, typically, recovery proceeds are distributed sequentially to each tranche, by order of seniority). In such cases, we believe the recovery prospects of senior-ranking tranches are negatively affected in a default scenario. We generally apply a negative adjustment to the initial coverage factor assessment, as contemplated in the methodology for atypical structural features that may reduce recoveries. We generally apply this adjustment to all tranches, except the most junior tranche affected by the provision, because recovery prospects would actually be improved for this tranche.

Management and Governance

14. Table 1 displays what best describes "very strong" or "strong," "adequate," and "weak" or "very weak" management and governance assessments. We would assign a "very strong" ("very weak") assessment if there is a combination of the stronger (weaker) characteristics, or if we view a particular strength (weakness) to be particularly significant to the transaction's credit profile.

Table 1

Management And Governance Assessment: Factors And Examples
Management effectiveness
Very Strong/Strong Adequate Weak/Very Weak
Management has considerable expertise, experience, and a record of success in operating the specific property type for which they are engaged. The management entity has good depth and breadth across its major lines of business. Management has sufficient, but unexceptional, expertise and experience in operating its major lines of business. Management's depth or breadth is limited in some areas. Management lacks expertise, experience, or resources compared with industry peers. Management's knowledge of the property, processes, and residents is superficial. The enterprise has a track record of deviation from policies, procedures, and budgets. The loss or frequent turnover of key personnel could lead to mismanagement or operational disruption. Communication with management is difficult, and can result in incomplete, inaccurate, or untimely data and information.
The management organization has a reputation and record of market leadership and of achieving financial/operational goals, supported by key performance indicators. The organization and the properties under management are successful relative to peers. Organizational plans lack depth or specific financial/operational goals. The management organization has a record of achieving most financial/operational goals. The organization's management approach is less sophisticated than that of industry leaders. There is limited evidence that organizational plans exist, or plans are superficial, lack detail and are unclear. Operational and financial strategy is inconsistent with the organization's capabilities or market conditions. The organization experiences abrupt or frequent changes in strategy, acquisitions, divestitures, or restructurings. Management often fails to achieve its financial/operational goals. Management does not possess or does not have access to resources generally needed to successfully manage the property.
Management has successfully instituted policies that mitigate key risks, and has set rigorous and ambitious, but reasonable, standards for operational performance. The entity generally remains free of regulatory, tax, reporting, or legal infractions and has stable relationships with regulatory authorities. Management has set standards for operational performance that are achievable and similar to industry norms. Management maintains average risk management function and resources relative to those of peers. Management's resources, discipline, or commitment to achieve set standards is below that of peers. Set standards for financial or operational performance are superficial or lack specificity, or set standards are weaker than those of peers. Evidence of limited or superficial risk-management infrastructure, process, or efforts relative to those of peers.
Owner/Sponsor/Related party role, responsibilities, involvement and incentives in the project
Very Strong/Strong Adequate Weak/Very Weak
The transaction benefits from a high level of oversight and incentive for project success. There is a strong link to and support from related party/other, which is supported by formal contracts/agreements. The related entity has substantial resources, tools, ability and/or interest to support the success of the project and is likely to, or may provide financial support to the project. There is solid evidence of strategic alignment between ownership and management of the property. Neither strong nor weak. The transaction is characterized by limited or ineffective project oversight compared with industry peers. Related party/borrower/ownership entity has a weak link or provides little support to the project. The related entity has limited or no financial stake in the project or lacks sufficient resources to support project success in the long term. The governing entity is not likely to, or incapable of, intervening if the property is being mismanaged. The mission of the governing entity is not aligned with the property type.
Financial reporting, internal controls, and transparency
Very Strong/Strong Adequate Weak/Very Weak
Audited financial reports are timely, accurate, and, along with supporting schedules and documents, provide detail sufficient to support quality financial statement analysis. Project owner/sponsor or representatives are responsive and transparent on matters relevant to project operations and financial performance. Neither strong nor weak. Evidence of financial statement reporting that is not timely, inaccurate, incomplete, presented in a format that is not understandable, or is inadequate for quality financial statement analysis. History or evidence of failure to comply with disclosure requirements for projects within the governing entity's portfolio.

15. Our analysis focuses on the key parties' track record of developing, constructing, owning, and/or managing similar properties. We focus on historical performance because we have typically observed similar management quality across properties with the same developer/manager/owner. A strong track record relative to that of peers may support a "strong" or "very strong" management and governance assessment. Conversely, a variable or poor track record in developing, constructing, owning, and/or managing other properties in which the key parties are associated generally results in a "weak" to "very weak" management and governance assessment. For example, if an owner has incurred a payment default on one of its transactions, that will be incorporated in the management and governance assessment for all transactions associated with that owner.

