CDC Real Estate Development What Board Members Should Know

1. CDC Real Estate DevelopmentWhat Board Members Should Know Session 1 May 19, 2012

2. What is your CDC’s mission? What does the Mission Statement say? …………….. and How does that relate to real estate development?

3. CommunityDevelopmentCorporations are inevitably involved in real estate development as current real estate developers and/or past real estate developers and/or owners of real estate For the majority of CDCs, real estate development is a CORE BUSINESS but not always the main MISSION

4. Mission-Business Compatibility COMMUNITY DEVELOPMENT Building community ? Developing housing (or stores, or factories or community centers ) Social change organization Sustainable business Community service organization

5. 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. CONSTRUCTION SCOPE New construction Substantial Rehabilitation Moderate Rehabilitation Land improvement

6. 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 )

7. Portfolio/”resumé” of a large Boston CDC

8. Pipeline of the same CDC

9. 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 moderate income established firms “workforce” chains and franchises middle income non-profit organizations market rate & institutions mixed income

10. 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 • 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 Area Median Income AMI Median Family Income MFI

11. Median Family IncomeMetro Area vs. Local

12. Area vs. City vs Neighborhood

13. Keep in Mind about Rents “Affordable to Low Income Families” What government defines as Low or Very Low income may really represent a higher income group in your CDC’s service area Rents established to be affordable to the government-set Low income limit may not be affordable to low income families in the CDC’s area.  Because the government-set low-income limits may be close to the average income in a CDC’s service area, more local support for affordable housing can be won by convincing people that typical families in the area would be eligible to live in the housing.

14. Government Programs –Subsidies – to Make Housing Affordable Rental Assistance The only type of subsidies that make housing truly affordable to anyone within the income eligibility limits. Subsidy recipients pay a fixed percentage of their income, rather than a rent that government agencies have deemed to be affordable. The Programs: Federal: Section 8 vouchers State: Mass. Rental Voucher Program (MRVP) Two versions • Tenant-based, “mobile voucher” Subsidy is awarded to the low income household and can be used at any housing at a rent belowFMR • Project-based: subsidy is attached to a particular apartment in a specific housing development

15. Government Programs –Subsidies – to Make Housing Affordable Rental Assistance issues Subsidies are very scarce: Long waiting lists – many years – for mobile voucher applicants. Very small number of project-based subsidies are awarded to new projects each year. Myths and realities about “Section 8 families” Myth: All rental assistance beneficiaries are extremely poor, unemployed and beset with multiple social problems Realities: Many Section 8 recipients- especially mobile voucher holders – are the working poor in stable families Very scarce subsidies have caused awarding agencies to prioritize the subsidies for Extremely Low income families, especially those that are homeless or at risk of becoming homeless.

16. Government Programs –Subsidies – to Make Housing Affordable Development subsidies A number of federal, state and local programs provide grants or grant-like financing to new projects that enable the CDC developer to reduce rents to the target rent levels deemed affordable to Low, Very Low or Extremely Low income families. The major programs: HOME, Mass. Affordable Housing Trust Fund, Boston Neighborhood Housing Trust, Low Income Housing Tax Credit, Housing Innovation Fund ( HIF), CDBG

17. Rental Subsidies, Other housing subsidies and rents “non-assisted” rents Rent subsidies Other Housing subsidies

18. The dimensions of neighborhood real estate development USERS/OCCUPANTS Commercial neighborhood scale retail anchor/large retaillight manufacturing, institutional, office community facilities l start ups established firms chains and franchises non-profit organizations & institutions

19. Why do CDCs develop commercial—non-residential—space? To provide needed or desired goods or services that are not currently being provided to a community To create places where new jobs can be created in a community [jobs for whom?] To help existing businesses thrive… and not be pushed out by rising commercial rents To support entrepreneurial aspirations of local residents by providing space for new businesses. To establish or maintain vibrancy by having a diversity of land and building uses in neighborhood To address pockets of blight, crime hot spots, etc in a neighborhood commercial district.

