REAL ESTATE DEVELOPMENT BY CDCs: A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS

1. REAL ESTATE DEVELOPMENT BY CDCs:A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS Session 1 Scope and Stages of Real Estate Development Basic Analytical Tools March 9, 2012

2. The dimensions of neighborhood real estate development USES/TENURE PROPERTY TYPE Rental Housing Multi family (apartment) bldg. Ownership Housing 1-4 family houses Non-residential (commercial) Commercial/institutional bldg. land improvement CONSTRUCTION SCOPE New construction Substantial Rehabilitation Moderate Rehabilitation

3. The dimensions of neighborhood real estate development USERS/OCCUPANTS HousingCommercial Families, neighborhood scale retail elderly anchor/large retailhomeless light manufacturing, special needs institutional, office community facilities low-income start ups mixed income established firms “workforce” non-profit organizations market rate institutions

4. The dimensions of neighborhood real estate development COMBINATIONS/HYBRIDS Mixed use: rental + retail/commercial New construction + substantial rehab Co-op housing (rental and homeownership elements) 2-4 family homes (ownership + rental) Demolition ( existing structure) and new construction ( on vacant land) Adaptive re-use ( conversion of commercial or institutional buildings to housing)

5. Community Works RI Portfolio/”resumé”

6. Community Works RI Portfolio/”resumé” Hybrid Pure

7. Another Boston CDC’s portrait

8. Portfolio and Pipeline SO WHAT??? • Do the pictures match how the CDC is deploying its resources? • Data and presentation useful/necessary for fund-raising and PR • If picture of pipeline very different from picture of portfolio suggests some change may be needed in resources and competencies to succeed in pipeline implementation

9. Constructing your CDC’s portfolio and pipeline pictures • Decide on your metric: housing unit equivalent, square feet, constant $ cost • On a spreadsheet list all of the projects: For each Dimension you want to represent create a column for each subcategory • Allocate your metrics of each project across all of the sub-categories in each dimension you are “mapping”

10. … for example

11. The Life Cycle Of A Real Estate Development Project Stages Project Selection Pre-development Construction Operation and Management = Asset Management Re-finance and re-development

12. Lenses for our Life-Cycle Journey Tasks that have to be accomplished Necessary personnel: CDC staff, professional consultants Funders, lenders and regulators Interdepartmental issues and impacts within the CDC

13. The Organization Team

14. The Organization TeamWorking Relationships Who is responsible for Advising Doing Reviewing Supervising Deciding

15. The Organization TeamWorking Relationships What to do now (or every so often)? The Four “C”s Construct/Craft/Create Clarify Codify Carry on

16. LET’S HAVE LUNCH

17. Overview of Afternoon Session • Basic analytic tools in real estate development • Development Budget • Operating Pro forma • Financing Gap Analysis • Affordability and market concepts • Housing affordability and affordable housing

18. DEVELOPMENT BUDGET USES Acquisition Property purchase carrying costs* Hard Costs construction cost construction contingency environmental remediation* Soft Costs Physical development: A&E geo-technical traffic studies historic consultant environmental assessment construction inspection Financing financing fees pre-development loan interest construction loan interest other interest lender legal costs Property appraisal operating expenses during development*, survey Occupancy relocation marketing and rent-up lease up reserve* Everything project attorney development consultant *Use category may vary

19. DEVELOPMENT BUDGET USES (continued) Capitalized reserves Developer Overhead and Fee Overhead = project management=developer’s project management cost Fee = Profit

20. DEVELOPMENT BUDGET Sources Equity Financial Equity By Developer or investor(s); requires a financial return “Social” Equity Grants, contributions; often converted to another Source type Debt Serviceable debt Soft debt

21. OPERATING PRO FORMA Definitions Projected operating budget generally for 10-20 years “The term pro forma is used in the financial sense to denote financial projections or assumptions. In a business start-up budget, for example, the income and expenses must be assumed, since there is no previous record to use to determine what these numbers should be. A pro forma P&L is thus an estimate, not actual numbers based on past results.” From About.com

22. Sample Operating Pro Forma

23. OPERATING PRO FORMA (CONT.)

24. OPERATING PRO FORMA (CONT.) Calculating the Debt NET OPERATING INCOME $82,250  Debt Service Coverage Ratio 1.15 Available to Support Debt $71,522 Mortgage amount Excel =PV function $959,102

25. FINANCING GAP ANALYSISConnectsDevelopment Budget and Operating Pro Forma Operating Pro Forma Income EGI…………………………….………$ IN,EGI Disbursements Operating Expenses………….($EE,EEE) Reserve Deposits……………...($ R,PLC) NOI $NN,NNN  DSCR 1.xx Available for DS $DD,DDD Supportable Debt/ Mortgage $MMM,MMM Cash Flow: $NN,NNN - $DD,DDD Development Budget Uses Acquisition Hard Costs Soft Costs Capitalized Reserves Dvlpr. OH and Fee ________ TOTAL USES $U,UUU,UUU Sources Financial Equity ?a? [gap] Social Equity ?b? [gap] Serviceable Debt $MMM,MMM Soft Debt ?c? [gap] Gap = $U,UUU,UUU - $MMM,MMM

26. FINANCING GAP (not GAAP) Development budgets have LOTS of assumptions that need to be continually and regularly updated as you go through the development process to make sure you’re on track The fundamental question is: Do the sources of funds equal the uses of funds? If not, you have a gap– and a problem…

27. Underwriting the process that a large financial service provider (bank, insurer, investment house tax credit investor/syndciator) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit).

28. The art of project underwriting Real estate deal underwriting is about analyzing the likelihood of success vs. risk of failure for a project- it’shoping for the best, and preparing for the worst Anyone who agrees to lend you $$ to develop a real estate project wants to be sure of two key facts: • Is there confidence that you can deliver on what you promise? Do you have a team that knows what they’re doing– both in the short-term development phase, and in long-term operations? Can you demonstrate this? • Does your organization have the financial and organizational capacity to respond if one or more bad things happen?

29. Affordability and Markets • The financing gap in community development projects is largely filled with Gap Subsidy • Gap Subsidy: public funding required to cover all development costs that cannot be covered by (i) financially driven serviceable debt and (ii) equity receiving a return…even if the rents and returns are dictated by a particular sub-market (such as low income families) • Affordability subsidy is provided to households that are outside of the market that gap subsidy is addressing • Public financing programs targeted to specific income groups are typically gap subsidies rather than affordability subsidies.

30. Affordable Housing: Who is it for? Some terms and definitions • Very Low Income: Household with income at or below 50 percent of the Area Median Family Income Area Median Income AMI Median Family Income MFI • Extremely Low Income ( ELI) Household with income at or below 30 percent of the Area Median Family Income – often characterized as homeless or at risk of homelessness • Tax Credit Rents: Rents calculated to be affordable to either Very Low Income Families or household with income at or below 60 percent of AMI. • Fair Market Rents (FMR):Maximum rent that a housing authority or other administrator of Section 8 vouchers may offer a landlord in a particular city or metropolitan area. • Low Income ( formerly “moderate income”) Households with income between 50 ( sometimes 60) percent and 80 percent of AMI. [not widely used at current time] Primarily for affordable homeownership

31. Median Family Income: “Area” vs. neighborhood

32. Median Family Income: “Area” vs. neighborhood

33. Affordable in your neighborhood?