16. Due to our reliance on third-party and issuer-provided reports, our assessment of management and governance is typically informed by our assessment of the transparency and reliability of these reports. For example, if we assess the information provided by a third-party provider to be consistently unreliable, we will generally, all else equal, assign a weaker management and governance score.

Market Position

17. Table 2 sets out the typical characteristics of "very strong," "adequate," and "very weak" assessment levels for each factor of the market position assessment considered, according to the methodology.

Table 2

Market Position Assessment
Very strong Adequate Very weak
PROPERTY-SPECIFIC CHARACTERISTICS
Property age and condition Excellent condition with no deferred maintenance Average condition with some deferred maintenance Poor condition with substantial deferred maintenance
Curb appeal Greatly superior quality, size, amenities, and/or services relative to comparable projects Average quality, size, amenities, and/or services relative to comparable projects Greatly inferior quality, size, amenities, and/or services relative to comparable projects
Observed occupancy rates Occupancy consistently at or close to 100% High and stable occupancy rates Low and/or volatile occupancy rates, which we believe indicate weakness in demand for the rental units
DEMAND AND SUPPLY CONSIDERATIONS
Demand Considerations
Project rents versus market rents Increasing market rents, and/or low project rents, relative to market rents, support strong future rental income from the rental units The relative position of project rents versus market rents does not significantly affect our outlook for future rental income from the rental units Declining market rents, and/or high project rents relative to market rents, represent a risk to future rental income from the rental units
Trend in targeted population Growth in the targeted demographic in the local area indicates strong future demand for the rental units Local trends in the targeted demographic do not significantly impact our outlook for demand for the rental units Local trends in the targeted demographic represent a risk to future demand for the rental units
Supply Considerations
Supply of competitive properties Local under-supply of housing alternatives for the targeted demographic indicates strong future demand for the rental units Local supply dynamics do not significantly affect our outlook for demand for the rental units Local over-supply of housing for the targeted demographic represents a risk to future demand for the rental units
Examples of factors that may result in an adjustment to the market position anchor
Positive factors Negative factors
Expected improvement in market position, for instance due to favorable local economic trends or property-specific considerations not already captured in the initial assessment Expected deterioration in market position, for instance due to unfavorable local economic trends or property-specific considerations not already captured in the initial assessment
Material but partially mitigated environmental, seismic or construction risks
Market Position: assessing property-specific characteristics

18. We base our assessment of property age and condition on the current condition of the property. In the case of a property undergoing a major rehabilitation, we will generally improve our assessment only upon completion of the work.

19. Our analysis of curb appeal focuses on the unit-level and common areas. Even if our assessment of the property's condition is favorable, our assessment of curb appeal may be less favorable, for example due to out-of-style/less attractive appliances, flooring, fixtures, etc.

Market position: adjustments to the initial assessment

20. As contemplated in the methodology, a negative adjustment to the initial market position assessment may result if there are material, but partially mitigated, environmental, seismic, or construction risks. Partially mitigated can refer to, among other things, the level and quality of insurance coverage; the use, or lack of, guaranteed maximum price or lump sum contracts; restrictions on construction fund disbursements; the availability of capitalized interest to pay debt service; depth of recovery and continuity plans in place; and other proactive steps taken by owners/managers to prevent maximum damage and destruction due to the exposed risk.

GUIDANCE APPLICABLE TO SPECIFIC TRANSACTION TYPES

Affordable Housing: Tenant Rental

Coverage and Liquidity Reserves: Application of the volatility adjustment

21. In our view, cash flow volatility risks for tenant rental developments are mostly related to the scale of the development and operating expenses. In particular, for smaller scale properties (typically fewer than 300 units), we have observed a higher frequency of large and unplanned increases in the maintenance and repair line item as well as contract expenses and utilities. For this reason, we generally apply a negative adjustment to the coverage assessment for small-scale transactions, as contemplated in the methodology, to account for higher cash flow volatility risks.

Management and Governance

22. Our analysis considers the level of oversight and incentive for success. We consider that the active oversight of an experienced and involved low-income housing tax credit (LIHTC) partner is likely to have a favorable impact on the management of a housing development. Where a strong LIHTC partner is present, we will likely assign a stronger management and governance assessment than in the absence of an LIHTC partner. However, the presence of a partner does not preclude that a "weak" or even "very weak" assessment could be assigned, if other risks are present.