20. See Separate Handout

21. Overview of Afternoon Session • Basic analytic tools in real estate development • Development Budget • Operating Pro forma • Financing Gap Analysis • The life-cycle stages of a real estate development • Stage 1: Project selection and feasibility analysis

22. 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

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

24. 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

25. 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

26. Sample Operating Pro Forma

27. OPERATING PRO FORMA (CONT.)

28. 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

29. 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

30. FINANCING GAP 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…

31. Underwriting the process that a financial service provider (bank, insurer, investment house, tax credit investor/syndicator, public agency funding community development) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit, subsidies).

32. 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 to or invest in a real estate project wants to be sure of two key facts: • Is there confidence that the CDC can deliver on what it promises? Does it have a team that knows what they’re doing– both in the short-term development phase, and in long-term operations? • Does the CDC have the financial and organizational capacity to respond if one or more bad things happen?

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

34. REAL ESTATE DEVELOPMENTSTAGE 1 PROJECT SELECTION FEASIBILITY ANALYSIS Timeframe: 3 to 6 months

35. Undertaking a new real estate development project requires at least two steps of assessment and evaluation The CDC must assess how the potential project aligns with its mission, strategies, organizational needs and capacities, and constituent/stakeholder needs and desires The CDC must make an initial determination with the information available that the project is feasible, financially, physically and politically.

36. When and Why Project Selection Occurs Time for a new project: The CDC’s business model requires real estate development activity to occur on a particular schedule. A specific opportunity or opportunities present themselves Site “prospecting” requires “go/no-go” decisions for specific properties Real estate development offers unique solutions for a community issue or challenge.

37. Evaluating Development Opportunities Mission and Strategy • Does the project align with mission and strategy? Is the project opportunity central, tangential or inconsistent with achieving current strategy and fulfilling mission. • Does project address community needs and desires? as articulated by • community leaders within and outside CDC • data • policy-makers, opinion-leaders, researchers, private funders

38. Evaluating Development Opportunities Organizational capacity • Capacity of staff to manage new project now • Capacity of staff to manage this type and scale of development • CDC’s track record with this type/scale of development?  external credibility? need for partner and/or new team members? • Availability of working capital and political capital to obtain funding and approvals to move forward?

39. Evaluating Development Opportunities Organizational Benefits and Risks (non-financial) • Are there innovative features that will produce future organizational recognition and/or funding? • Local political opposition: How strong? Could it de-rail project or damage CDC in long-run? • Opportunity costs: What will CDC be unable to do if it pursues this opportunity? Would CDC potentially compete with itself for project or other funding? • Will completed project complement other activities of CDC, strengthen portfolio, contribute to operating efficiencies

40. Evaluating Development Opportunities Organizational Benefits and Risks (financial) • Will the project generate sufficient revenue to cover its costs- in the short-run? In the long-run? • How financially risky is it? • Will the project generate additional cash to support overhead/operations? • Will the project provide access to new sources of capital? • Will the project require grant funding that would compete with other existing grant needs? • What is the reasonable timeframe from initial concept to construction completion? How long will you need to assign staff & carry the predevelopment work?

41. Evaluating Development Opportunities Project-specific issues • Site control: Is timing realistic and achievable • Zoning and other land use issues: Can approval of variances and permits reasonably be expected? • Knowable site conditions: geological and topographic, environmental contamination… • Market issues – especially for type of project contemplated.

42. Evaluating Development Opportunities THE EVALUATION PROCESS No Lifeguard on Duty? Wading into an undertow Who should be involved? When does it happen? Who manages it? How are decisions made? How are decisions recorded?

43. Feasibility Analysis A feasibility analysis is undertaken to determine whether a real estate development to be occupied by specified segment or segments of a market can be developed with the private and public financing sources that can reasonably be expected to be available… …and can provide the developer with full compensation for the costs of undertaking the development and a fair profit or return

44. Feasibility Analysis Caveats and cautions Feasibility is not determined at one moment in time… constant shift from feasible to infeasible to feasible throughout the development process Result of Feasibility Analysis Go/No-Go decision on project Lay groundwork for property acquisition negotiation Modify CDC’s bottom line program requirements