EVALUATING ALTERNATIVE APPROACHES TO
FINANCING MARKET RATE HOUSING:
A SITE IN CENTRAL SQUARE,
CAMBRIDGE
by
Brigid Snow Flanigan
Bachelor of Arts
Brown University
1978
SUBMITTED TO THE DEPARTMENT OF ARCHITECTURE
IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE DEGREE
MASTER OF SCIENCE IN REAL-ESTATE DEVELOPMENT AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
SEPTEMBER, 1985
O
Brigid Snow Flanigan 1985
The Author hereby grants to M.I.T.
permission to reproduce and to distribute publicly copies
of this thesis document in whole or in part.
Signature of the author_______________Flanigan
Brigid 8now Flanigan
Department of Architecture
August 15,
1985
Certified by
Assistant Professor of Planning and R
Ly ne E.
ag yn
l Esta e Deve opnient
Thesis Su ervisor
Accepted by
Lawrence S. Bacow
Chairman
Interdepartmental Degree Program in Real Estate Development
RoM,
OF TECNLOGY'T
SEP 0 5 1985
LIBRARIES
ACKNOWLEDGEMENTS
could
thesis
This
not
have
been
assistance and support of a few key persons.
Professor Lynne Sagalyn
thank
to
like
project and the developer,
proposed
attention
as
support
unwavering
of
process
a thesis topic.
and
thank
"real"
attention.
Erin
Donald Tofias,
I
Finally,
am
I
the
summer
writing
has
thesis
this
to
would like to thank my
Their assistance
humor this summer have been invaluable.
2
both
In addition, I would like
most appreciative of his
O'Boyle and Sarah Abrams.
my
to
made
the
Donald Tofias for the opportunity
project.
the
bringing
and
enjoyable and highly educational.
to
First, I would
Her insightful comments
throughout
researching
for
the
without
completed
analyze
time
a
and
classmates,
and
good
Evaluating Alternative Approaches to Financing Market
Housing: A Site in Central Square, Cambridge
Rate
by
Brigid Snow Flanigan
Submitted to the Department of Architecture on August
16, 1985 in partial fulfillment of the requirements for the
Degree of Master of Science in Real Estate Development
ABSTRACT
This thesis analyzes the market, political and financial
feasibility of constructing a multifamily rental housing
Cambridge,
Square,
in
Central
on
a site
project
a local
Massachusetts. The site is presently owned by
developer.
First, the author describes the site and demographic and
housing characteristics of the surrounding neighborhoods.
Second, the current demand in the Cambridge housing market
analyzed, and potential users and rent levels are
is
established. Third, the author outlines the public approval
and those obstacles which must be overcome by the
process
developer. Fourth, the financial feasibility of the project
is analyzed. When the project is found to be economically
a range of public
infeasible with private financing,
financing alternatives are identified and described. The
financial returns to the developer are analyzed and compared
these
to
the limitations imposed on the project by
developer
the
financing sources. The author concludes that
financial
achieve
public financing to
utilize
must
feasibility.
Thesis Advisor:
Lynne B. Sagalyn
Assistant Professor of Planning and
Real Estate Development
3
TABLE OF CONTENTS
Acknowledgements............................................2
Abstract.................................................... 3
Chapter One: Introduction and Description of Site and
Surrounding Neighborhoods................
Chapter Two: Market Feasibility of the Proposed
Project................................. -- --18
Chapter Three: Political Feasibility of the Proposed
31
Project..............................
Chapter Four: Financial Feasibility of the Proposed
Project...............................
.40
.. 74
Chapter Five: Conclusions and Recommendations........
List of Exhibits and Tables
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Three.
Four..
Five..
Six...
Eight.
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Notes..............
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Appendix Exhibits. ..
Exhibit
Exhibit
Exhibit
Exhibit
Exhibit
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Table One...
Table Two...
Exhibit One.
Exhibit Two.
Table Three.
Table Four..
Table Five..
Table Six...
Table Seven.
Table Eight.
Table Nine..
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-- -a.a.110
4
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CHAPTER ONE
INTRODUCTION
The
purpose of this thesis is to analyze
and
political
feasibility
financial
market,
the
a
constructing
of
multifamily rental housing project on a privately owned site
in
Central
the
Massachusetts.
of
this
The owner of the site, a local developer, is
with numerous obstacles which makes
confronted
Cambridge,
of
neighborhood
Square
The
project particularly difficult.
identify these obstacles,
development
will
thesis
to
as well as suggest strategies
overcome them.
adjacent land uses
Chapter One will describe the site,
and
the
demographic
surrounding
architectural
Chapter
Two
project
by
and housing
In
neighborhoods.
plans
will
first
for
the
addition,
project
the market
analyze
will
declining supply of privately-owned rental
comparables
preliminary
outlined.
be
potential
identifying the demand
housing.
the
for
generated
for the project will be described,
the
of
charactersitics
by
a
Market
as well
as
the perception of the site by local brokers.
Chapter
Three will focus on the political
feasibility
of the project, specifically the response of local residents
and the impact of rent control laws on long term projections
of financial feasibility.
Lastly, Chapter Four will analyze
5
the
found
financing,
will
to
be
private
with
a range of public sector financing
be identified and described.
will
When the project
infeasible
economically
and
utilizing
identified,
be
and participation financing.
conventional
is
project
the
of
rewards
risks
The
feasibility of the project.
financial
alternatives
The financial returns to
the developer will be compared to the limitations imposed on
the
Chapter
financing.
project by utilizing public sector
Five concludes by recommending that the developer
undertake
the project if he is willing to assume the risks inherent in
the process of competing for scarce public finnacing.
EXISTING CONDITION OF SITE
site of the proposed rental housing project is
The
25,000
square
foot parcel located in
neighborhood of Cambridge,
of
block
Massachussetts
Central
Square
Massachussetts. It is within one
intersection
the
the
a
of
Avenue and is bounded
Prospect
by
and
Street
Prospect,
Bishop
Allen and Essex Streets.
The site is presently used as a parking lot for tenants
of
three
buildings
comprise
Square.
provided
office
contain
buildings located
nearby.
apporximately 176,000
These
square
office
feet
and
the largest cluster of office buildings in Central
Additional parking for the office buildings is also
on a lot located on the western edge
6
of
Prospect
(see Exhibit 1).
Street
These lots presently accomodate 300
cars. [1]
cluster
The
Street
on the east and west side of Prospect
lots
located
were
recently purchased as a package by a local
Central Plaza Realty Trust (CPRT).
developer,
of
The development plan
is to convert the parking lot located on the west side
CPRT
of
parking
two
of office buildings and the
Street into a three story
Prospect
covered
provide
locates nearby.
buildings
for
office
the
of
the tenants
economic
In order to ensure the
intends
to
a total of 80,000 square feet of office space
on
the developer also
of the garage,
feasibility
construct
parking
will
which
garage
The construction of the garage
two floors above the garage.
would subsequently make the subject parcel, located directly
to
adjacent
the
garage
on the
east
side
Prospect,
of
available for development.
developer
The
the
site
is actively considering development
into rental housing or
condominiums.
of
local
The
government as well as community groups would like to see the
In exchange for providing rental
site developed as housing.
housing which fulfills a community need, the developer would
like
to
western
three
space.
western
parcel
secure a zoning amendment for the
on
the
side of Prospect in order to construct the proposed
story
garage and two additional
At the present time,
side
of
of
office
a portion of the parcel on the
Prospect is located in
7
stories
a
Residence
C-1
District ,
Zoning
residential
the
which generally limits permitted uses to
zoning designation from Residence C-1 to a
Designation,
parking
and
the
developer
proposed
the
proposed
office structure.
of
The site
Residence B and
permitted
Residential housing is a
A-1 District.
B
Business
can proceed with the
housing project is located in a Business A,
Business
change
If the municipality agrees to
housing.
use in all three of those Districts.[2]
As
closely
percieved
by the developer,
interrelated
in
and,
all
the two projects
are
will
not
likelihood,
proceed independently from one another.
SITE CONTEXT
Central
provides
well
as
Square
services
is
area
a retail and shopping
to adjacent residential
result of the proximity of the site to Central
land
uses
are
predominately
as
communities
MIT.
the student population of Harvard and
surrounding
which
As
Square,
commercial
a
the
in
nature.
Prospect
and
is
Street borders the eastern edge of
heavily trafficked,
Massachusetts
Turnpike
at
as numerous trucks
the
edge
of
the
the
exit
site
the
adjacent
neighborhood, Cambridgeport, and travel down Prospect Street
towards Somerville. Structures on Prospect Street within one
block of the subject site include a Bread and Circus grocery
8
ADD Inc.; and
the offices of an architectural firm,
store;
facilities.
The
edge of the site faces Bishop Allen Drive and
the
neighborhood-oriented
small,
southern
commercial
The entrance
rear entrance to Woolworth's Department Store.
appears
and
be used primarily for loading purposes
to
is
poorly maintained. A cluster of townhouses is located at the
of
intersection
and
Stree t
Essex
These
adjacent to the eastern edge of the site.
townhouses
been renovated into small offices and contain numerous
have
The
houses.
two-and-three
is
street
essentailly
and is dominated by two-and-three
residential in character,
family
The
Essex Street.
by
bounded
backyards and rear ent rances of
houses
family
site
The eastern edge of the
not-for-profit organizations.
is
Drive,
Allen
Bishop
on
Essex
these
the
form
St reet
northern edge of the site. (see Exhibit 1.)
