Overview of Affordable Housing Programs
Standard & Poor’s (S&P) has rating criteria for municipal and corporate bonds, the proceeds of which are to be used to finance the acquisition, refinancing, or renovation of affordable rental housing communities. These affordable housing program transactions (“AHP” or “AHPs”) do not utilize credit enhancements (such as municipal bond insurance) but rely on the strength of the underlying real estate and its associated cash flows. Such AHP transactions became eligible for investment grade ratings by S&P in the early 1990s.
While the S&P unenhanced AHP program has been in existence for decades, AHP bond transactions have been on the rise in the past several years. S&P’s AHP program allows nonprofits, as well as for-profits, to achieve investment grade ratings for publicly sold bond issues and can be used as a reliable source for acquiring or refinancing and improving existing properties. Ultimately, this provides quality, affordable multifamily facilities for moderate and low-income individuals and families.
S&P’s Revising Rating Criteria for AHP
On June 19, 2014, S&P released new criteria for the rating of affordable multifamily housing bonds. Included in the scope of the criteria are unenhanced AHPs, federally subsidized housing projects, such as apartment communities that enjoy Section 8 project based rental assistance contracts, and privatized military housing projects. Under these guidelines, S&P publishes rating reports on all transactions reviewed under the revised criteria. Such reports for unenhanced AHP programs include two major criteria: (1) real estate analysis and valuation and (2) enterprise and financial risk profiles. These two overarching criteria result in an assessment of the following factors:
- Drivers of housing demand;
- Strength of local housing market;
- Level of on-going government support
- Strategy and management;
- Construction risk (if applicable);
- Loss coverage;
- Financial strength;
- Asset quality;
- Operating performance; and
- Financial policies and practices.
One of the key analytical components of the criteria is the real estate valuation portion, in which the underlying real estate collateral’s credit quality is evaluated. This involves deriving the S&P net cash flow, debt service coverage, and loan-to-value ratio. The indicative rating outcome for unenhanced AHPs results from the combined assessment of the financial and enterprise risk profiles; however, certain factors affecting the criteria may result in overrides or adjustments.
S&P rated AHP bonds are an attractive financing alternative since, generally speaking, these bonds rated by S&P are non-recourse to the sponsor, may generate up to 100% of the costs of acquiring or refinancing and improving the project, and may have terms as long as thirty-five (35) years.
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