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:

Logistics
Agenda Handouts Breaks Restrooms Questions

Parking Lot Who is here? Introductions

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
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 Cs:
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 doesnt have to compete

Market Risks
Rents above market Rents unaffordable Excess capacity; slow absorption Competitive disadvantage Market wont sustain occupancy Property wont 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 Cs 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 developers 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/Lenders 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 $15,000 $285,000 $60,000 ---------$360,000 Sources Equity 1st Mortgage PRI Public Loan(s) --------Total$ Gap

Total

Wrap-up
Review of highlights Next Steps Questions

Evaluations

Thank you for your time and attention.