Although
that
are
there
indic ates
physical inspection of the site
surroundings
its
nature,
a
are
several
commercial
predominately
in
site
the
features which make
appropiate for residential. It is within one block of an MTA
station, which is presently being extensively renovated. The
site
travel
is also within one block of numerous bus routes
to
facilities
conveniently
Square
and
downtown Boston
such
as grocery,
Harvard
are
addition,
the
inexpensive,
In
ethnic
which serve the students of MIT and Harvard.
9
Shopping
drug and clothing stores
located in Central Square.
contains numerous
Square.
which
restaurants
DESCRIPTION OF NEIGHBORHOOD
The
is,
of a rental or condominium
marketability
subject to the image of the surrounding
in large part,
The common perception of Central Square is a
neighborhoods.
dominated
neighborhood
substandard
project
housing.
The
by
for the
task
and
persons
income
lower
is
developer
to
understand how this perception is formulated and whether the
perception is an accurate reflection of the demographics
the Square and adjacent neighborhoods.
can
economic
A marketing strategy
be developed which acknowledges
subsequently
of
existing
conditions while emphasizing those aspects of
the
neighborhood which appeal to upper-income groups.
As
housing
by
the site
indicates,
2
Exhibit
project is surrounded by two neighborhoods
the Cambridge Planning Department as
Five.
Neighborhood
and
Neighborhood Four,
The
defined
located
Four
in
which is the eastern section of the area
Massachusetts Avenue,
That
proposed
Neighborhood
site is actually
commonly known as Mid-Cambridge.
Five.
the
of
The site is one block from
Neighborhood
the nothern boundary of
neighborhood
is
city
known to
residents
as
Cambridgeport.
Using data from the 1980 Census,
a
profile
of
neighborhoods.
the
In
households
addition,
the
the city has compiled
residing
city
has
in
these
two
analyzed
the
existing housing stock. The demographic picture of these two
neighborhoods is outlined below.
Family and Income Characteristics
The
following
table summarizes the family and
characteristics of Neighborhoods Four and Five,
income
as well
as
the city of Cambridge.
Table 1:Demographic Characteristics of Project Market Area
City
Area #4
Area #5
6,532
8,670
Number of minorities
as a % of pop.
50%
22%
18%
Percentage of persons
under 15 years
22%
13%
13%
9.6%
13%
11%
Characteristic
Number of Persons
95,322
Percentage of persons
over 65 years
Median Family Income
$11,073
$15,474
Percentage of Persons
Below Poverty Level
27%
17%
11%
Percentage of Families
headed by single women
46%
32%
24%
Average size of Families
3.21
w/children under 18
3.07
3.03
Source: Cambridge Department of Housing and Community
Development
As
the
Neighborhood
clearly
indicate,
Four contains a greater number of
minorities,
demographics
11
above
young persons and large families headed by single women than
either
Neighborhood
result,
the
significantly
or the city as
Five
median
lower than the income level
Neighborhood
Four
whole.
As
family income of Neighborhood Four
In addition,
Five or the city as a whole.
of
a
is
59%
of
is
Neighborhood
the poverty rate
than
higher
a
the
adjacent
Neighborhood Five.
Housing Characteristics
The
the
following chart summarizes the characteristics
housing stock for these two neighborhoods,
as well
for the city overall.
Table 2: Housing Characteristics of Project Market Area
CHARACTERISTIC
Number of Occupied
Units
Area
#4
2,447
Area #5
City
4,012
38,836
Percentage Owner
Occupied
15%
19%
23%
Percentage Renter
Occupied
85%
81%
77%
Percentage Constructed
prior to 1940
81%
72%
68%
Percentage of
Subsidized Units
20%
15%
11%
Source: Cambridge Department of Housing and Community
Development
12
of
as
The percentage of owner occupied units in
Neighborhood
Four is only half of the city-wide average. In addition, the
overall
of subsidized units is almost twice the
percentage
rate for the city. Not suprisingly, these housing statistics
mirror
In
above.
the family and income demographics described
Neighborhood
summary,
Four
more
and
poorer
is
deteriorated than the majority of neighborhoods in the city.
DESCRIPTION OF PROPOSED PROJECT
successful
A
neighborhoods.
for
must
site
the
two
these
The site is not buffered from the impact
neighborhoods,
these
plan
social and physical profile of
the
acknowledge
development
The
Four.
particularly Neighborhood
range of development alternatives must be narrowed,
of
and the
who will feel comfortable with the social environment
users
must be identified.
rental
predominance of lower-income persons and older
addition,
of
housing.
In
the developer determined that the predominance of
uses
commercial
size
the
given
condominium project is not feasible,
or
luxury
a
developer has therefore concluded that
The
the
developement
on adjacent parcels and
parcel
makes the
unattractive.[3]
alternative
The
alternative remaining is a multi-family,
condominium project.
13
relatively
only
of
small
townhouse
residential
mid-rise rental or
rental
four stories.
is
Street
Essex
and the building which borders on
stories,
five
a
by
joined
buildings
the
for
The building directly adjacent to Propect Street
courtyard.
is
residential
two
of
construction
calls
The plan
project.
condomimium
or
a
for
has developed a preliminary design
who
ADD,
firm,
architectural
the developer retained an
a result,
As
the
of
The gross square footage
building,
as presently designed, is 47,400 square feet. The
exterior
of
brick
fireproof
be
will
building
the
construction and from a design perspective, will emulate the
brick townhouses which face Essex Street to the east.[4]
The
laid
for the buildings has individual units
plan
out along a single corridor in each building, with elevators
36
two-bedroom
units of approximately 905 square feet and nine
one-bedroom
in
both
The buildings contain
buildings.
units of approximately 660 square feet.
to
Specifically,
kitchens
with
cabinets
and
door.
the
commomnly
is
what
create
the
a
defined
The developer plans
floors,
units will contain wood
dishwasher,
access
disposal
and
to balconies through a
unit.
"b+"
a
as
modern
high-quality
glass
double
The two- bedroom units will include two bathrooms. At
present time,
the developer plans to meter all of
to
the
tenants.
the
the
Finally,
utilities
individually
architect
has also designed one level of parking underneath
the
foot
building,
ramp
which will be accessible by car from
and by elevator from the
14
residential
a
units.
six
A
total of 45 parking spaces will be provided.
While
architect has developed preliminary
plans,
the developer has not determined whether the project
should
be
the
developed
identified
for
the rental
or
condominium
market,
appropiate rent levels or sale prices.
or
The next
chapter will discuss current trends in the Cambridge housing
market,
for
as well identify an appropiate user and rent
the
project,
as
presently.
Chapter
Four
level
will
subsequently anaylze the economic feasibility of building
rental
housing
project
on the
subject
site,
recommended rent levels and cost of construction.
15
given
a
the
cC)3
___________C
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EXHIBIT
DEVELOPERAOV UM~
ONE
III__________
NeighborhoodsH
'oA
r~ i.
Community Development Department
1976
CHAPTER TWO
CURRENT TRENDS IN THE CAMBRIDGE HOUSING MARKET
In
order
to
identify
the
appropiate
condominium market for the subject site,
or
rental
the overall trends
in the Cambridge rental and homeownership markets must first
be
analyzed.
The
table below summarizes the changes
that
have occured in these markets between 1970 and 1980.
Table
3: Changes in the Cambridge Market 1970 to 1980
1970
1980
Number of Occupied Units
36,411
38,836
Number of Privately Owned
Renter-Occupied Units
27,143
25,484
Housing Characteristics
(6%)
Percentage Change from
1970 to 1980
Number of Subsidized Units
2278
4463
97%
Percentage Change from
1970 to 1980
Number of Owner Occupied Units
6990
8889
27%
Percentage Change from
1907 to 1980
Number of Conversions from
Private Rental to Condominium
1983
7.3%
Number of Conversions as a
Percentage of Private Rental Units
Source: Cambridge Department of Housing and Community
Development
18
privately
These figures indicate that the growth in the
housing market has occured exclusively in the
owned
occupied ,
the
as opposed to renter-occupied,
number
sector. Although
during
occupied units increased by 7%
of
owner-
the
the number of privately owned rental units decreased
1970s,
This decline can be attributed,
by 6.1%.
in part,
to
the
significant number of conversions during the decade. A total
of 1983 units, or 7.3% of the existing rental units in 1970,
were converted into condominiums.
a
As
result
throughout the 1970s.
equal to 3.3%.
the
increase,
a variety of factors have precipitated this
existence
of
rent
stringent
addition,
In
and additional subsidized units were vacant
undergoing renovation.[5] In light of these
city officals revise the figure of 6% downward,
that
a
vacancy
a
priced
units for rent or sale were inaccurately
for the market,
while
control
has encouraged some landlords
to keep their rental units off the market.
of
six
the vacancy rate had risen to
regulations during the decade
number
low
remained
the city's vacancy rate was
In 1970,
In 1980,
While
percent.
the vacancy rate has
stock,
rental
private
city's
the
of the absolute decrease in
rate of between 1.5
and
accurately reflects the housing market.[6]
19
3
factors,
and suggest
percent
more
FACTORS AFFECTING MARKET TRENDS
A
the
in
of factors have caused the decline
variety
number of privately owned rental units. From the perspective
decline is attributable
the
officals,
local
of
to
the
economic infeasibility of constructing new rental housing in
a
with increasing
densely settled urban area
such
Cambridge.[7]
as
have
rents
kept
not
They suggest that the
pace with
the
land
values
increase
in
cost
of
increasing
residential construction. They also suggest that alternative
such
as
opportunities,
construction
of condominiums or office buildings,
housing.
