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:

Logis tic s
Agenda Handouts Breaks Restrooms Questions

“Parking Lot” Who is here? Introductions

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

Module 1

Underwriting

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

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

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

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

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

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

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

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

Cash: Equity & Liquidity
• How much equity is committed • Timing, amount & source of equity
– Cash – Land – Contribution of Fees

• What else is available...if needed?

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

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

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

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

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

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

Construction Issues
• Environmental Issues • Davis-Bacon Act • Procurement Process
– M/WBE, EEO, Section 3

• Housing Quality • Contingency • Deadlines: readiness to proceed

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,HOME, LIHTC, Other • Utilities & utility allowances • Market issues:
• street rent v. 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

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) =______

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

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) =_______

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

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

Evaluations
Thank you for your time and attention.

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.