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PROJECT FEASIBILITY

PROJECT FEASIBILITY. “ Does the Input =the Output?” or “Can It Work?”. The Stages of the Development Process. Creating the Concept Testing the market Evaluate Site Costs Pro Forma Income Expenses Finding Tenants Permanent Financing. Construction Finance “Gap” Financing

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PROJECT FEASIBILITY

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  1. PROJECT FEASIBILITY “Does the Input =the Output?” or “Can It Work?”

  2. The Stages of the Development Process • Creating the Concept • Testing the market • Evaluate Site Costs • Pro Forma • Income • Expenses • Finding Tenants • Permanent Financing • Construction Finance • “Gap” Financing • Construction • Under Budget • Within schedule • Managing Property • Selling the Asset • Starting Over

  3. Sponsored by: U. S. Department of Housing and Urban Development TDA, Inc. Presented by:

  4. “Parking Lot” Who is here? Introductions Logistics • Agenda • Handouts • Breaks • Restrooms • Questions

  5. Session Rules • Keep it informal • Ask questions • Share your experience • Use your manual - take notes on the pages • Enjoy the number crunching

  6. Module 1 Underwriting

  7. What is Underwriting? • Determining facts • Making reasonable assumptions • Analyzing risks • Making recommendations to minimize risks

  8. Conv. Lenders consider: market risk borrower risk project risk portfolio risk Public Lenders also consider: public purpose regulatory compliance affordability gap analysis Public v. Conventional

  9. Market Risk • Rent-up risk • Maintenance of occupancy & rents • Maintenance of collateral value

  10. Borrower Risk The Five C’s: • Cash • Capability • Creditworthiness • Character • Collateral

  11. Project Risk • Completion risk • Financial feasibility risk • Collateral risk

  12. The Shift to “Market” • Market v. jurisdiction/service area • Customers v. clients • Product v. service • Demand v. needs • if we build it, they will come • LI housing doesn’t have to compete

  13. Market Risks • Rents above market • Rents unaffordable • Excess capacity; slow absorption • Competitive disadvantage • Market won’t sustain occupancy • Property won’t maintain value

  14. Scope of Borrower Analysis Assessing risks that the borrower will complete the project, considering: • Organizational structure • Business experience & qualifications • Financial condition & prospects • General credit history

  15. Key Borrower Questions • What type of borrower? • New v. existing entities • For-profits v. not-for-profits • Who are the “key principals”? • Creditworthiness of principals • Personal liability • Recapture requirements

  16. Five C’s of Borrower Risk • Cash • Collateral • Creditworthiness • Capability • Character

  17. Cash: Equity & Liquidity • How much equity is committed • Timing, amount & source of equity • Cash • Land • Contribution of Fees • What else is available...if needed?

  18. Collateral • Completion guarantee • Operating guarantee • Portfolio: • Overall stability, profitability, liquidity & vulnerability of other assets in portfolio • Diversification of portfolio • Other direct & contingent liabilities • Cross-collateralization

  19. What to Look at: Collateral • Net worth • Schedule of real estate investments • Notes on contingent liabilities • Level of reserves/escrows • Potential refinancings (e.g., balloons) • Trends in property cash flows • Market factors

  20. Creditworthiness • Loan payment history • Current debt load • Current performance • Discrepancies

  21. Capability • Legal entity • Experience: projects of similar scope • Prior collaboration of team members • Loan history (incl. defaults) • Property management performance • Not-for-profit issues

  22. How to look at Capability • Financial statements: debt load • Credit report: payment history • Lender contacts • Property inspections

  23. Character • Subjective judgments: • Likelihood to perform/stick with it • Integrity/live up to commitments • Look at: • Past development performance • Physical/management condition • References on past debt performance & problem resolution

  24. Financial Statements • Used to identify “current” problems • losing $$ on operations • not enough cash to meet obligations • Used to identify “potential problems” • look at trends • Used to identify “source of problems”