Market Position

23. Our market position assessment for affordable housing properties reliant solely on tenant rent focuses on property-specific considerations, and places particular emphasis on site visits and the review of third-party reports. Tenants generally have a greater choice of properties compared with federally subsidized properties; therefore, factors such as physical condition, curb appeal, amenities, and location are more relevant, in our view, in predicting occupancy trends. For example, close proximity to public transportation, grocery stores, schools, and employment opportunities may lead us to assess the market position as "strong" or "very strong," whereas we would likely assess the market position of a property that is more isolated or in disrepair as "weak" or "very weak."

24. Our market position assessment also emphasizes the comparison of property rents to market rents, as the affordability of the rental units is a key driver of demand for the property. If we assess that property rent levels represent a risk to future rental income, our overall market position assessment will likely be "weak" or "very weak."

Affordable Housing: Mobile Home Parks

Coverage and Liquidity Reserves: Application of the volatility adjustment

25. Mobile home parks typically exhibit very high and consistent occupancy rates due to the low turnover of residents. Where this is demonstrated by park-specific historical data, we typically apply a positive adjustment to the initial coverage factor assessment to reflect the expected high stability of net cash flows.

Management and Governance

26. Our analysis of management and governance for mobile home parks generally places less emphasis on the sophistication of the property manager, relative to other property types. Property management of mobile home parks is generally more straightforward than management of other asset types because tenants own the housing units and are renting only the space at the mobile home park. Management is not responsible for in-unit upkeep, maintenance, and repair.

Market Position

27. Our market position assessment for mobile home parks, where residents own the home and are paying rent for the use of the land owned by the mobile home park, focuses on observed occupancy rates, and particularly on historical turnover rates. Generally, among the transactions that we currently rate, mobile home parks benefit from high occupancy and low turnover rates, due to resident ownership and the logistical and financial challenges involved in moving a mobile home. Under the methodology, we therefore typically assess the market position for mobile home park transactions as "strong" or "very strong."

Affordable Housing: Federal Rent Subsidy

Coverage and Liquidity Reserves: Application of the volatility adjustment

28. In our view, cash flow volatility risks for federally subsidized properties are mostly related to the scale of the property and operating expenses. While the federal subsidy can help create a stable revenue stream, there is little oversight or control related to expenses. In particular, for smaller scale developments (typically fewer than 300 units) we have observed a higher frequency of large and unplanned increases in the maintenance and repair line item as well as contract expenses and utilities. For this reason, we generally apply a negative adjustment to the coverage assessment on small-scale developments, as contemplated in the methodology, to account for higher cash flow volatility risks.

Management and Governance

29. In evaluating the owner/sponsor's experience, we focus on its track record with the specific federal program, including subsidy renewal. If an owner has successfully maintained and renewed federal subsidy contracts, it is more likely it will continue to do so, in our view. The administrative and reporting requirements can be complicated and burdensome and the loss of the federal subsidy detrimental to the transaction. Therefore, the management and governance score would usually be no better than a '4' where the owner/sponsor does not have ample experience with the federal subsidy program or where the owner/sponsor has experienced difficulty or delays in maintaining and renewing existing contracts.

30. Our analysis also considers the level of oversight and incentive for success. We consider that the active oversight of an experienced and involved LIHTC partner is likely to have a favorable impact on the management of a property. Where a strong LIHTC partner is present, we will likely assign a stronger management and governance assessment than in the absence of an LIHTC partner. However, the presence of a partner does not preclude that a "weak" or even "very weak" assessment could be assigned, if other risks are present.

Market Position

31. Our analysis of property-specific characteristics for affordable housing properties with federal rent subsidies generally places more emphasis on property age and condition than on observed occupancy rates. This is because historical occupancy rates at federally subsidized housing are often very high, even if a property's condition is deteriorating, due to the very high demand for affordable housing. The poor condition of a property may, however, lead to a sharp drop in occupancy from historical levels if higher-quality competing properties become available, or if some units become uninhabitable. Poor physical condition may also jeopardize continued eligibility for the federal subsidy, for example, under the terms of a Housing Assistance Payments contract.

