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Underwriting Commercial Real Estate Development With a case study of the Wicker School Redevelopment

Underwriting Commercial Real Estate Development With a case study of the Wicker School Redevelopment. Tucker Bartlett Self-Help Ventures Fund June 22, 2005. Agenda. Self-Help Overview Underwriting Points of Concern Typical Loan Terms Questions. Self-Help Ventures Fund Overview.

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Underwriting Commercial Real Estate Development With a case study of the Wicker School Redevelopment

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  1. Underwriting Commercial Real Estate DevelopmentWith a case study of the Wicker School Redevelopment Tucker Bartlett Self-Help Ventures Fund June 22, 2005

  2. Agenda • Self-Help Overview • Underwriting Points of Concern • Typical Loan Terms • Questions The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  3. Self-Help Ventures Fund Overview Mission: “To create ownership and economic opportunity for minorities, women, rural residents, and low wealth families and communities.” - 25-year history - $3.9 billion financed - 43,880 families, businesses and non-profits - Credit union, mortgage lending, commercial lending, real estate development, advocacy The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  4. The Wicker School Redevelopment in Sanford, NC • $5.4 million restoration of an African-American Rosenwald school built in 1929 • Conversion into a commercial project with important community facilities • Tenants include a dental clinic, mental health clinic, daycare center, business incubator, and a dental hygienist school The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  5. Underwriting Points of Concern • Cash Flow (Income less Expenses = NOI) • The Borrower • Collateral The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  6. Cash Flow: Income from Leases • Pre-Leasing- 50% often required, but this is difficult with small tenants • Credit Quality of Tenants and Lease Expiration Schedule • Mom & Pop vs. Credit Tenant • Will the business work? • Adequate Parking (Office: 4 per 1,000sf; Retail 2.5 per 1,000sf; Residential 1 per unit; Hotel 1 per room) • Traffic counts and Market Demographics- Get a market Study • Possibility of a Master Lease The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  7. Wicker Income from Leases • Pre-Leasing and Credit Quality • Lease Expiration Schedule • Will the business work? • Parking • Market Study • 94% pre-leased • 31% government • 39% related to CDC • 24% for profit but related work • All five year leases • Will the business work? • Parking- from the county • Market Study- knowledge of neighborhood • $210k of projected income (still assumed 8% rent loss) The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  8. Cash Flow: Operating Expenses • Are your leases NNN, gross, or some combination? • Management & Leasing • Janitorial • Maintenance (elevator, HVAC, general) • Utilities • Insurance • Real Estate Taxes • Other- security, pest control, legal & audit, advertising, landscaping • Possibility of real estate tax abatement for nonprofits or historic projects The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  9. Wicker Operating Expenses • Lease pass throughs • Real Estate Tax abatement • Modified Net Leases • Net of janitorial, utilities, insurance, taxes • $36k in projected other operating expenses (primarily management and maintenance) • Working on tax abatement for nonprofit uses The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  10. Cash Flow: After NOI • Operating Reserve (debt service and op ex- amount depends on operating risk) • Capital Reserve- ~$0.30 per year • Debt Service- lender requires 1.15-1.25 projected coverage • Subordinate loans? • Ground lease? • Preferred returns to equity investors? • Asset management fees? The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  11. Wicker After NOI • Operating Reserve • Capital Reserve • Debt Service • Preferred returns to equity investors? • Asset management fees? • $133k (one year of debt service and non-reimbursed op ex) • $0.30/sf/year • Loan originally underwritten based on 1.25x • 2% pref to HTC/NMTC investor • $5,000/year to investor The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  12. The Borrower • Do you have experience doing commercial real estate loans? • Who is on your team? • Developer, architect, contractor, leasing agent, property management • Market knowledge • Do you have helpful connections with tenants, government officials, financers? • Financial strength to provide a guaranty • Construction loan, permanent loan, tax credit investor The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  13. Wicker Borrower and Original Team • CDC Experience • Who is on your team? • Developer, architect, contractor, leasing agent, property management • Market knowledge • Financial strength to provide a guaranty • No experience in commercial development • Team- no fee developer, primarily residential architect, great contractor, no property manager • Great connections in the area and knowledge of market • $1.2 million in net assets The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  14. The Collateral • Appraisal • “As is” vs “As completed” • Income approach is often key • Environmental • Get Phase 1 done early; preferably before acquisition • Control of property • Zoning • Access to Parking The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  15. Commercial Real Estate Loan Terms • Loan Size- lesser of: • 75-80% LTV • 80% LTC • 1.15-1.25 projected 1st year Debt Service Coverage • Amortization- 15 to 25 years • Term: 5 to 10 is typical (7 for NMTC) with a balloon The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  16. Commercial Real Estate Loan Terms • Rate: • Construction- Floating at Prime –1% to +1% • Perm- Fixed at Treasury + 200-300 bps • Origination Fee- 50 to 100 bps • Other • Contingency- 5 to 10% (higher for rehab) • Need for hard cash equity • Pre-payment penalties on fixed rate loans (exclusion on NMTC) • Environmental Indemnification The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  17. Wicker: The Numbers and The Gap • Cost- $5.4 million • NOI- $175,000 per year • Value capped at 10% = $1.75 million • 80% LTV = $1.4 million • Other Sources of Equity • CDBG and County Contribution- $1.15 million • HTC and NMTC equity- $1.6 million • CDC equity $130k • Loan need of $2.5 million creates gap of $1.1 million The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  18. Wicker: The Solution • EDGE Loan from the Federal Home Loan Bank of Atlanta • $2.5 million loan based on 1.25 debt coverage ratio • 1% rate • 20 year term • 30 year amortization • Still standard lenders worried about operating and refinancing risk The Balancing Act: Blending Housing and Commercial Development to Build Thriving Communities

  19. Questions Tucker Bartlett Director of Commercial Real Estate Development and Lending Self-Help Ventures Fund Durham, North Carolina www.self-help.org tucker.bartlett@self-help.org 919.956.4661

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