Cambridge,
combined
yield
are more
and yield a higher return to the developer
profitable
rental
or
conversion
development
They point out that,
the
with
tax
advantages
the potential of
of
than
in a market such
homeownership,
substantial
as
when
appreciation,
a much higher return to the purchaser than
a
"high-
end" or luxury rental unit.
From
number
perspective of brokers,
of rental units is,
factors
stringent
the
the
in part,
the decline in
attributable
to
the
on
the
rent control laws as the primary explanation
for
discussed
decline
in
above.
the
However,
number
of
they
focus
renter-occupied
housing
units.[8] The city's Rent and Eviction Control Enabling
of
and
1969 places strict limits on the rent levels,
the
the
increases
scope of improvements which can implemented
20
Act
by
a
or 15,000 units are under the
58%
units,
rental
of a total of 25,484 privately-owner
Out
landlord.
jurisdiction
of
rent control.[9]
conversions
brokers also point to the number of
These
negative
occured during the 1970s as evidence of the
which
impact of rent control laws on the city's housing market. As
was
7.3% of the privately owner rental units
stated above,
were converted to condominiums during the 1970s. As a result
of
the moratorium on conversions passed by the City
in
August
1979,
of
number
the
recent
Coucil
has
conversions
declined dramatically.
NEWLY CONSTRUCTED RENTAL HOUSING
the early seventies,
Since
undertaken
projects
have
Cambridge
been
project
located
Composed
exempt
Agency,
at
city
of
variety
of
by the private sector in the
heavily subsidized by
government housing programs.
rental
construction
the only new
that
a
The most recently
contains
any market
rate
constructed
units
808 Memorial Drive and was completed
of 301 units,
in
1976.
in
the project was financed with
financing through the Massachusetts Housing
with
conjunction
low- interest
financing provided through HUD's Section 236
is
tax-
Finance
permanent
program.
Only
81 units in the building are defined as "market rate", in so
far
as the tenants of these units are not subject to income
restrictions
under the Section 236 program.
21
The rents
for
$750
these market rate units are $615 for a two-bedroom and
for
bedroom,
three
a
hot
and
water.
the equity return to
other MHFA projects,
to
Similar
inclusive of heat
the
developer is limited to 6%.[10]
The only other activity in the new construction
rental
is a project presently under construction in Central
market
Undertaken
Square.
Development
by the Winn
Company,
the
project is located at the intersection of Western Avenue and
River
Street.
When completed,
contain a total of 85 units,
approximately
the-ten story building will
several levels of parking
and
3000 square feet of commercial space.[11] The
project will provide 23 units affordable to low and moderate
income persons, comprised of four three-bedroom units and 19
two-bedroom units.
The balance of market rate units will be
units.
composed of 8 three bedroom and 54 two- bedroom
The
cost per unit is equal to $120,000, of which $50,000 will be
subsidized
through
the SHARP program implemented by
and
program
Grant
HUD's Housing Development Action
of
and
Communities
the
state's
Development.
The
Executive
Office
developer
projects to rent the units for an average of $850
inclusive of heat and hot
per month for a two bedroom unit,
and
water
$1,000
three
for a
bedroom
unit.
Structured
parking will be available for an additonal $60 per month.
It
is important to recognize that the subsidy
available to the developer,
present
time
and,
Winn,
cannot be secured at the
in light of the priority
22
package
given
rental
housing by the Reagan Administration,
in
the
future.
reduces
The depth of
will not be available
this
subsidy
significantly
the market risk undertaken by the developer,
in the opinion of the author,
may not adequately define the
upper limits of the newly constructed rental housing
in
the
Central
Square neighborhood.
Both
developer
used
the
Control Board as comparables
Rent
limits.
the
they
market
MHFA
market
and
the
rental buildings under the jurisdiction
Because
controlled,
and ,
these
to
comparables
establish
are
rent
artifically
may not provide an accurate "reading"
demand
for
housing
in
the
of
Central
of
Sqaure
neighborhood.
MARKET COMPARABLES
As was discussed above, the supply of rental housing in
Cambridge
has
addition,
approximately 15,000 units,
number
the
decreased
over
the
last
ten
or 58% of the
of privately owner rental housing units,
jurisdiction
of
rent
control.
years.
In
total
are
under
Significantly,
these
include all multi-family rental properties larger than three
units
and
constructed
jurisdiction
properties
prior
of rent control.
in
the
Cambridge
to
1969
fall
under
As a result,
there are
market which
can
serve
the
few
as
accurate comparables for the proposed 45-unit project.
The
majority
of projects appropriate
23
as
comparables
fall
into the following three
categories:
1)
condominium
units purchased by investors and currently rented; 2) rental
units
located
in
deregulated areas
adjacent
to
Central
Square such as Somerville and 3) units owned by institutions
such
as
Exhibit
these
Harvard available to students
Three indicates,
three
and
employees.
As
the market comparables drawn from
categories range from $500 to $760 for
a
one
bedroom and $700 to $1000 for a two bedroom. On the basis of
these
comparables,
the average rent for a one
bedroom
is
equal to $630 and $850 for a two bedroom.
There
are
specific
drawbacks associated
with
using
these comparables. The units located in Somerville are in an
inferior location with poor transportation access to Harvard
Square
Harvard
and
downtown Boston.
as such,
housing affordable.
units
available
through
are limited to persons studying or working for
institution and,
the
The units
are located in
the
Harvard has an incentive to keep
In addition,
many of the
Harvard
Cambridge.
Lastly,
superior areas of
the number of condominium units currently rented are limited
as
well as technically under the jurisdiction of
the
Rent
Control Board.
MARKET DEMAND AS PERCIEVED BY BROKERS
In
light
of the dearth of accuarte
must look to the privately owned,
comparables,
unregulated rental
one
stock
to provide an indication of demand and thereby an achievable
24
of rent levels for the proposed project.
range
In order to
secure this data, the author interviewed four brokers active
in
Cambridge
the
The
exterior
in
described
interior finishes
and
Chapter
of
size
quality,
(as
project
the
brokers
the
Subsequently,
One).
first
were
brokers
with an overall description of the
provided
and
market.[12)
provided the author with their analysis of the image, market
demand and projected rent levels for Central Square.
Image of Central Square
brokers believe that while the demand for rental
These
image
of
continues to be poor and has the effect
of
The Central Sqaure neighborhood
is
Cambridge is extremely
housing
in
Central
Square
depressing rent levels.
divided
into
portions
of
number
Cambridgeport
commercial district.
certain
sections
Neighborhood Four,
the
of
predominance
housing.
However,
residential
of
These brokers point
broker,
brokers
Central
out
that
are not strong residential markets given
because
these
neighborhoods
are
more
rental and condominium units can
as descibed by
"smack in the middle" of Central
that
substandard
and
of lower-income persons
in character,
believe
Mid-
particularly
submarkets,
command higher prices than housing which is,
one
and
Five)
(Neighborhood
these
those
including
submarkets,
(Neighborhood Four) which border on the
Cambridge
Sqaure
a
the
strong,
there is a
25
great
deal
Square.
of
The
"market
resistance" to this location one block from the intersection
of Massachusetts Avenue and Prospect Street.
Brokers are encouraged by the ongoing renovation of the
Central
enough
Square
signs
subway station.
However,
they do not
to believe that a significant
and
long-term
improvement is underway which could alter the area's
In
their
opinoin,
revitalization,
environment
homebuyer.
for
the
which
a
area could undergo
would mean a safer,
moderate-or
Alternatively,
the
a
more
ameniable
renter
the present problems of crime,
loitering and
commercial establishments would remain.
that
or
could continue in its
present function as a service area to low-income
and
image.
significant
middle-income
area
see
residents,
marginal
The brokers believe
the area has the potential to move in either direction
and are not willing to make any predictions about trends
in
the area for the next three to four years.
Identifying the Market for the Project
this
at
The
brokers believe that the most suitable market
type of rental housing project would include
MIT
downtown
and
Harvard and young professionals
Boston,
Harvard
Square or
Kendall
who
for
students
work
Square.
in
The
brokers were divided on the question of whether these groups
would be willing to live in Central Square and pay the rents
necessary to finance debt service and operating expenses for
a newly construction project.
26
A number of the brokers cited
Kendall
the accessibility of the Square to downtown Boston,
MIT and Harvard.
