Proposed Military Base Cuts Are Credit Negative for Privatized Military Housing

Proposed Military Base Cuts Are Credit Negative for Privatized Military Housing

Last Monday, US President Barack Obama released his budget request for fiscal 2013, which includes an initiative to resize military forces and reassess the structure of military bases through a process known as Base Realignment and Closure (BRAC). A reduction in base personnel from a downsizing or closing of military bases is credit negative for private military housing financings, as they rely on a sizable and consistent presence of military households to maintain demand for such housing.

Privatized military housing bonds finance the construction and renovation of on-base housing for military personnel and their families. Most military housing projects are privately owned and managed under contracts with the US Department of Defense (DoD). The financings are secured by rental revenues, which consist of Basic Allowance for Housing (BAH) stipends paid to military service members. We maintain ratings on 24 military housing financings totaling $9.6 billion of debt, with a median rating of Baa1.

The BRAC initiative is a component of overall targeted reductions of $259 billion in the military’s discretionary budget over five years. BRAC is a process used by the DoD and Congress to close and realign military installations in order to increase efficiency and reduce expenses on operations and maintenance. Through two rounds of BRACs, the DoD plans to downsize the Army and Marine Corps by approximately 92,000, or 12% of active service members by 2017, and demolish approximately 10% of base structures by 2016. A 2005 BRAC process closed 14 major military installations and realigned nearly a dozen others. The 2005 BRAC affected just one housing finance transaction we rate, and in that case, managers were able to scale back the scope of the development early enough in the construction phase to adjust to the decline in demand.

For housing financings, the worst-case scenario is an outright closure of a base, which eliminates the tenant pool unless managers can repurpose the properties for private use. This is especially challenging in rural areas that depend heavily on the military’s presence and lack alternative job opportunities and commercial development potential. As the exhibit on the next page shows, the military housing projects with greater exposure have a relatively lower proportion of potential tenant pool size compared to the number of privatized military housing units, as measured by the ratio of local base personnel to housing units.

Even for bases that are not closed, a change in the base’s mission that alters its personnel composition could negatively affect military housing operators’ ability to cover debt service. The military’s BAH rates are based on service members’ geographic duty location, pay grade and dependent status, with lower-ranked personnel and those with no dependents earning lower stipends. Privatized military housing projects rely on a weighted average mix of ranks and soldier family sizes, as projected when their financings were originally structured. A BRAC that results in marginally lower military ranks and a higher proportion of soldiers without dependents could adversely affect the housing debt.
When military bases are closed, the surviving bases often gain personnel or functions. Though the added personnel would be expected to benefit military housing projects near the surviving bases, in some cases it has created incentives for private developers to build competing housing in the surrounding communities, thereby diluting the apparent increase in housing demand.

Military Housing Projects with Lower Ratio of Base Personnel to Housing Units Are More Vulnerable