Affordable Rental Housing: Development & Operation

1. Affordable Rental Housing:Development & Operation AHS gratefully acknowledges the use of materials developed by the Virginia Community Development Corporation (AHS has deleted slides and made minor edits on others )

2. The Development ProcessOverview • FOUR phases (roughly) in development process: • Predevelopment • Development • Operations • Disposition

3. PredevelopmentThe Development Team • Responsible for completing development tasks • Includes range of stakeholders, both paid and volunteer: • Developer staff and board members • Design professionals • Representatives of regulatory and funding agencies • Clients • Contractors

4. PredevelopmentThe Development Team • Includes range of stakeholders, both paid and volunteer (continued): • Local building officials • Neighborhood residents • Property managers • Attorneys

5. Predevelopment Site Selection and Control

6. PredevelopmentSite Selection CONSIDER TRADE-OFFS: • Access / Utilities • Environmental Conditions • Inspections • Legal / Zoning • Services • Timing • Cost • Community Need and/or Opposition

7. Predevelopment Determining the Market

8. PredevelopmentDetermining the Market Market Analysis: • Defining the market • Where will residents come from? • Local area only • Commuters • In-migration • New household formation • Pent-up demand • Who will residents be? • Factors may be defined by developer • Age specific • Special needs • Income level – maximum and minimum incomes • Household size • Housing preferences • Location • Design • Focus on the right households

9. PredevelopmentDetermining the Market Market Analysis (continued): • Evaluate all available data including: • US Census data for • Income level • Household size • Age • Housing Tenure • Employment trends • Commute to work • Age of housing • Quality of housing • “Movership”

10. PredevelopmentDetermining the Market Market Analysis (continued): • Evaluate all available data (continued) • Local data • Employment trends • Residential building permits by type • Completions by type • Neighborhood evaluation-amenities • School report • Utilize local knowledge • Comparable survey • Unit size • Rent • Amenities • Vacancy/waiting list

11. PredevelopmentDetermining the Market Market Analysis (continued): • Provide an appropriate analysis of the data • Capture Rate • Percentage of qualified households necessary to fill the proposed units • Absorption Period • Amount of time expected for lease-up • Estimate of Market Vacancy • Estimate of Market Rent • Draw conclusions • Is the project feasible • Mitigating circumstances peculiar to market or project

12. PredevelopmentDetermining the Market Typical Market Study should include: • Intro/ Executive Summary – salient facts and conclusions • Project Description • Site Evaluation • Description of the Market Area – primary and secondary • Description of the area economy and market demographics • Supply and Demand Analysis

13. Predevelopment Architecture and Engineering

14. PredevelopmentArchitecture and Engineering Design Issues to Consider: • Appropriateness • Scale • Context • Accessibility • Desirability • Environmental Issues • Cost

15. PredevelopmentArchitecture and Engineering Levels of Completion • Preliminary conceptual drawings, renderings, elevations • Sufficient to apply for financing • Bid documents • Construction Ready • As-builts or post-construction

16. Predevelopment Environmental

17. PredevelopmentEnvironmental • Most projects require completion of a Phase I Environmental Assessment • In addition to typical hazards, including asbestos, lead, and storage tanks, lenders and investors are seeking clearance of mold and radon concerns • Phase I happens earlier in adaptive reuse or rehabilitation projects • Sometimes necessitates more testing

18. Predevelopment Appraisal

19. PredevelopmentAppraisal • Appraisals, particularly those performed by third parties, are essential in the real estate business • Establish fair market value (FMV) to be relied on by developers, owners, and third parties • Generally involves valuation based on three approaches: income, sales comparison, and cost. Typically one of these valuation approaches provides the basis for FMV • Value adjusted for restricted rents and below market financing

20. Project Feasibility The Development Budget

21. Project FeasibilityThe Development Budget • Consists of all costs necessary to build the project • Will be a fluid number that will become more precise as the time of construction approaches • The number should be firm before the construction starts • Stages: • Owner’s Estimate • Architect’s Estimate / Contractor’s Estimate • Contractor’s Bid • Construction Contract