Square,
of
supply
In their
opinion,
affordable rental and condominium
the declining
will
housing
this project more competitive and mitigate against the
make
poor image of its location. The alternative view provided by
is that,
brokers
other
exception
with the
students,
of
persons who can afford to pay rents in the range of $650-800
for
want
live in the heart of Central
to
prefer
housing
find
to
of
advantages
desirable
in more
They
homeownership.
Essentially,
would
or
locations
"starter" condominium and gain
a small,
purchase
Square.
not
do
one bedroom and $800-1000 for a two bedroom
a
the
tax
do
not
they
believe that the overall housing shortage will significantly
offset the image of Central Square.
According to these brokers, rents in the Central Square
neighborhood
range from $500 to $750 for a one bedroom
$650 to $1000 for a two bedroom,
age
in
two
of the unit and
depending on the location,
quality of construction.
more desirable locations in Cambridge,
bedroom range from $1000 to $1200.
Central
and
In contrast,
the rents for
The poor
Square translates into a discount of
image
one
suggested
bedroom
exclusive
present
of
and
that a rent of $650-700 per month for
$800-900 per month
utilities,
for
a
two
is the top of the market
time for a newly constructed,
27
of
approximately
$200 per month in the rent for a two bedroom apartment.
brokers
a
"b+" quality
The
a
bedroom,
at
the
rental
project at the proposed site.
CONDOMINIUM MARKET
to these brokers,
According
the condominium market in
the
Central Square neighborhood at the present time
the
price
brokers
these
to
cite
quality
their discussion of the rental
market,
the
the
poor image of
influence on condominium prices.
negative
in
"b+"
range of $100 per square foot for
Similar
units.
is
as
Square
a
range
The price
for one bedroom and two bedroom condominium units is $85,000
to
suggest
brokers
that,
supply
the
as
multifamily housing continues to decline,
time
first
the
homebuyers
will
These
respectively.
$140,000
and $120,000 to
$95,000
be
and
single
of
virtually all
the
into
pushed
of
condominium market, which will cause prices for condominiums
to rise. The increasing demand for these units will mitigate
against the poor image of Central Square and the market
condominiums
"starter"
$100,000
in the price range of
for
to
$150,000 in this location will become stronger.
As
the
a result,
subject
housing
years.
realize
and
converted
a
into condominiums in
opinion,
five
the developer will be
gain
substantial
upon
sale
rental
as
site should be developed initially
their
In
a number of these brokers suggested that
to
able
given
ten
to
the
revitalization of the Square and the ongoing appreciation of
28
for
this site will be stronger in five to
ten
the dwindling supply of condominiums and
the
at
condominiums
given
years,
market
property.
residential
They
suggest that
prohibition against conversion of
present
the
controlled
rent
property into condominiums.
CONCLUSION:
RECOMMENDED MARKET AND RENT LEVELS
perspective
The
of
the
poor image of the Square
the
marketability
the
given
project
levels
namely that
reached at the end of Chapter One,
conclusions
has a signifiacnt
of the proposed
overwhelming
demand
project.
rental
for
carefully
identified.
on
impact
Nevertheless,
the
housing,
can be a success if the potential renter
are
the
supports
brokers
these
and
On the basis
rent
field
of
research, the author makes the following recommendations:
1)
Graduate
represent
a
students and short term
strong market for the
project.
In
MIT
at
faculty
addition,
young professionals who work in the Kendall Square area will
These
appreciate the convenience of the project's location.
two
groups
should
be
targeted,
as
they
will
be
less
concerned with the Square's negative image.
2) Projected rent levels should reflect the location of
center.
the
site as one block from the Square's commercial
The
author therefore recommends that rent levels be set
existing average rents,
which approximate $650 for a
29
at
one-
These figures will
bedroom and $800 for a two-bedroom unit.
be
trended
upward
to the estimated date
of
construction
completion.
While
achieve
political
been
the
full
occupancy
given
these
rent
project
levels,
and financial feasibility of the project has
established.
political
approval
developer
confronts
approval.
the
author is confident that
The
next
process,
in
his
chapter
and
will
analyze
the obstacles
efforts
to
secure
that
can
the
not
the
the
project
Chapter Four will analyze the feasibility of the
project using both private and public financing sources.
30
CHAPTER THREE
POLITICAL FEASIBILITY
the
During
acquired
has
Cambridge
decade,
a
as a city that does not welcome new development.
reputation
process
approval
public
The
last
Given
politicized.
the
reputation,
this
highly
be
to
appears
political
feasibility of a rental housing project at the proposed site
in
Square
Central
possible,
a
be
must
carefully
examined
and,
if
the
strategy must be formulated to respond to
City Coucillors and residents of
concerns of city officals,
the adjacent neighborhoods.
The role of the municipality in the development of this
rental housing project will be significant.
officials
local
and
residents will
center
The concerns of
around
three
issues:
1) the provision of a zoning amendment necessary to
proceed
with the overall project;
rent
control
2) the applicability
laws to the project and 3) the impact of
of
the
project on the adjacent neighborhoods.
ZONING ISSUES
While zoning regulations define
a multi-family
rental
housing project as an allowable use, the developer wishes to
developement on this parcel to new developement on
the
adjacent parcel on the western side of Prospect Street.
As
tie
31
the developer wishes to develop
was discussed in Chapter 1,
a
parking garage and 80,000 sqaure feet of office space
the
parking
directly
across
project.
While
the
Prospect
Street,
the
proposed
housing
a parking garage is an
regulations.
As
office/garage structure will exceed 35 feet,
is
use,
allowable
an
under
in excess of 35 feet is not allowed
zoning
existing
of
side
site of
the
from
building
office
the west
on
lot
on
the
proposed
the
developer
Council
in need of a new zoning ordinance from the City
in order to proceed. [13]
A number of City Councillors and neighborhood residents
do
not support additional commercial development in Central
Square.
They are, however, strongly in favor of residential
development.
The strategy of the developer to date has been
to formulate an overall plan for the two parcels on the east
and
west side of Prospect Street which
political realities.
the
garage/office
acknowledges
these
In presenting a "package deal" of both
structure
and
housing
project,
developer recognizes the desire of the City Council and
community
for
additional
multifamily housing as
their opposition to additional commercial
developer
believes
favorably
upon
that
the City Coucil
well
development.
will
look
his request for a zoning amendment for
the
the
as
The
more
the
garage/office structure if the housing project is contingent
upon its receipt.
32
RENT CONTROL
1969,
Since
Cambridge
city
investment
of
laws
has been governed by stringent rent control
limit the initial rents,
which
on
the rental housing stock in the
rental increases and return
to owners of property constructed
prior
to
1969. Out of a total of 25,484 privately owned rental units,
15,000
units,
or 58% units are under the
jurisdiction
of
rent control. [14]
With
proposed
statute
regard to the applicability of these laws to
project
exempts
in Central Square,
the
it is clear that
any new construction project
built
the
after
January 1,1969. The enabling legislation for the city is the
Cambridge Rent Control and Eviction Enabling Act,
the
Massachusetts
Senate and House of
passed by
Representatives
on
March 31, 1976. The act defines "controlled rental units" as
all rental units except".. .2) rental units the
construction
of which was completed on or after January 1,1969,
are
or which
housing units created by the conversion from housing to
nonhousing use on or after said date..."
Because
jurisdiction
the proposed project does not fall
of
the
Rent
Control
Board,
under
the
the
existing
ordinance which prohibits conversion of rental property into
condominiums does not apply.
[15] In 1979, the City Council
passed an ordinance restricting the conversion of controlled
rental
units
into condominiums except in the case
33
of
the
since
continuously
proposed
the
Because
August 10,1979.
unit
the
in
lived
to a tenant who has
unit
a
of
sale
project does not contain "controlled units", the prohibition
against conversion does not apply.
Future Application of Rent Control Laws
existing
the
While
constructed after 1969,
the
law
buildings
exempts
clearly
the
into
statute to move the exemption date
existing
revise
the City Council can always
future. For instance, in 1990, the City Council could revise
the
the
scenerio,
project
would
fall
under
the
The
future
of rent control laws would have a very
serious
the
Rent
Control
Board.
projections
of
likelihood of an expansion of the existing law
is
project and the long
the
on
impact
proposed
this
Under
1990.
1,
those
as
units
controlled
January
of
jurisdiction
application
define
after
or
on
constructed
to
law
existing
term
financial feasibility.
The
upon:
contingent
memebers
overall
who
are
political
(1)
in
those
the position of
favor of rent control
climate in the city.
Staff Director of the Rent Control Board,
city
Legal
that
coucilmen,
city
(2)
the
to
the
Mervis,
the
and
According
Bob
state legislatores and activists (such
Aid lawyers) who support rent control do not
these
laws
coucil
should be extended
multi-family projects.
to
new
as
believe
construction
Mr. Mervis maintains that even these
34
of rent control understand that its extension
advocates
newly
constructed
projects will have a negative impact
to
on
new
increasing the overall supply of rental housing through
construction.
Mr.
