The Performance Assessment is conducted to analyze a project’s operations and performance. A project’s performance can be rated on a scale of 1 to 5, with 5 being the best. The specific criteria for the ratings are as follows:

Debt Service Coverage Ratio (“DSCR”): 

DSCR represents a project’s ability to make mortgage payments. DSCR is the ratio of net operating income divided by debt service payments. It is calculated as:Net Operating Income before Depreciation and Interest Expense Debt Service (Principal + Interest + Mortgage Insurance Premium)

Based on DSCR, a project’s financial performance is rated in the following scale:

a) 1.30 or above 5
b) 1.20-1.29 4
c) 1.10-1.19 3
d) 1.00-1.09 2
e) .99 or below 1

A well-performing project should have DSCR at least 1.10 or above the ratio projected by the underwriting pro forma.

REAC Inspection Score:

If a project is subject to REAC inspections, the REAC score is an indicator whether the project is in decent, safe, and sanitary condition:

a) 90-100 5
b) 80-89 4
c) 70-79 3
d) 60-69 2
e) 0-59 1

A well-performing project should have a REAC score of 75 or above. A score of 60-74 indicates that the project has marginal physical condition. A score below 60 indicates that the owner/management agent fails to maintain the project in a decent physical condition.

Percentage of Uncollected Rent (POUR):

POUR is the percentage of revenue that is not earned due to vacancy and poor collection. It measures effectiveness of property management in terms of leasing and rent collections. It is calculated as:

Vacancy Loss + Bad Debt Expense
Total Potential Rental Revenue

Based on POUR ratio, a project is given the following performance rating:

a) 4% or below 5
b) 5% 4
c) 6-8% 3
d) 9-10% 2
e) 11% or above 1

POUR should be no more than 5% for a well-performing project. If it is in the range of 6%-10%, the project’s performance is marginal. If it is above 10%, the project is deficient in leasing and rent collections.

Operating Expense Level:

The operating expense level is measured on a per unit month (PUM) basis. Holding the revenue level constant, higher operating expense means less cash available for debt service payments.Assuming that a project does not have separate security contracts and is not paying more than 25% of utilities for the individual units, performance rating for the project based on its operating expense is as follows:

a) $500 & Below 5
b) $501-600 4
c) $601-700 3
d) $701- 800 2
e) $801 & Above 1

If the project has a security contract or pays more than 25% of utilities for the residential units, the cost for the security contract or the portion of utilities over 25% of the total shall be subtracted from the operating expense level calculation and the adjusted expense level shall be used to measure the project’s performance.

2) Risk Rating

After the above review and assessment, a project can be placed in one of the following categories:

A Category: 

Projects in this group are well performing. The risk for mortgage default is low. Debt service coverage is at or above the ratio projected in the underwriting pro forma. For the most recent two years, there is no history of monetary or covenant defaults; the project (if applicable) has received a REAC score of 75 or above.

B Category: 

Projects in B Category have no immediate risk for monetary default, but need more frequent monitoring and oversight. Projects in this group are underperforming in one or more areas such as debt service coverage below the ratio projected in the underwriting pro forma; some history of covenant defaults although the defaults have been cured; less than 75 REAC score.

C Category: 

Projects in this group have serious performance deficiencies and have a high probability for mortgage default. The projects exhibit one or more of the following characteristics: debt service coverage ratio below 1.0; some history of monetary defaults although the defaults may have been cured; REAC score is below 60; POUR is 11% or more; trade payables are more than two months of rental income; delinquent in payments for utilities.

3) Watch List Criteria

Based on performance review and risk rating analysis, the high risk or underperforming projects will be placed on the Watch List. This List shall cover all projects in the C Category as well as some projects in the B Category. In summary, a project exhibiting any of the following indications will be placed on the Watch List:

  • A DSCR of 1.0 or below;
  • REAC score of 60 or below. If not subject to REAC, the project failed inspections by DCHFA or another government or regulatory agency;
  • POUR is 9% or above;
  • Operating expense, adjusted for utilities and security contracts, is above $600 per unit month;
  • Any history of mortgage defaults;
  • Project rents are abnormally low and the Owner has not implemented adequate rent increases;
  • Repeated failures in submitting reports required by DCHFA and HUD;
  • The project’s outstanding trade payable is more than two months’ rental income;
  • Serious findings are reported in the audited financial statements;
  • Other indicators as determined by DCHFA.
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