  25. Module2 Analyzing Project Risk

  26. Analyzing Project Risk Development Budget

  27. Budgets are... • Estimates • Iterative • Dynamic • Linked

  28. Development Budget Sources Uses Operating Budget Revenue Expenses NOI Cash Flow The Budgets

  29. Development Cost Analysis • Underwriters do their own estimates & analyze variance from developer’s budgets • All development costs analyzed: • Acquisition cost • Construction cost • Soft costs, esp. developer fees • Development Sources: gap analysis

  30. Project Selection • Look the gift horse... • Watch out for problem sites • unsuitable location • topographical & subsoil conditions • environmental problems & wetlands • Beware complex projects • You & me against the market... • The neighbors

  31. Acquisition: Cost v. Value • Requiring an independent appraisal • public $ often first in, used for acquisition • often non-arms-length transactions • Valuation methods • Valuing low-income housing • Loan-to-value issues

  32. Construction Issues • Environmental Issues • Davis-Bacon Act • Procurement Process • M/WBE, EEO, Section 3 • Housing Quality • Contingency • Deadlines: readiness to proceed

  33. Fee Analysis • Fees are for services rendered; (return on equity is separate) • Use of consultants • Program/Lender’s fee limits • Split of fees in joint venture • Identity of interest & non-arms-length transactions

  34. Other Soft Costs • Marketing • Initial Operating Deficit • Capitalized reserves • Relocation

  35. The Operating Pro Forma

  36. Operating Expenses

  37. Rents & Revenue Issues • Mix of incomes • Rent Limits: CDBG,HOME, LIHTC, Other • Utilities & utility allowances • Market issues: • street rent v. limits • vacancy/collection loss • Affordability of rents • Rent adjustments in the future

  38. Debt Service • Paid from income after expenses (NOI) • Debt service coverage requirements • Capitalize NOI to determine value and maximum loan

  39. Operating Analysis Key Operating Measures: • Net Operating Income (NOI) • Cash flow (ROI/ROE) • Debt coverage ratio • Break-even ratio

  40. Module 3 Analyzing Project Risk II: Putting Together Sources of Funds

  41. Balancing the Budgets • Financial feasibility/viability analysis • “Front door” v. “back door” analysis • Closing the Gap • Gap funding source impacts

  42. Development Budget Sources Uses Operating Budget Revenue Expenses NOI Cash Flow The Budgets

  43. Public Financing Issues • Computing maximum public subsidy • affordability standard • Layering • Regulatory overlap • Deferral terms • Enforcement & recapture mechanism

  44. General Financing Issues • Equity required • Firmness of other commitments • Inter-creditor issues • Rate/order of disbursements • Overruns • Balloons & other long-term issues

  45. Case Study Steps 1 & 2 Gross/Net Income (Steps 1 & 2) No. Rent - Util Revenue 1 BR ___ ____ ____ ______ 2BR ___ ____ ____ ______ Gross Potential Income =______ Vacancy/Coll. Loss 5% -______ Effective Gross Income =______ - Operating Expenses -______ Net Operating Income (NOI) =______

  46. Step 3 Calculate 1st Mortgage Debt: NOI _______ Divide by: Debt Serv. Cov. /_______ NADS =_______ Divide by: Mortgage Constant /_______ Maximum Loan =_______ LTV Ratio (Loan/$370,000) =_______

  47. Step 3, cont.. Calculate Net Available for PRI Loan NOI _______ - 1st Mortgage Debt Service -_______ Net Available =_______ Divide by: Mortgage constant /_______ Max. PRI Loan (<$50,000) =_______

  48. Uses Acq. $15,000 Constr. $285,000 Soft Costs $60,000 ---------- Total $360,000 Sources Equity 1st Mortgage PRI Public Loan(s) --------- Total$ Gap Step 4

  49. Wrap-up • Review of highlights • Next Steps • Questions

  50. Evaluations Thank you for your time and attention.

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