Using Strong Credit Ratings to Expand Opportunities for Public Housing Authorities

Despite an intricate and sometimes lengthy process, obtaining a favorable credit rating can provide immense benefits for public housing authorities.

“It changed our whole approach to financing,” Scott Scharlach, chief operating officer of the Columbus Metropolitan Housing Authority (CMHA), explains. “We can go from conception of an asset to closing and owning a property in less than 90 days…and we are able to limit the equity we bring to the table because the credit rating allows you to issue bonds based on the general revenues of the housing authority.”

A credit rating is favorable for housing authorities, as it enables them to borrow funds at more favorable interest rates or issue tax-exempt bonds to fund construction, demolition, and upgrade efforts. These powerful tools combine to provide a “huge lever,” says Mary-Margaret Lemons, president of Fort Worth Housing Solutions. “You can use it creatively and quickly. Tax credits can be years-long processes to go through. They have their place, but this is an additional tool to add to the toolbox that can be used in conjunction with, or separately to, the tax credit process.”

Lemons stresses that the overarching benefit of acquiring a favorable credit rating is access to the bond markets, which can enable authorities to bring more affordable housing to communities more quickly.

“The Dallas Fort Worth metroplex is growing quickly and we were limited in the affordable housing that we could create ourselves and with development partners,” she says. “Having this tool expands opportunities.”

Sam Adams, managing director of KeyBanc Capital Markets Public Finance, provides information and guidance to housing authorities and other agencies considering seeking a credit rating from Standard & Poor’s (S&P) or other rating agencies. He says a credit rating can be a powerful tool for many housing authorities, but not all. Those who obtain a rating need to be careful not to take on too much debt too quickly, which would immediately lower their rating.

“There are many housing authorities that could likely secure an investment-grade rating as-is right now,” explains Adams. “But as soon as they start using it, they would likely change their financial profile quite quickly…because they took on too much debt.”

Detailed, Lengthy Process
The process of applying for a credit rating can be long and laborious, Lemons and Scharlach say, but well worth the effort. Adams and his team at KeyBanc provide information to housing authorities and others on what information the rating agencies may ask for during the rating application process.

“A lot of my work is identifying housing authorities that likely would benefit from a credit rating and helping them to understand why and how to secure a rating,” Adams says. “And then, more importantly, once they have their rating, we examine the benefits of having a rating in the market.”

Adams and his team will initially ask for publicly available audits when first working with an authority.

“We are able to give them an analysis quickly and preliminarily,” Adams says. “Then, we typically do…a mock rating process, preparing pretty much everything that is needed to get rated.” This process, says Adams, helps housing authorities present “their best version of themselves.”

Adams says S&P typically performs a “two-year look-back” of the authority, studying the finances of its current year and those of the two preceding years. The rating agency may also examine the housing authority’s strategic plans to understand its intended direction.

“If you are a housing authority and maybe have a new executive director or a new mission from the board and will be going on a rapid-fire acquisition plan, it is important to communicate that, so you are not getting rated and then you are downgraded,” explains Adams.

Transparency with rating agencies is key, says Adams. If a housing authority had a bad operating year, it is critical that the authority have an explanation on hand. Likewise, if the authority was the subject of negative media attention, an explanation is needed.

“We always tell people, ‘Bad news is manageable, but surprises aren’t great,’” Adams says. “You don’t have to be perfect—large real estate organizations rarely are—but you have to be transparent.”

Though the credit rating process is a “fairly large investment of time up front,” Adams says that once authorities have the rating, it does not take nearly as much time to maintain it.

Scharlach and Lemons say the rating process is laborious, but not onerous.

“It was not difficult. It was really just gathering all the information that they need to review…the books, financial reports, policies and procedures,” says Scharlach, who went through the rating process with CMHA a few years ago. “We had to provide the information and answer all of their questions for about a six-month period.”

Lemons says that meeting with the rating agency team is “engaging,” with “a lot of due diligence work and providing a ton of information,” including background on their executive team.

“Our development and finance teams were able to get that together,” explains Lemons. “We then hosted a site visit for (the rating agency team) to come and talk to our senior management and to see some of the work that we have already done and the developments that are on the ground.”

Rating Makes Authorities More Nimble
Lemons and Scharlach state that once their housing authorities received a credit rating and were able to enter the bond market, they were able to swiftly close deals and bring projects online.

Before the rating, “we were using traditional financing sources where you put down ten, 15, 20 percent equity,” says Scharlach. “You use your Fannie Mae or Freddie Mac products or your local banking resources. While we were doing a decent job at that kind of financing, we had no idea what getting a credit rating would do for us.”

Scharlach says that deals that used to take two to three years to put together with investors, Low Income Housing Tax Credits and other means now take as little as 90 days, since a rated agency can issue the bonds itself, rather than going through other avenues to secure financing. He says the housing authority is now able to do “quick-strike acquisitions.”

“We can buy these properties quickly, almost immediately,” he says. “We can restrict the rents at certain levels of area median income, like 30 percent of the units at 80 percent AMI, and then we can take housing vouchers in a certain percentage of the units.”

Lemons says Fort Worth Housing Solutions received its credit rating in the fall of 2024 and began using it almost immediately to assemble financing packages using bonds at lower interest rates.

“We’ve been pretty aggressive,” she says. “We didn’t do this just to say we have a credit rating. As soon as that tool became available, we deployed it. …It makes financing easier because you don’t have to go out to investors.”

Bond financing can comprise 100 percent of the capital stack for a project, a boon for projects that might otherwise require multiple funding sources with individual regulatory requirements.

Lemons says that one repercussion of having a bond rating is that housing authorities must closely monitor the health of their liquidity.

“Typical housing authorities aren’t necessarily concerned about their liquidity,” she says. “Going forward, that is a concern for us because we want to be able to maintain our rating or be upgraded, not downgraded.”

Adams says that housing authorities considering getting a credit rating would do well to speak to other peer authorities that have gone through the process. “You can talk to lawyers, bankers, advisors, and consultants all you want, but speaking to a CFO, CEO, [or] COO of another housing authority that has gone through rating—and more importantly, used bonds using their rating—is the single best guidance we can give,” he says.