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

• Finding Tenants• Permanent Financing

• Construction Finance• “Gap” Financing• Construction

– Under Budget

– Within schedule

• Managing Property• Selling the Asset• Starting Over

Sponsored by:

U. S. Department of Housing and Urban Development

TDA, Inc.

Presented by:

LogisticsLogistics

AgendaHandoutsBreaksRestroomsQuestions

“Parking Lot”Who is here?Introductions

Session RulesSession Rules

Keep it informalAsk questionsShare your experienceUse your manual - take notes on the

pagesEnjoy the number crunching

Underwriting

Module 1

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 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

Development Budget• Sources

• Uses

Operating Budget• Revenue

• Expenses

• 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

Development Budget• Sources

• Uses

Operating Budget• Revenue

• Expenses

• 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. $15,000

Constr. $285,000

Soft Costs $60,000

----------

Total $360,000

Sources

Equity

1st Mortgage

PRI

Public Loan(s)

---------

Total$

Gap

Wrap-up

• Review of highlights

• Next Steps

• Questions

Evaluations

Thank you for your time and attention.