Mervis
surrounding
brief,
he
rent
the
to
points
legislative
control to support
his
history
conclusions.
when Govenor Dukkais was initially elected in
convinced
the legislature to pass a statewide
In
1970,
enabling
act, which allowed individual communities to enact their own
rent
control
Somerville
laws.
The
cities
of
Boston,
and Brookline subsequently passed
Cambridge,
rent
control
In 1975, when the state enabling legislation expired,
Dukkais
pass
laws.
was
an
unable to convince the
extension of the prior
state legislature
bill.
As
present procedure requires the locality,
a
result,
to
the
such as Cambridge,
to
seek approval from the state legislature and the Govenor
of
any
revised
legislature
rent
control
govenor
of
will
and
after
Mr.
approval by the state legislature
Local realtors,
however,
the
signed
Mervis argues that
serve as a "check" on the activities
City Council.
state
Only
has passed the bill and the Govenor has
it can the statute become law.
requirement
statutes.
the
and
the
of
the
point out that the
legislature tends to respect the concept of home rule
would,
in
all
likelihood,
approve
initiative presented by the City Council.
35
any
legislative
The
future
political climate in the
will
also
affect the probabilities of a revision of the statute.
Even
though
city
it is impossible to predict the climate,
the city's
unique electoral system does provide a number of clues as to
how City Coucillors will evaluate the need for an
expansion
of the existing laws.
A
key
feature
Cambridge
lies
figurehead,
of
with
as
this system is that
the City
opposed
to
Council.
the
The
power
mayor
other municipalities
in
is
such
a
as
Boston where he (or she) leads the municipal government. The
mayor
is
votes,
elected from the city council by
and
electorate
a
majority
of
therefore does not recieve the mandate from the
that
would
be forthcoming as
a
result
of
a
general election.
The
electoral
system
encourages the
nomination
and
election of Coucillors who are more attuned to the interests
of
particular
groups,
larger majority.
of
proportional,
Voters
as opposed to the concerns
of
City coucilmen are elected under a
as opposed to
majority,
the
system
representation.
prioritize their votes and candidates are elected on
the basis of a minimum number of "#1" votes.
The net result
is that city coucilmen need to secure a minimum of the total
number of voters cast divided by the number of council seats
plus
one.
In the last election,
a candidate
needed
only
3,112 votes out of 28,000 votes cast in the city to secure a
seat.
This
number represents only 3% of the city's overall
36
population. [16]
The
encourage
a
effect of proportional representation
to
candidates who are responsive to the interests of
small minority.
appeal
is
Because these coucilmen do not
to the majority of voters,
have
to
they are not required to
confront a number of issues which have an overall impact
on
the
or
city.
public
As a result,
officals
to
the ability of the city coucil
create longer
address these issues is
The
does
only
term
strategies
which
severly hindered.
way to guarantee that the
proposed
project
not fall under the jurisdiction of rent control is
utilize
state or federal financing.
developer
program,
financed
the
project
For instance,
under
the
if
state
to
the
SHARP
the rents in the project would be regulated by the
Massachsetts Housing Finance Agency and the project would be
exempt
from rent control,
even if the City Council
pushed
the exemption date into the future. [17]
CONCERNS OF NEIGHBORHOOD RESIDENTS
Lastly, the political feasiblity of the housing project
is contingent upon the reaction of the residents immediately
adjacent to the site.
into
an
advisory
Coalition,
bounded
which
The residents are formally
coucil
has
named
the
organized
Neighborhood
Four
jurisdiction over Neighborhood Four,
on the southern edge by Massachusetts Avenue.
37
On
the
Neighborhood
that
of
Four Coalition and city officals,
appears
concerns
the
it
focus
of the residents will
on
1) the impact of traffic generated by the
issues:
2)
basis of discussions with the leaders
the overall design of the building and its
the
three
project;
compatablity
with adjacent structures and 3) the availability of a number
of the units to low-and moderate- income residents. [18] The
developer
has
neighborhood
initiated
a
series
of
meetings
with
residents and city officals to inform them
of
the project and solicit their opinions . This process should
enable
the developer and neighborhood residents to reach an
acceptable
as
well
compromise over a majority of the design issues,
as an approach to mitigate against the
impact
of
additional traffic generated by the project.
With regard to the provision of rental units affordable
to low-and-moderate income persons, the developer must first
decide how the project will be financed,
financial
structure
enables
him
to
and whether such a
make
these
affordable to lower income persons and subsequently
these
conclusions
scenerio
refrain
that
to
to the community residents.
may appear obvious at first,
from
the
raising expectations without
these expectations will be met.
persons,
present
While
this
developer
must
some
assurance
If it is not feasible
provide units at rents affordable to
income
units
low-and
moderate-
the developer may need to demonstrate this
by sharing his proformas with key members of the
38
community,
as well as the City Coucil.
The
to
strategy of the neighborhood residents with regard
negotiations
cannot
be
with
fully
Developement
the developer and
predicted
at
this
the
City
time.
Coucil
The
Winn
Company has had the most recent experience
interacting
and
Square.
As
was described in Chapter Two,
company
is
presently constructing a
project
at
the
Avenue,
located in Neighborhood Five.
negotiating with the residents of
85
Central
the
development
unit
residential
intersection of River Street
and
Western
The project mananger
stated that the community group was an active member of
development
team
of
and strongly negotiated for a
the
number
of
design changes, as well as the provision of 3000 square feet
of commercial space on the ground floor of the project. [19]
However,
the
project manager added that the
neogotiations
were carried out in good faith and that the project received
their full support.
A
the
major distinction between the Winn developement
project
under consideration is that the developer
able to secure sufficient public subsidies to finance
and
was
those
project
amenities
chapter
will carefully analyze the financial feasibility of
the
proposed
structure
can
desired by the
45 unit project,
neighborhood.
and whether
accomodate the desires of
residents.
39
the
the
The
next
financial
neighborhood
CHAPTER IV
FINANCIAL FEASIBILITY
newly
has
the financial feasibility
the last decade,
During
rental housing projects in older
constructed
become
imperiled,
as
the cost
of
cities
construction
expenses has increased faster than
operating
of
and
levels.
rent
Even in cities such as Cambridge where the demand for rental
housing
is
overwhelming,
a
rent level cannot
achieved
which generates revenues sufficient to
cost
operating expenses and debt service.
of
privately financed,
city
during
the
always
cover
The lack
be
the
of
newly constructed rental housing in the
last fifteen years
is
evidence
of
the
difficulties in achieving financial feasibility.
The project under consideration is no exception to this
overall trend in the field of rental housing.
project
suffers from an additional
its location in Central Square.
Two,
handicap,
However,
the
specifically
As was discussed in Chapter
the negative image of Central Square has the effect of
reducing
the
achieved
in
According
rents
below
those
levels
which
could
alternative locations such as Harvard
to local brokers,
be
Square.
the rent levels of $650 for
a
one bedroom and $800 for a two bedroom (exclusive of utility
payments)
constructed
are
the
"top
of
the
unit located on the site
40
market"
under
for
a
newly
consideration,
one block from Central Square. These rent levels represent a
discount of
approximately $200 per month as a result of the
poor image of Central Square.
The
difficulties
in
achieving
financial
feasibility for a rental housing project, when combined with
the additional handicap of this project's location, requires
the
developer
strategies.
If
conventional,
consider
to
think
the
long
creatively
project
term
is
about
not
financing,
financing
feasible
the
using
developer
must
options to reduce the cost of financing and/or the
project's overall costs. This chapter first analyzes: 1) the
impact of financing the project on a conventional
2) the criteria used to
the
project
has
conventional basis,
alternatives
are
basis
and
measure financial feasibility. When
been
found
to
be
infeasible
on
a
a range of private and public financing
examined,
and
their
impact
on
the
feasibility of the project is examined. In addition, several
alternatives
to reduce the overall cost of the project
are
analyzed concurrently. The challenge is to create a strategy
to
reduce
costs
as
both the cost of financing and
overall
project
which can be implemented in the near future and
assure
the
economic
success
of
the
well
project.
THE BASE CASE
In
order to evaluate the base case using
financing,
conventional
a template was developed to project revenues and
41
expenses over a ten year period,
and
as well as the before
after tax return. After consultation with the developer, the
assumptions have been incorporated into the
following
base
template.
Table 4: Project Cost and Revenue Assumptions
Project Costs
$10,000 per unit
$64.00 per square foot
$5,000 per space
5% of total costs
5% of total costs
Land Costs
Building Costs
Parking Costs
Development Fee
Contingency
Operating Expenses
Revenues
One bedroom
(660 s.f.)
Two bedroom
(905 s.f.)
Vacancy Rate
$820
Management
$1000
Maintenance
Total
5%
Construction Period: 20 months
Holding Period: Ten years
Disposition Cap Rate:
9%
Before Tax Discount Rate:
20%
After Tax Discount Rate
: 10%
Because
of
the
importance
5% of net
revenues
2% of net
revenues
$3,074
per unit
Growth Factors
Rents
Expenses
of rent
5% per yr.
4% per yr.
levels
to
the
overall economic feasibility of the project, the methodology
used to establish them should be identified.
