PROJECT FEASIBILITY

1. PROJECT FEASIBILITY “Does the Input =the Output?” or “Can It Work?”

2. The Stages of the Development Process • Creating the Concept • Testing the market • Evaluate Site Costs • Pro Forma • Income • Expenses • Finding Tenants • Permanent Financing • Construction Finance • “Gap” Financing • Construction • Under Budget • Within schedule • Managing Property • Selling the Asset • Starting Over

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

4. “Parking Lot” Who is here? Introductions Logistics • Agenda • Handouts • Breaks • Restrooms • Questions

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

6. Module 1 Underwriting

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

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

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

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

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

12. 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

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

14. 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

15. 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

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

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

18. 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

19. 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

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

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

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

23. 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

24. 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”

25. Module2 Analyzing Project Risk

26. Analyzing Project Risk Development Budget

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

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

29. 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

30. 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

31. 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

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

33. 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

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

35. The Operating Pro Forma

36. Operating Expenses

37. 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

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

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

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

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

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

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

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

45. 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) =______

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

47. 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) =_______

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

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

50. Evaluations Thank you for your time and attention.