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

• Construction Finance • “Gap” Financing • Construction
– Under Budget – Within schedule

• Finding Tenants • Permanent Financing

• Managing Property • Selling the Asset • Starting Over

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

Presented by:

Logistics
Agenda Handouts Breaks Restrooms Questions

“Parking Lot” Who is here? Introductions

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

Module 1 Underwriting .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 .

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” .

Module 2 Analyzing Project Risk .

Analyzing Project Risk Development Budget .

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

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

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

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

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 .

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

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 .

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

• The Operating Pro Forma .

Operating Expenses .

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

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

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

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

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

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

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

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

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

Cov. /_______ NADS =_______ Divide by: Mortgage Constant /_______ Maximum Loan =_______ LTV Ratio (Loan/$370.000) =_______ .Step 3 Calculate 1st Mortgage Debt: NOI _______ Divide by: Debt Serv.

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

000 $60. Soft Costs $15.000 Sources Equity 1st Mortgage PRI Public Loan(s) --------Total$ Gap Total .Step 4 Uses Acq.000 ---------$360.000 $285. Constr.

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

Evaluations Thank you for your time and attention. .

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