The
projected
rent levels for the one and two bedroom units were developed
by trending, at 6%, the rents which can be achievable at the
present
time
operation.
at the site forward until the first
year
of
As was discussed in the previous chapter, rental
42
brokers
believe
achieved
at
that
highest rents
the
present time for the
the
which
could
be
size
and
proposed
quality of unit is $650 for a one bedroom and $800 for a two
parking.
exclusive of utiliities and on site
bedroom,
The
developer anticipates that the project could be complete and
The
available for occupancy approximately September 1,1989.
interviewed believe that a rate of six precent is a
brokers
conservative
estimate
of
the increase
in
the
rents
of
decontrolled units.
In
addition,
project
the
because
the
largest component
cost is the building cost on a square
of
foot
basis,
assumptions used to establish the cost per square
should
be
developed
noted.
on
The
building
construction
the basis of discussions with the
the
foot
costs
were
developer,
who estimated present costs of $55 per square foot exclusive
of
parking.
annually
of
This
cost
was
trended
upward
for two and one half years until the
construction
to arrive at a figure of
$64
six
percent
commencement
per
square
foot.
CONVENTIONAL LONG TERM FINANCING
The
base
financing
case
provided
for the project
on a
was
conventional,
developed
using
non-participation,
long term basis. Conventional financing sources who would be
willing
to
finance this project are commercial
43
banks
and
institutional lenders such as insurance companies or pension
case
The
funds.
uses
an
interest
of
30
years,
period
amortization
and
of
basis
the
on
12%
of
rate
discussions with a syndicator and investment banker familiar
the
[20]
Because the developer is not interested
equity into the project,
if
it
cost.
syndication
deficits
In
proceeds
in
investing
the author analyzed the project as
receive debt financing equal
would
project
time.
cost of permanent financing at the present
with
addition,
the
to
entire
assumed
author
would be used
the
to
finance
that
operating
in the initial years and that the project would be
syndicated for an amount equal to the operating deficits.
Under
this
feasible.
first
It
alternative,
generates
the project is
$1,412,383 in cash losses
nine years of operation.
author
has
clearly
As was
stated
assumed that the equity investment
partners
will
partners
would therefore invest $1,412,383.
equal the operating
deficits.
not
in
the
above,
the
by
limited
The
limited
The tax losses
generated during the pay-in period are $3,400,002. The ratio
of
tax losses to operating deficits is equal to 2.4
Because of the magnitude of these losses,
to
1.
the after tax net
present value, discounted at 10%, is equal to $479,894.
The
large
tax
that
losses generated under the base case
the
project
meets
the
criteria
of
are
equity
investors,
who usually desire a ratio of $2 dollars of
losses
one
to
dollar of cash invested during
44
the
so
tax
pay-in
real
cash
so
are
losses
to
to make the project impossible
as
substantial
the
However,
[21]
period.
finance
with potential investors.
In
losses,
of
addition
to
generating
the project fails to meet the underwriting criteria
When the first year net operating
conventional lenders.
income
cash
large
unacceptably
is
capitalized
is
$3,742,811
at
9%,
than the total
less
projected
value
of
development
costs
of
for
the
the
$4,987,661.
Lastly,
developer
the
project
is
a poor
investment
if conventional financing is used.
Its
rate
of
return on assets (8%) is well below the rates of between 12%
and 18% anticipated by a majority of developers.
CRITERIA TO MEASURE FINANCIAL FEASIBILITY
The base case using conventional financing demonstrates
the
difficulty
constructed
and
in
generating
revenues
from
a
newly
housing project which will finance debt service
operating
conventional
costs.
basis,
If
the project
cannot
work
the alternatives are to reduce
the cost of capital or project costs,
or both,
on
a
either
in order to
bring the project within the range of economic feasibility.
At a minimum,
the
these financial alternatives must reduce
real cash losses from the project and,
do occur,
if these losses
confine them to no more than four years after the
45
of
year
first
compatible
be
the
in
developer
they must
interests
with the financial
project.
will
developer
The
these
if
even
However,
reduce the cash operating deficits,
alternatives
also
operations.
of
the
earn
a
after
significant return only well into the holding period,
sufficient time has elapsed and rents have risen faster than
The
operating expenses and debt service on an annual basis.
the developer will be forthcoming in
to
return
of
years
the
project
and
as
importantly,
later
upon
sale,
Therefore,
or conversion into condominiums.
refinance
the
any
financial alternative should enable the developer to capture
this return in the later years. In addition, these financial
equity
alternatives should enable the developer to keep his
to minimum,
investment
percent
debt financing.
as he wishes to secure one
Lastly,
hundred
the financial alternative
should
be available in the marketplace at the present
or
the near future,
in
with a realistic
possibility
time
of
securing such financing.
PARTICIPATION LONG TERM FINANCING
In
order
to
reduce the cost of
economic
feasibility,
mortgage
from
alternative
the alternative of
a private lender was
(Number 2),
capital
the
a
examined.
to
achieve
participation
Under
this
participation mortgage has an
interest rate of 10% and the lender receives a 50 % share of
1)
the
cash flow after payment of operating
46
expenses
and
debt
service and 2) residuals upon sale or
refinance.
interest rate of 10% was chosen on the basis of
with
discussions
syndicator and investment banker familiar with
a
mortgages
participation
of
cost
The
for
the
multi-family
housing.[22]
impact
The
of this alternative is that
cash losses are significantly reduced,
economically
impact
infeasible.
The
although
the
the project is still
table below
summarizes
of on the project when the interest rate is
the
reduced
by 200 basis points from 10% to 12%.
Table 5:Comparison of Conventional & Participation Financing
#1:Conventional
Alternative
#2:Participation
10%
12%
$706,000
$1,412,383
Cash Losses
Percentage Change
Period of Cash
Losses
Tax Losses during
50%
9 years
6 years
$2,088,536
$3,400,002
Pay-in period
Before Tax NPV
After Tax NPV
negative
$479,894
negative
$567,843
Before Tax IRR
negative
negative
The
most
participation
deficits.
significant
impact
of
utilizing
mortgage is a 50% reduction in the
a
operating
In addition, the period of operating losses drops
from nine to six years. However, while the overall financial
47
"picture"
improves
project,
project
In the first four years of
remains economically infeasible.
the
the
alternative,
this
under
.80.
the debt coverage ratio does not exceed
The cash losses are so large that financing from a lender or
equity investor would not be forthcoming.
THE IMPACT OF REDUCING PROJECT COSTS
If a reduction in the cost of capital does not make the
project economically feasible,
costs
project
mortgage
the developer can reduce the
concurrently with securing
at 10%.
a
participation
There are three components of the project
costs which can be reduced. First, the building costs can be
from
reduced
which
$64 per square foot to $58 per
represents
a reduction of
square
approximately
foot,
10%.
reduction can be accomplished without a significant drop
This
in
A construction cost of $58
the
quality level of the units.
per
square foot is equal to $50 per square foot in
current
dollars.
The
second cost component which can be reduced is
the
developer's fee, which is equal to 5% of the overall project
cost in the base case.
The developer can forego his fee and
services.
thereby
recieve no reimbursement upfront for his
Lastly,
the land cost can be reduced from $10,000 per
unit
to $5,000 per unit. The latter figure is consistent with the
current land prices for rental apartment units.
48
project
the
If
at
mortgage
10%
is
financed
and the costs are
with
a
participation
as
reduced
discussed
the project becomes significantly more feasible. The
above,
table below summarizes the impact of a reduction in project
costs.
Table 6: Comparison of Participation Loan at 10% with
and without Reduction in Project Costs
#3:Participation
10% w/Costs Reduced
#2:Participation
Alternative
10%
Cash Losses
Percentage Change
Period of Cash Losses
$706,000
63%
6 years
Tax Losses during
pay-in period
$2,088,529
Before Tax NPV
negative
negative
After Tax NPV
$567,843
Before Tax IRR
negative
$831,491
12.81%
The
in
of
$259,315.
In addition,
years,
previous
4 years
$1,155,978
significant impact of this alternative is
most
reduction
four
$259,315
63%
as
the cash
$706,000
from
the cash losses occur in the
opposed
alternative.
losses
to a six year
period
The before tax IRR becomes
a
to
first
under
the
positive
and the after tax NPV increases by thirty two percent.
ASSESSING THE FEASIBILITY OF PRIVATE FINANCING
The
strategy
capital
analysis
of
summarized
reducing 1)
through
a
above
indicates
project costs and 2)
participation
49
mortgage
the
is
that
cost
the
the
of
most
alternative
realistic
face
the developer will still
However,
private financing.
use
to
chooses
developer
the
if
to
obstacles if he wishes to secure a mortgage
significant
finance
the
provide
a
entire project.
long
term
in
loan
not
The permanent lender may
the
substantial
of
face
operating deficits in the early years, even if the developer
is able to secure limited partners who agree, at the time of
permanent loan closing,
the lender will insist on a debt coverage ratio
likelihood,
of
the
in the first year of operation and thereby
1.15
value
face
all
In
to finance these deficits.
of the loan to
achieve
reduce
The
ratio.
this
developer can seek out a secondary lender to provide interim
[23]
during the early years of the project.
financing
The
interim loan would be "taken out" by the permanent lender as
deficits
operating
require
collateral
decline.
other
The
than
the
to a personal guarantee from
addition
demands
cumulative
of the two lenders
project,
subject
the
and
developer.
make
financing package complicated
the
in
The
investors
the
as well
could increase the transaction costs significantly,
as
might
lender
secondary
and
therefore
difficult to close.