22. Project FeasibilityThe Development Budget Cost Categories • Land and Building • Site Work • Rehabilitation / New Construction • Contingency • Architect and Engineer Fees • Interim Costs • Financing Fees and Expenses • Soft Costs • Syndication Costs • Developer’s Fees • Project Reserves

23. Project FeasibilityThe Development Budget Land and Building • The cost of purchasing land on which to build a project and/or the cost of a building or buildings to be rehabilitated or occupied as is by low / moderate-income renters • Land and building costs should be separated • Look at: • $ / Acre • $ / Unit • % of project cost • Compare with other projects

24. Project FeasibilityThe Development Budget Site Work & Rehabilitation / New Construction • Separate categories for hard construction costs including: • Off-site work • Site-work • Demolition • Abatement • New Construction • Rehabilitation • General Requirements • Overhead • Profit • Bond • FFE (Financing Fees and Expenses)

25. Project FeasibilityThe Development Budget Contingency • Covers the unknown. • May be required by and regulated by the lender. • Can get smaller as development proceeds. • Higher for rehabilitation than new construction. • Discussed as a percentage of construction costs. • 5% for new construction • 10% for rehab

26. Project FeasibilityThe Development Budget Architect and Engineering Fees • Fees paid to architects and engineers for building and site design, construction supervision, and soil testing, concrete testing, storm-water management plans, etc . • Does not include cost of construction lender’s, or other required third party inspecting architect. • Discussed as percentage of construction costs: 4%-8%.

27. Project FeasibilityThe Development Budget Interim Cost • Non-construction costs incurred during the construction period. • Construction interest • Construction loan fees • Inspecting Architect’s fees • Title updates • Taxes • Insurance

28. Project FeasibilityThe Development Budget Financing Fees and Expenses • Cost of obtaining permanent financing including: • Points (on permanent financing) • Closing costs (for permanent financing) • Credit enhancement fees • Title and recording work • Appraisal, market study, environmental • Mortgage Broker Fee

29. Project FeasibilityThe Development Budget Soft Costs & Syndication Expenses • Fees that are project-related but not directly related to construction like: • Legal • Accounting • Consultants • Tax credit reservation / application fees • Syndication fees – costs of forming the ownership entity

30. Project FeasibilityThe Development Budget Developer Fee • Compensates the developer for staff time, entrepreneurial effort, and risk. • Should include fees, overhead, and profit. • The developer’s major return from the project.

31. Project FeasibilityThe Development Budget Reserves • Funds set-aside out of the development budget to cover: • Lease-up expenses. • Operating losses. • Replacement of capital assets. • Debt service payments. • Rent subsidies. • May be required by the lender and/or investor • May be determined by the developer to be necessary for the financial viability of the project.

32. Project Feasibility The Operating Budget - Income

33. Project FeasibilityThe Operating Budget - Income Income Sources (continued) Tax Credit rents: • The maximum rents allowed under the tax credit program are established in the law based on: • Which qualifying test is met • Area Median Income (from HUD data) • The size of the households occupying the units

34. Project FeasibilityThe Operating Budget - Income Income sources (continued): • Sources not directly related to the rental of low-income units: • Market rate units • Commercial space • Surcharges • Air conditioner • Parking • Late charges • Other • Laundry • Other

35. Project FeasibilityThe Operating Budget - Vacancy Vacancy • There are two general types of vacancy: • Normal vacancy • Market vacancy and credit losses • Turnover • Initial vacancy and lease-up expense

36. Project FeasibilityThe Operating Budget - Expenses Operating Expenses • Costs that arise from operation of the project, rather than from its development/construction. • Expenses that are recurring and necessary for the proper functioning of the project. • Typical operating expenses include: • Taxes • Insurance • Water/Sewer • Utilities • Maintenance • Management • Other (Inspections; Accounting; Legal; etc) • Replacement Reserves (for major capital items)

37. Project FeasibilityThe Operating Budget - Expenses • Projecting operating appropriately expenses is critical • There is little margin for error • Rents are often fixed and regulated • Cash flow is thin • The ability to raise rents in future years is limited

38. Project FeasibilityProjecting the Proforma Net Operating Income: Cash available to pay all stakeholders (lenders get paid first – investors and owners last). • Calculated as follows: Gross Rents - Vacancy = Effective Gross Collections - Expenses = Net Operating Income