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Underwriting Guidelines for the Community Development Block Grant Program

Underwriting Guidelines for the Community Development Block Grant Program. CDBG Underwriting Guidelines. Established by Statute: 42 USC 5305 (e) and Regulation: 24 CFR 570.209. CDBG Underwriting Guidelines. (a) Are project costs reasonable?

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Underwriting Guidelines for the Community Development Block Grant Program

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  1. Underwriting Guidelines for the Community Development Block Grant Program

  2. CDBG Underwriting Guidelines Established by Statute: 42 USC 5305 (e) and Regulation: 24 CFR 570.209

  3. CDBG Underwriting Guidelines (a) Are project costs reasonable? (b) Are all project financing sources committed? (c) Are CDBG funds being substituted for non-federal sources? (d) Is the project financially feasible? (e) Is the return on the owner’s equity unreasonably high? (f) Will CDBG funds be disbursed on a pro rata basis with other finances provided to the project?

  4. CDBG Underwriting Guidelines (a) Are project costs reasonable? Ensure thatproviding either too much or too little CDBG assistance for the proposed project is avoided Accomplished by financial analysis of source and uses and revenue and expense projections.

  5. CDBG Underwriting Guidelines (b) Are all project financing sources committed? Ensure: -sufficient sources of funds have been identified to finance the project -participating parties funds have affirmed intention to make funds available -participating parties have financial capacity to provide funds

  6. CDBG Underwriting Guidelines (c) Are CDBG funds being substituted for non-federal sources? Ensure the most efficient use of CDBG funds Accomplished by financial analysis revenue and expense projections; debt service requirements and return on equity investments.

  7. CDBG Underwriting Guidelines (d) Is the project financially feasible? Ensure the public benefit of CDBG assistance will materialize by financing a viable project. Accomplished by – -examining assumptions about project’s market share, sales levels, growth potential. - examiningfinancial projections to determine the breakeven point and debt service capacity. -evaluating the experience of the company’s management to achieve the projections.

  8. CDBG Underwriting Guidelines (e) Is the return on the owner’s equity unreasonably high? Ensure- - that the CDBG assisted activity should not provide more than a reasonable return on investment to the owner given the industry rates of return, local conditions and the risk of the project. - that the ED program is able to maximize the use of CDBG funds for its economic development objectives.

  9. CDBG Underwriting Guidelines (f) Will CDBG funds be disbursed on a pro rata basis with other finances provided to the project? Ensure that CDBG funds are not placed at significantly greater risk than non-CDBG funds

  10. CDBG Underwriting Guidelines Are project costs reasonable? Are all project financing sources committed? Are CDBG funds being substituted for non-federal sources? Is the project financially feasible? Is the return on the owner’s equity unreasonably high? Will CDBG funds be disbursed on a pro rata basis with other finances provided to the project?

  11. CDBG Underwriting Guidelines Application to financial underwriting

  12. Underwriting Guidelines applied to financial analysis Working Capital Loans Fixed Asset Loans

  13. Underwriting Guidelines applied to financial analysis Working Capital Fixed Assets

  14. Working Capital Fixed Assets Net Working Capital = Current Assets $5,220 Minus Current Liabilities $2,110 Equals $3,110

  15. Working Capital Fixed Assets Net Working Capital = Current Assets $5,220 Minus Current Liabilities $2,110 Equals $3,110

  16. Working Capital For Loan Purposes Accounts Receivable Inventory Minus Accounts Payable

  17. Working Capital Loan Underwriting Calculate the Working Capital Cycle Calculate the Borrowing Base

  18. Working Capital Loan Underwriting Calculate the Working Capital Cycle Determine Days Receivables Determine Days Inventories Determine Days Payables

  19. Determine DAYS RECEIVABLES Divide Accounts Receivable $1,320 by Annual Sales $16,000 = .0825 or 8.25% Multiply .0825 X 365 days = 30 days

  20. Determine DAYS RECEIVABLES equals Divide Accounts Receivable $1,320 by Annual Sales $16,000 = .0825 or 8.25% Multiply .0825 X 365 days = 30 days

  21. Determine DAYS INVENTORY Divide INVENTORY $1,430 by COST of GOODS SOLD $8,760 = .165 or 16.50% Multiply .165 X 365 days = 60 days equals