In
addition to these obstacles,
loan requires the developer to assume all
participation
the
risk
generating
profit
when
the alternative of
for
cash
the first four years when
losses,
but share fifty
the
project
percent
the project finally "turns the corner".
50
a
of
is
the
of
As
a
result,
the
a
participation loan does not meet a criterion
developer,
specifically to capture a large portion
of
of
the project's cash flow in later years.
PUBLIC SECTOR FINANCING
The
difficulties
financing
with
securing
private
for the proposed project require the developer to
analyze
the
sector.
These
costs
associated
of
alternatives
the
restrictions.
available
alternatives
project,
In
through
the
will increase the
as well as
exchange,
the
impose
public
transaction
a
number
of
developer may be able
to
secure operating subsidies and/or a reduction in the cost of
capital which will enable the project to become economically
feasible.
and
The developer must determine whether these
restrictions
can
be
justified on the
basis
costs
of
the
subsidy that is forthcoming.
The balance of this chapter will describe in detail the
federal
and
state
constructed,
benefits
proposed
multi-family
and
identified.
programs
rental
restrictions
Subsequently,
project
available
will
of
the
be
financing alternatives.
51
to
finance
housing.
each
The
program
newly
costs,
will
be
economic feasibility of the
analyzed
using
these
public
FEDERAL FINANCING PROGRAMS
Since
the
Administration
from
the
commencement
in 1980,
federal
of
the
the number of
first
programs
government to finance low
the
long-standing
financing
history
moderate
critically
of the
income
affected
federal
housing,
moderate
Considering
government
this
the ability of both
available
and
income rental housing have greatly diminished.
Reagan
in
reduction
has
private
and
the
public sectors to respond to the demand for rental housing.
The two subsidy programs available for the construction
of
family
Program
rental
(HDAG)
housing
and
the
are the
Urban
Housing
Action
Grant
Development
Action
Grant
Program (UDAG), both funded by the Department of Housing and
Urban
Development.
initial
The
appropriation
HDAG program was
of
1985.[24] As of this date,
$315
funded
million
in
with
Fiscal
an
Year
the Department has completed its
review of applications for funding,
and expects to make its
second
August
and final funding awards by
1,
1985.
The
Administration's budget for HUD calls for the termination of
the program in Fiscal Year 1986, and the Department does not
expect
that
Congress will offer an alternative to
require
its continuation.
The
only
Developement
construction
other
source
of
Action Grant program
and
permanent
52
financing
(UDAG),
financing
for
is
the
which
real
Urban
provides
estate
projects
in
urban areas.
approved
an
annual authorization of $330 million
coming fiscal year,
As of this
date,
Congress
has
for
the
which represents a 25% reduction in the
program's FY 1985 budget.[25]
The
competition
current guidelines,
the
proposed
funded
in
the
negligible.
Projects
following characteristics:
cities that are defined by
"distressed";
2)
and,
given
the possibility of securing funding for
project is
have
located
for UDAG funds is fierce
1)
the
that
are
they
are
Department
they generate a large number of new
as
jobs
and
tax revenues and 3) they leverage a minimum of five
six
dollars of private funding for every one dollar of UDAG
financing.
While
"distressed"
substandard
cities.
as
city,
units
Therefore,
other
projects
adddition,
it
Finally,
positive
city of Cambridge is
its
is
poverty
rate
defined
and
not as great as a
as
percentage
number
of
a
of
other
the project would not be as competitive
from
more
"distressed"
cities.
In
because the project is residential as opposed to
commercial,
city.
the
or
cash
would not generate additional jobs for
in
order
for
the project
flow in the first year
of
to
operations,
ratio
of
private to UDAG dollars
three
to
one.
ratio
achieved by projects that recieve funding
would
achieve
be
the
a
the
approximately
This ratio is significantly lower than
under
the
the
program.[26]
Because
these two programs represent the only
53
federal
initiatives
the
to encourage the production of rental
developer
housing,
must look to the state of Massachusetts
for
public sector financing alternatives.
STATE FINANCING PROGRAMS
The
state
of
Massachusetts has taken the
lead
creating new programs which attempt to fill the gap
in
created
by the decline in federal funding. The Massachusetts Housing
Finance
Agency and the Executive Office of Communities
Developement
capital
have developed programs to reduce the cost
and/or
provide
annual
operating
subsidies
and
of
for
munlti-family rental projects.
THE SHARP PROGRAM
The
primary
financing tool available at
the
present
time is a combination of tax-exempt financing in conjunction
with
an
Housing
annual project subsidy provided
Assistance
under
the
for Rental Production Program
State
(SHARP).
The purpose of the program is to encourage the production of
rental
housing available to middle income persons
afford
to
pay market rate rents,
as well as lower
who
can
income
persons who recieve a rent subsidy.[27]
Program Benefits
Construction and permanent financing for SHARP-assisted
projects
is
provided
through
54
the
Massachusetts
Housing
Financing Agency (MHFA) from the sale proceeds of tax-exempt
bonds.
The interest on these bonds is approximately 2 to 4
points below conventional financing.
the
At the present
interest rtae on bonds issued by MHFA is
time,
approximately
9.5% to 10%.
In addition to the favorable financing provided through
the
use
of tax-exempt financing,
Communities
the Executive Office
of
and Development (EOCD) provides SHARP funds
to
finance operating deficits. These funds are in the form of a
loan to write down the cost of interest payments on the taxexempt bonds.
"the
By statue, the SHARP program may only provide
minimum amount necessary to make the
housing project feasible...".
proposed
rental
This amount is defined as the
gap between the "cost-based" rent and the "attainable" rent.
"Cost-based"
support
rent
debt
project.
is
service
defined
as the
rent
payments and operating
necessary
costs
of
"Attainable rent" is defined as the maximum
which
can be achieved in the market.
rents
will grow more quickly than "cost based"
to
a
rent
Because "attainable"
rents,
the
amount of the subsidy should decline after the initial years
of operation and the project must be self-sufficient by
15th year.
its
(Because the SHARP program is administered by a
public agency,
the author questions whether MHFA is willing
to
projects with rents which "push" the top
the
underwrite
market
period.
upward
and result in a
substantial
lease
of
up
The agency may favor projects which have "average"
55
or
"conservative"
completion,
higher
the
as
rents
opposed
and
are
to those
fully
rented
projects
which
upon
achieve
rental income streams and require less subsidy
over
long term but have a longer and more difficult lease-up
period.)
The
Executive
(EOCD)
Office of Communities
and
requires that the developer make a
investment
finding
of
the
SHARP
subsidy
is
for project feasibility.
developer
minimum
20% in order to make the required
that
reqiured
Development
has
the
In
statutory
minimum
essence,
equity
amount
once
the
agreed to invest 20% of the project cost
equity
(as defined below),
annual
subsidy
the SHARP program
to the project.
The subsidy
provides
reduces
as
an
the
interest payments on the bond issue from the rate prevailing
at
the time of bond issuance for tax-exempt rental
projects
to
no lower than 5% annually.
The term
housing
of
the
subsidy cannot exceed fifteen years.
Because the SHARP subsidy is a loan,
"as
it must be repaid
the project can afford to do so" but in no event
than upon sale or refinance.
developer
will
At the time of repayment, the
repay the lesser of the
loan
or
50% of the sale proceeds.
that
if
the
subsidy,
payment."
"the
repayment does not
outstanding
SHARP
The regulations
state
equal
the
entire
SHARP
unpaid remainder will be scheduled for later
During the term of the loan,
5% annually,
later
interest accrues at
although EOCD and MHFA may reduce the interest
56
rate
on the unpaid remainder of the loan at the end of
subsidy
term,
residents.
if
In
such a
reduction
addition,
the
protects
program
the
low-income
allows
for
the
recycling of SHARP funds back into the project as opposed to
a
loan
repayment,
recycled
funds
tenants.
if
it can be demonstrated
will benefit the low
In any event,
and
that
moderate
these
income
the developer must demonstrate how
the low interest tenants will be "protected" after the SHARP
subsidy end.
Program Restrictions
In
return
providing
for
reducing
the
cost
an annual operating subsidy,
of
capital
the program
and
places
major restrictions on the developer. These restrictions fall
into two general categories:
low
and
1) a setaside of the units for
moderate income persons and 2)
investment
and
a
a
minimum
limitation on the annual return
equity
to
the
developer.
The program requires that a minimum of 25% of the units
must be affordable to low-income persons, who are defined as
families with incomes which do not exceed 80% of the
median
income.
The rents in these units are set according
to the maximum limit allowed under HUD's Section 8
program,
income
persons
which
persons.
who
area's
Existing
provides rental assistance payments to
Developers
must
market these
have already secured certificates
57
units
for
low
to
rental
payments
under
HUD's
Section 8
program
or
state's
the
Section 707 Program (similar in structure and purpose to the
If the developer is unable to fill all
Section 8 Program).
of
the state
the units with persons who have certificates,
additional make Section 707 certificates available
will
income
subsidize the rents of those units set aside for low
tenants.
