Improving Communities Enhancing Lives

2. Improving Communities Enhancing Lives • NDC is the nation’s • oldest non-profit • provider of community • development technical • assistance and training

3. A Powerful Mission • Increasing the flow of capital for • investment, jobs and community • development to distressed urban and • rural communities throughout the U.S.

4. Partners in Community Development Since 1969 • NDC works in partnership with local and state governments and non-profit organizations to help them build their communities and economies • The Pub Group in Portland, OR

5. NDC defines, designs and executes development and business finance strategies, programs and projects NDC identifies, secures and structures public and private financing and develops project from concept to completion Partners in Community DevelopmentTechnical Assistance • Bijou Theatre in Bridgeport, CT

6. NDC offers courses designed to give participants the skills and knowledge they need to successfully facilitate housing and economic development in the communities where they live and work Partners in Community DevelopmentNDC Training & Professional Certification • NDC’s Chuck Depew teaching • Mixed-Use Real Estate Finance

7. Partners in Community DevelopmentNDC Corporate Equity Fund • As an equity investor, NDC finances affordable housing and historic preservation • Dublin Road Townhomes in Mankato, MN

8. NDC creates jobs and economic development with direct small business lending with a focus on women and minority-owned businesses Partners in Community DevelopmentNDC Grow America Fund • Red Barn Pet Products • in Long Beach, CA

9. Partners in Community DevelopmentNDC Housing and Economic Development Corporation • NDC finances and builds community and public facilities on behalf of our client communities • Redmond City Hall in Redmond, WA

10. Partners in Community DevelopmentHEDC New Markets • As one of the leading non-profit participants in the New Markets Tax Credits program, NDC provides technical assistance and NMTC financing for economic and community development projects • YMCA in Albany, NY

11. Evaluating A Project’s Need for Public Gap Financing

12. Evaluating A Project’s Need for Public Gap Financing • A project’s financing gap is defined as the difference between projected costs (uses) and the debt and equity (sources) it can reasonably attract as follows: • Project Costs • - Bank Loan • - Equity • = Gap

13. Defining the Financing Gap • Project Costs – are they reasonable & adequate? • - Bank Loan – maximized? • - Equity – fair return without undue enrichment? • = Gap – are there public sources available to close?

14. A Fundamental Problem in • Real Estate Finance • Project Costs Often Greater Than Completed Value • But...debt and equity are a function of value, not cost • Where project costs exceed fair market value, there will likely be a need for federal, state and/or local economic development resources to get the project done

15. Cost-Value Differential Example

16. Why Do Economic Development Projects Require Public Sector Assistance? • Project Costs > FMV • Investors see inadequate Return on Investment (ROI) • Lenders see unacceptable Level of Risk

17. Investor’s Perspective • Investors are seeking to maximize economic benefits and minimize equity investment • Looking to invest in projects yielding the highest Return On Investment (ROI) • Concerned about the liquidity of the investment (can it be sold to free up equity for next opportunity)

18. Lender’s Perspective • Lenders are risk limiters, not profit maximizers • Lending is a low-margin, high-volume business • No “upside" for lenders • Marginal return on investment (interest) • Expected return of investment (principal) • Fixed returns • Will participate but want to mitigate all risks

19. Project Sources and Uses • Structuring the Project • Sources of funds must be equal to uses of fund • Identify all project costs (uses) • Acquisition • Construction • Soft costs and Reserves • Identify all project sources • Debt • Equity • Public Gap Financing • If uses are greater than sources, find additional sources

20. Sources and Uses • Sources • Bank $ 6,000,000 • Equity 2,335,000 • $ 8,335,000 • Uses (Project Cost Summary) • Land $ 100,000 • Site Improvements 200,000 • Construction – Shell 5,000,000 • Parking 50,000 • Architect and Engineering 200,000 • Tenant Improvements 1,000,000 • Legal and Accounting 50,000 • Permanent Loan Fees 90,000 • Construction Loan Fees 120,000 • Organizational Expenses 40,000 • Construction Interest 300,000 • Marketing 60,000 • Property Taxes 25,000 • Lease-up Reserves 600,000 • Developer Fee 200,000 • Contingency 300,000 • Total Project Cost $ 8,335,000

21. Lender Underwriting / Debt Capacity • The maximum loan amount will be determined by the lender’s primary underwriting criteria: • Debt Coverage Ratio (DCR) • Loan to Value Ratio (LTV)

22. Permanent Lender Underwriting (cont.) • Debt Coverage Ratio (DCR) • DCR = NOI • D/S • Measures project's ability to repay loan from revenues (lender's "first way out“) • Higher the DCR, lower the risk • Typical DCRs: 1.10 to 1.35

23. Permanent Lender Underwriting (cont.) • Loan-to-Value Ratio (LTV) • LTV = Loan Amount • FMV (Fair Market Value) • Measures project's ability to repay loan from sale of the asset (lender's "second way out") • Lower the LTV, lower the risk • Typical historical LTV: 75%

24. Sizing Equity: Three Benefits of Investing in Real Estate • Investors/developers seek three benefits when investing in real estate: • Cash Flow • Tax Benefits • Appreciation • Investors want all three benefits, but cash flow requirement is first because it is the most immediate and tangible benefit National Development Council

25. Benefits of Owning Real Estate (cont.) • Cash FlowIncome- Operating Costs- Debt Service= Cash Flow

26. Benefits of Owning Real Estate (cont.) • Tax Benefits – two main benefits • Income tax deferral from depreciation • Income Tax Reduction from Tax Credits • (Historic) Rehabilitation Tax Credits • Low-Income Housing Tax Credits • New Markets Tax Credits • (Renewable Energy) Investment Tax Credit National Development Council

27. Benefits of Owning Real Estate (cont.) • AppreciationSelling Price- Purchase Price= Appreciation in Value

28. Time Value of Money • Investors demand a return on their money given their perception of: • Risk • Inflation • Opportunity Costs • These three factors determine the discount rate. The discount rate converts a future value to a present value • The discount rate is the same as the investor's desired rate of return

29. Valuing Investor Benefit 15% Discount Factor

30. Filling the Gap: The Public Toolbox • Reduce Development Costs • Discounted or donated properties • Fund infrastructure and site work through general obligation bonds • Reduce Cost of Capital • Lower price and longer term • Make Capital more Readily Available • Subordinated (junior) financing • Stretch debt • Reduce equity • Loan guarantees

31. Filling the Gap: The Public Toolbox (cont.) • Decrease Operating Costs to Expand Borrowing Capacity and Equity Attraction • Tax abatements or Payments in Lieu of Taxes (PILOTs) • Utility savings • Attract outside Equity • State and federal tax credits in exchange for equity • Types of federal credits • Low-Income Housing Tax Credits • Historic Rehabilitation Tax Credits • New Market Tax Credits • Investment (Renewable Energy) Tax Credits

32. Filling the Gap: The Public Toolbox (cont.) • Attract Grants • Less commonly available these days • Always tied to public benefit standards • Monetize Tax Increment • Tax Increment Financing (TIF) • Using future tax increment to finance up-front capital costs, especially infrastructure

33. For More Information • Tom Jackson, Director • tjackson@nationaldevelopmentcouncil.org • New York Office Training Division • 708 Third Avenue, Suite 710 927 Dudley Road • New York, NY 10017 Edgewood, KY 41017 • 212-682-1106 0ffice 859-578-4850 Office • www.nationaldevelopmentcouncil.org