  22. Determine DAYS INVENTORY Divide INVENTORY $1,430 by COST of GOODS SOLD $8,760 = .165 or 16.50% Multiply .165 X 365 days = 60 days equals

  23. Determine DAYS INVENTORY equals equals Divide INVENTORY $1,430 by COST of GOODS SOLD $8,760 = .165 or 16.50% Multiply .165 X 365 days = 60 days

  24. Determine DAYS PAYABLES Divide ACCOUNTS PAYABLES $600 by COST of GOODS SOLD $8,760 = .069 or 6.90% Multiply .069 X 365 days = 25 days

  25. Determine DAYS PAYABLES equals Divide ACCOUNTS PAYABLES $600 by COST of GOODS SOLD $8,760 = .069 or 6.90% Multiply .069 X 365 days = 25 days

  26. Determine WC Cycle Add Days RECEIVABLES [30] plus Days INVENTORIES [60] subtract Days PAYABLES [25] = 65 days

  27. Determine WC Cycle equals Add Days RECEIVABLES [30] plus Days INVENTORIES [60] subtract Days PAYABLES [25] = 65 days

  28. Use WC Cycle to Determine Needs for Additional Growth

  29. Use WC Cycle to Determine Needs for Additional Growth Add Days RECEIVABLES [30] plus Days INVENTORIES [60] subtract Days PAYABLES [25] = 65 days

  30. Use WC Cycle to Determine Needs for Additional Growth At the same WC cycle the new WC requirement is$2,361; an increase of $211

  31. Use WC Cycle to Determine Needs for Additional Growth At the same WC cycle the new WC requirement is$2,361; an increase of $211

  32. Working Capital Loan Underwriting Calculate the Borrowing Base

  33. Calculate the WC Borrowing Base Add ACCOUNTS RECEIVABLE [$1,320] plus INVENTORIES [$1,430] subtract ACCOUNTS PAYABLE [$600] =$2,150 Typically lenders do not make loans at 100% value

  34. Determine WC Borrowing Base Loan to value ratios for AR and Inventory Multiply ACCOUNTS RECEIVABLES [$1,320] X 80%; multiply INVENTORIES [$1,430] X 50% =$1,775

  35. Determine WC Borrowing Base Assets Loan value =$1,775 Minus supplier credit [$600] = $1,175

  36. Determine WC Borrowing Base Assets Loan value =$1,775 Minus supplier credit [$600] = $1,175

  37. Determine WC Borrowing Base Assets Loan value = $1,775 Minus supplier credit [$600] = $1,175 which represents the Borrowing Base or collateral for a Working Capital loan

  38. Determine WC Borrowing Base CDBG Underwriting Guidelines (a) Are project costs reasonable? Ensure that providing either too much or too little CDBG assistance for the proposed project is avoided Accomplished by financial analysis of source and uses and revenue and expense projections. Assets Loan value = $1,775 Minus supplier credit [$600] = $1,175 which represents the Borrowing Base or collateral for a Working Capital loan

  39. Determine WC Borrowing Base CDBG Underwriting Guidelines Are all project financing sources committed? Ensure participating parties have financial capacity to provide funds Total Net WC $2,150 minus external financing $1,175 = $975 equity financing needed

  40. Other Considerations for WC Loans When sales remain even throughout the year, so do WC requirements

  41. Other Considerations for WC Loans But when fluctuationsinSales occur so will changes in WC requirements

  42. Other Considerations for WC Loans Sales fluctuations will change WC requirements

  43. Other Considerations for WC Loans CDBG Underwriting Guidelines Are all project financing sources committed? Sufficient sources of funds been identified to finance the project Sales fluctuations will change WC requirements

  44. Other Considerations for WC Loans

  45. Other Considerations for WC Loans Changes in WC cycle can adversely effect the borrowing base

  46. Other Considerations for WC Loans Net WC is $3,490 for base year

  47. Other Considerations for WC Loans For the following year: Net WC is $4,645; a 33% increase but Sales only increased 6%

  48. Other Considerations for WC Loans The WC cycle has increased The key financial ratio; Current Ratio has improved from 3:1 to 5:1; But the efficiency ratios; Sales/Working Capital has decreased from 7:1 to 5:1; Sales/Total Assets will also decrease

  49. Underwriting Guidelines applied to financial analysis Working Capital Fixed Assets

  50. Fixed Asset Loan Underwriting Loan to Value Ratio and Cash flow to Debt Service requirements

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