PROJECT FEASIBILITY

“Does the Input =the Output?”

or
“Can It Work?”
 The Stages of the Development Process

• Creating the Concept • Construction Finance

• Testing the market • “Gap” Financing
• Evaluate Site Costs • Construction
• Pro Forma – Under Budget
– Income – Within schedule
– Expenses • Managing Property
• Finding Tenants • Selling the Asset
• Permanent Financing • Starting Over
 Sponsored by:
U. S. Department of Housing and Urban
Development
TDA, Inc.

Presented by:
 Logistics

 “Parking
AgendaLot”
 Who
Handouts
is here?
Breaks
 Introductions
Restrooms
Questions
 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
 Public v. Conventional
PublicLenders
Conv. Lenders also
consider:
consider:
• public
marketpurpose
risk
• regulatory
borrower risk
compliance
• affordability
project risk
• gap
portfolio
analysis
risk
 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
Operating Budget
Development Budget
• Revenue
Sources

• Expenses
Uses

• 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
Operating Budget
Development Budget
• Revenue
Sources

• Expenses
• Uses
• NOI
 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 Sources
Acq. Equity
$15,000 1st Mortgage
Constr. $285,000 PRI
Soft Costs Public Loan(s)
$60,000 ---------
---------- Total$
Total $360,000 Gap
 Wrap-up
• Review of highlights
• Next Steps
• Questions
 Evaluations

Thank you for your time and attention.