32. Our analysis of physical condition is based on the information obtained during site visits to the property, as well as the review of federally prepared physical inspection reports. The Real Estate Assessment Center (REAC) assesses the physical condition of all multifamily properties within the Department of Housing and Urban Development portfolio, based on a scale from 1 (worst) to 100 (best). REAC assessments take place every three years for properties with a score of 90 or better; every two years for a score between 80 and 89; and every year for scores of 79 or below. We generally view properties with inspection scores of 79 or less to be of "weak" or "very weak" physical condition, negatively affecting our view of market position regardless of occupancy and competitive landscape, resulting in a market position score no better than '4'. Conversely, while a score of 90 or higher is viewed as a credit positive and could translate into a "strong" or "very strong" property-specific assessment, it will not, in and of itself, have an overarching impact on the overall market position assessment when other risk factors are present.

33. Our analysis of demand and supply considerations focuses on trends in the local low-income population, relative to the supply of competitive properties. Our demand analysis places less emphasis on the level of property rents versus market rents, relative to our analysis of other property types, because, based on the federal subsidy, the rent paid by tenants is a defined portion of their income.

Age-Restricted Independent and Assisted Living Rental Housing

Coverage and Liquidity Reserves: application of the volatility adjustment

34. In our view, cash flow volatility risks are generally higher for age-restricted housing, and, specifically, assisted living and memory care properties, compared with other rental housing asset types. In these property types, units can become vacant suddenly and fill slowly. It is often more difficult to maintain waitlists and occupancy can be very volatile due to health and age-related move-outs. When occupancy drops, revenue declines are typically immediate, whereas any offsetting reduction in expenses often lags, causing negative pressure on financial stability and performance. For this reason, we generally apply a negative adjustment to the coverage assessment for these property types, as contemplated in the methodology. This means that, all else equal, a higher DSC ratio is necessary to support a given assessment level relative to property types with lower volatility risks.

Market Position

35. The analysis of property-specific characteristics includes an evaluation of appropriate amenities for the facility's tenants, in addition to the standard requirements of the Americans with Disabilities Act. For example, we assess whether assisted living facilities with memory care units have appropriate safety features in place.

36. In analyzing demand and supply considerations, we recognize that age-restricted senior living properties typically have higher rental rates compared with other property types covered by the methodology. Furthermore, as the level of care increases (ranging from independent living to memory care) monthly rents can far exceed market rent for an area. Therefore, we typically place less weight on the property rent versus market rates of pure rental units, and higher emphasis on the presence and impact of competing facilities in the area offering comparable units and levels of care and the property's rental rates compared with those of these competing units.

Multifamily Loan Pools

37. Multifamily loan pools can either be static or managed. The issuer for bonds backed by managed multifamily loan pools is often a state or local housing finance agency (HFA). HFAs can issue bonds backed by multifamily loan pools on a parity basis within a general resolution or as conduit debt. While HFAs may be the conduit issuer or loan purchaser in static pools, the obligors in these transactions are generally non-HFA entities and are structured where no additional bonds may be issued or additional loans may be added to the pool.

Management and Governance

38. Our assessment of related parties' effectiveness for pooled transactions is based on obligor-level and transaction-level related parties responsible for loan servicing and administration. Obligor is defined as the ultimate borrower on the debt obligation and is not, for example, a tax-exempt conduit issuer. The focus on obligor and transaction-level parties reflects that, unlike stand-alone transactions, multifamily pool transactions depend on the collective performance of multiple properties located in a variety of markets, and controlled by separate borrowers, owners, and managers. The obligors in pooled transactions generally perform due diligence on the managers and owners at the property level. Specifically, for multifamily pool transactions issued as part of an HFA parity resolution, we base our management and governance assessment on the board, leadership, and senior management of the HFA. For non-HFA multifamily pooled transactions, our evaluation of management and governance is generally based on our view of the servicer(s) and/or sub-servicer(s). In addition, in the case of pass-through conduit issuances, the involvement and incentives of the conduit issuer may affect our assessment of the transaction's management and governance.

Market Position

39. To evaluate property-specific characteristics of a loan pool, we rely heavily on third-party, issuer-provided property-level data, and servicer reports. In addition, for smaller, less diverse pools, our evaluation of property-specific characteristics generally includes site visits to a representative sample of the underlying pool properties, in terms of type, location, subsidy, physical condition as indicated in third-party reports, and borrower. The sample generally includes properties whose loans comprise a minimum of 50% of the pool principal loan/bond balance and, where applicable, properties with both very high and very low levels of deferred maintenance according to third-party reports.

