DEL MAR, Calif. — It’s likely to be a pivotal year in the ongoing program to privatize housing at U.S. military bases, according to participants last week at The Bond Buyer’s Financing Military Housing Privatization Conference here.
The year 2006 will see significant changes to the way the military administers the housing allowances that provide the financial underpinning for privatized military housing deals.
The sector is the result of a major effort by the military to turn the provision of family housing on its North American bases over to the private sector, which is charged with building, renovating, and maintaining the units.
A decade into the program, 115,000 homes have been privatized, said keynote speaker Joseph Sikes, the Department of Defense’s director for housing and competitive sourcing.
The program was developed because much of the military’s family housing was falling apart under direct governmental ownership and operation.
“We built houses and let them fall apart for 50 years,” Sikes said. “The good news is the houses are being fixed.”
Under the privatization program, the military turns the housing program over to developers for long periods of time — typically 50 years; the developers then either rehabilitate or replace the dilapidated existing housing stock, a program typically financed with taxable debt.
So far, about $10.7 billion in debt has been issued, said Amy Brown of MBIA Insurance Corp., who added that her firm has wrapped $4.3 billion of that.
The key revenue stream securing the debt comes from the “Basic Allowance for Housing,” or BAH. That’s the allowance the military pays service members who live in off-base housing. In the privatized housing projects, the BAH for each tenant flows directly to developers.
This year marks the end of a five-year process known as the Cohen Initiative, during which the BAH rate for service members was steadily increased to 100% of market rates, based on a survey of housing in communities surrounding each base.
“Now we have some link between the market and the allowances that we pay,” Sikes said.
The completion of the Cohen Initiative also marks the first time that BAH rates are allowed to fluctuate downward as well as upward, resulting in a reduced BAH for communities where rental rates have dropped in recent years.
“I don’t know how many people expected the geographic rate protection to be removed,” said Merrill Lynch & Co. analyst Kurt van Kuller, who released a research report on privatized military housing last week.
The effects are moderated because individual service members do not see their housing allowance changed while they are at the same posting, he said.
For pay grade E-5 — an Army sergeant or equivalent — the 2006 BAH dropped by more than 10% in six different regions. But it also jumped 20% or more in ten regions, many of them on the Gulf Coast where Hurricane Katrina’s destruction took a great deal of housing off the rental market.
“It underscores that rent levels can be a little volatile,” van Kuller said.
Overall, van Kuller predicts a strong outlook for military housing bonds, though each deal varies.
“These are real estate investments,” he said. “They’re based on the rental market and rents do go up and do go down.”
Sikes drew a lot of attention at the conference by saying he believed the Pentagon would help to work out deals that went awry for unexpected reasons, such as a natural disaster.
“My jaw dropped to the floor when I heard that,” Chet Marfatia, a vice president for Ambac Assurance Corp., said during a later panel.
“I think Joe [Sikes] is right,” said panelist Anthony Freedman, a partner at Hawkins Delafield & Wood LLP. “But I sure as hell wouldn’t underwrite it on that basis.”
Military housing deals have typically been placed privately, with little public disclosure. But Freedman said that’s beginning to change.
He said last year’s $1.6 billion Army Hawaii Family Housing LLC deal circulated under Securities and Exchange Commission Rule 144, which allows for the sale of unregistered securities to qualified investors.
“All of the sudden, rates came down,” Freedman said.
“The market has measurably broadened to include more buyers,” van Kuller said.
Freedman said market watchers should see if state housing finance agencies get involved in the military housing market. But Freedman doesn’t think military housing can be issued on a tax-exempt basis.
“The degree of control the military retains over the housing is inconsistent with the argument that the true beneficiary is the tenant,” he said.
Panelist Kathryn Thompson, a vice president at American Eagle Communities, a developer specializing in military housing privatization, said her work has been gratifying because of its end result.
“It is really a good feeling when you see what you are doing and the quality of life you’re bringing to these families,” she said.