40. Assets that comprise loan pools are often in more diversified locations than those of stand-alone transactions. Our market position assessment considers the supply and demand characteristics of the different market areas in which the pooled properties are located, with the emphasis on the locations that represent the largest share of the pool by loan balance. State HFAs generally issue bonds backed by multifamily loan pools where all of the underlying assets are located within the issuer's state. Therefore, in these cases, we will look to the economic outlook and demographic trends of the state when considering supply and demand dynamics.

Privatized Military Housing

Coverage and Liquidity Reserves: Application of the volatility adjustment

41. We generally apply a positive adjustment to the coverage score of military housing based on the inherent financial performance stability assuming the following:

  • Service members' basic allowance for housing (BAH), an allowance legislated by Congress as part of military service members' compensation with a long history of congressional support with no funding delays;
  • The financial support from the DoD through the direct transfer of money from the DoD to the trustee to pay bondholders, and the use of appropriate protections, as needed, for lenders against base closure, realignment, or deployment; and
  • The typically larger scale of military housing developments, which generally lessens cash flow volatility.

42. Our coverage assessment will also consider the historical trend and outlook of the applicable BAH rates where, for example, realized and expected declines in BAH allowances could indicate future deterioration in financial performance resulting in a negative adjustment to the coverage score.

Management and Governance

43. Our assessment of management and governance for military housing includes an evaluation of the link and oversight of military departments. Often privatized military housing developments have various types of DoD support, such as donated or leased land at nominal cost, donated housing units, cash equity investments in the joint ventures that own the housing, subsidized utilities or infrastructure, and below-market rate subordinate debt. The DoD has the legislative authority to and may make available loan guarantees for these developments in the event of mortgage defaults due to base closures, base realignments, or Armed Forces deployments. We view this additional oversight and incentive for success as a credit positive, which can result in a more favorable management and governance score.

44. In our view, owner/operators of military housing are typically well-established entities with sophisticated organization structures, due to the vetting process and barriers to entry in place by the DoD. Generally, military housing owners also fulfill the roles of asset manager and property manager, speaking to the size and capabilities of the ownership entity.

Market Position

45. For military housing developments, the trend in the targeted population of military personnel will remain stable as long as the related base remains operational. Our assessment therefore focuses on our view of the essentiality of the related military base, as analyzed under our methodology for assessing U.S. federal future flow securitizations (see Related Criteria). Our analysis may also consider any provisions made for alternative use of the housing units, in the event of a military-related event such as base closure, base realignment, or long-term military deployment.

46. We typically view the market position of military housing developments favorably due to strong demand at most military bases, as a result of DoD contributions that enhance feasibility while offering below-market rents. Military housing developments also typically offer amenities that are not always available in other affordable rental housing, such as modern appliances, storage areas, and community centers. The proximity of the development to the related military base can also play an important role in our assessment of curb appeal.

RELATED CRITERIA AND RESEARCH

Related Criteria
  • Methodology For Rating U.S. Public Finance Rental Housing Bonds, April 15, 2020
  • Federal Future Flow Securitization, March 12, 2012
Related Research
  • Criteria And Guidance: Understanding The Difference, Dec. 15, 2017

This report does not constitute a rating action.

This article is a guidance document for Criteria (Guidance Document). Guidance Documents are not Criteria, as they do not establish a methodological framework for determining Credit Ratings. Guidance Documents provide guidance on various matters, including: articulating how we may apply specific aspects of Criteria; describing variables or considerations related to Criteria that may change over time; providing additional information on non-fundamental factors that our analysts may consider in the application of Criteria; and/or providing additional guidance on the exercise of analytical judgment under our Criteria.

Our analysts consider Guidance Documents as they apply Criteria and exercise analytical judgment in the analysis and determination of Credit Ratings. However, in applying Criteria and the exercise of analytic judgment to a specific issuer or issue, analysts may determine that it is suitable to follow an approach that differs from one described in the Guidance Document. Where appropriate, the rating rationale will highlight that a different approach was taken.

Analytical Contacts:Joan H Monaghan, Centennial + 1 (303) 721 4401;
Joan.Monaghan@spglobal.com
Marian Zucker, New York (1) 212-438-2150;
marian.zucker@spglobal.com
Raymond S Kim, New York (1) 212-438-2005;
raymond.kim@spglobal.com
Criteria Contacts:Olga I Kalinina, CFA, New York (1) 212-438-7350;
olga.kalinina@spglobal.com
Andrew O'Neill, CFA, London (44) 20-7176-3578;
andrew.oneill@spglobal.com
Andrea Quirk, London (44) 20-7176-3736;
andrea.quirk@spglobal.com

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