The
developer is required to fill the units with
chosen from the waiting list compiled by the
tenants
to
local
In summary, the developer relinquishes a
Housing Authority.
certain amount of control over the tenant selection
process
for these units in exchange for favorable financing provided
under
the program.
The program also requires the developer
to maintain these units as affordable to low income
persons
for a minimum of fifteen years.
The
equity
cash
The
second program restriction requires a
significant
investment from the developer and also regulates the
return received by the developer on an
annual
basis.
equity investment is equal to 20% of the project costs,
and is composed of the following components:
1)
The
(exclusive
forego
his
developer's
of
fee
land costs).
fee,
the
of
10%
of
project
If the developer
equity required at
costs
chooses
closing
can
to
be
proportionately reduced.
2)
Cash equal to 2% of the mortgage amount.
3)
A
standard
letter of credit in a
minimum
equal to 4% of the mortgage for the term of their
58
amount
mortgage.
letter of credit can decline by 1% per year after each
This
year with a positive cash flow.
An additional letter of credit for a term of
4)
years
in the amount of 4% of the mortgage.
The
five
developer
may reduce this letter of credit by an amount equal to
cash
contribution at closing in excess of 2% or the present value
of
any
operating
subsidy that the developer
proposes
to
The program also limits the annual return on equity
to
provide.
a maximum of 6% for fifteen years. However, the program does
provide
gross
reasonable
rents),
construction
5%).
These
allowances for management fees
replacement
reserve
(.075% of
the
costs) and a vacancy allowance (a
allowances
(6%
direct
minimum
can provide the developer
of
with
of
an
additional source of income.
Availability of Sharp Funds
The competiton for SHARP funds is keen,
of
alternative
government.
financing
Since July 1,
sources
1984,
from
given the lack
the
federal
a total of $13 million as
been allocated by the State legislature and expended by
Executive Office of Communities and Development.
for
SHARP funds,
as measured by formal
the
The demand
applications,
has
exceeded the appropriations by over 600%.
It is anticipated
that
available
additional
SHARP funds will not be
59
untill
spring
from
at which time EOCD will fund
of 1986,
appropriations
applications
to be recieved from the state on
July
1,1986.
In
been
Given
are
addition,
funded
two projects located in
Cambridge
have
under the SHARP program during the last
year.
the political necessity of ensuring that SHARP
funds
provided to a variety of communities across the
additional
state,
projects from the city of Cambridge may be
competitive
than
those
from communities
which
less
have
not
secured program funding to date.
THE TELLER PROGRAM
The second alternative available on a state level is
new
local
program
call the TELLER Program.
Housing
Authorities
of
the
units
be
the
can issue tax-exempt
finance rental housing projects.
20%
Under
a
program,
bonds
to
The program requires that
affordable
to
moderate
income
persons.[28]
Program Benefits
The
major
advantage of the TELLER program is
that
developer can access long term financing at low rates,
a
and,
in the case of a high income area such as Cambridge, provide
a relatively shallow subsidy in return. Under the program, a
total
of
20%
units
must be set aside
60
for
persons
with
that do not exceed 80% of the median income of
incomes
municipality.
In the case of the city of Cambridge,
percent of the median income is equal to $25,850.
the
eighty
Given the
requirement that no more than 30% of the family's income can
be used to pay for the cost of shelter, the maximum rent for
a rental unit,
inclusive of utilities, is equal to $646. If
the rents for the market rate units are fixed at $820 for
one
bedroom
utilities),
and
the
$1000
annual
for a two
bedroom
project
subsidy
(exclusive
to
make
a
of
units
affordable to moderate income persons is $30,720.
At
bonds
the present time,
the interest rate on
tax-exempt
for multi-family rental housing projects ranges
from
8.0% to 10.%, inclusive of transaction costs. If a developer
wishes to secure tax-exempt financing on a longer term basis
such as ten or twelve years,
will
be
method
in the range of 9% to 10.5%.
used
between
the interest rate on the bonds
to issue the bonds,
the
Depending
upon
the
developer
will
pay
six and ten points initially to finance transaction
costs.[29]
The major barrier to the developer who wishes to
the
to
capital market for tax-exempt bonds is the
secure
"credit enhancement".
enter
requirement
Bondholders require
form of "credit enhancement" from the developer in order
ensure
that
interest
cash
funds will be available to pay
payments should the project generate
flow.
Credit
enhancement
61
is
secured
principal
some
to
and
insufficient
through
four
sources:
surety
1) an insurance company, who issues a guarantee or
bond;
2)
Developement
221(d)(4)
the
(HUD),
Department
who
program;
credit
and
4)
provides
Housing
insurance
Urban
through
the
which
are
commerical bank or unrated letters
secured through a savings and loan
insurance
and
3) rated letters of credit,
secured through a rated,
of
of
provided through
the
institution;
Federal
National
Mortgage Association (FANNIE MAE).[30]
The
project under consideration herein would,
likelihood,
basis
in
all
be unattractive to an insurance company on
the
of its' size as a $5 million project.[31] With regard
to the second option of securing mortgage insurance
HUD,
through
the primary drawback is the amount of time involved in
securing approval under the 221 (d) (4) program. The average
timeframe
to secure a firm committment is approximately one
year.[32]
The
Department
charges
an
anuual
insurance
premium of one half of one point for insurance. Given a base
rate of 8.25% for these bonds, the effective rate under this
option would
If
the
be 8.75%.
third option is analyzed,
the feasibility
of
securing a letter of credit from a rated commercial bank has
diminished
increasingly
recently
critical
as
bank
of
contigent
regulators
have
liabilities
become
such
as
letters
of
market,
banks are unwilling to provide long term letters of
credit.
In addition,
in
a
volatile
capital
credit which would be coterminous with the tax-exempt issue.
62
Although
to
some Savings and Loan Associations may be
issue
letters
marketplace.
of
credit,
they
are
willing
unrated
in
the
In order to ensure that bonds backed up with a
letter of credit from an S & L receive a favorable rating in
the
marketplace,
these institutions must collateralize the
letter of credit with assets having a value equal to between
120% and 170% of the face value of the bonds.
the
In
addition,
annual fee to secure a letter of credit will add
1.25%
to the interest rate, yielding an effective rate of 9.5% for
these bonds at the present time.[33]
Lastly,
provide
the Federal National Mortgage Association does
insurance
for
multi-family
tax-exempt
Unfortunately,
their
coverage
of 1.15 at the end of the
ratio
occupancy
underwriting
makes this project,
criteria
issues.
of
second
a
year
debt
of
as well as almost all of the
potential projects in the Northeast, unacceptable.[34]
In
summary,
alternatives
all
of
discussed
the
above
four
credit
present
enhancement
problems
for
the
developer. However, the most feasible alternative appears to
be
to
secure
program,
mortgage
although
insurance
through
the
this option would require a
221(d)(4)
significant
amount of time and energy to "lead" the project through
program's procedures.
of
In addition, HUD will require letters
credit from the developer in order to finance
losses
generated in the early years.
insurance
for
the
the
project will
63
be
operating
Provision of mortgage
contingent
upon
the
developer's ability to secure these letters of credit.
In
addition
to
reducing the cost of capital
to
the
developer, the TELLER program allows the developer to retain
control
over
the
responsibility
of
the
remaining
selection
process.
The
to comply with the minimum set aside of
units
purchaser,
tenant
rests
with
the
developer
and
20%
the
bond
as opposed to the local Housing Authority.
The
80%
of
the units can be
rented
at
prevailing
market rates.
Program Restrictions
The program contains few restrictions in comparison to
the SHARP program.
As was stated above, the developer must
make 20% of the units affordable to low income
addition,
termed
"lock-in"
period.
The
"lock-in"
period
is
as the period beginning on the date of issuance
of
the
bonds and ending on the later of the date
ten
years after 50% of the units are occupied or
of
the
In
these units must remain affordable during what is
the
defined
persons.
1) which
2)
term of the bond with the longest maturity
is
half
in
the
is also prohibited from converting
the
bond issue.
The
project
developer
into
a
condominimum during
the
lock-in
period,
although this restriction may be less onerous if the term of
the bonds is relatively short.
equal
to
four
In addition,
years after the expiration of
64
for a
the
period
lock-in
period,
if the developer wishes to convert the project into
condominium units, he may do so only if the low and moderate
income
tenants can remain in the project on a rental
until
the end of this additional four year
the four years has passed,
basis
period.
After
there are no restrictions on the
developer with regard to conversion or requirement to enable
low and moderate income tenants to continue occupancy in the
project.
The
most significant difference between the SHARP
and
TELLER programs is that the TELLER program does not restrict
the
annaul return to the developer during the bond term
thereafter.
cash
Because
flow
important
in
this project generates
the
impact
later years,
on
measuring
ths
a
significant
distinction
economic
or
has
feasibility
an
and
return.
Availability of TELLER bonds
Regulations
promulgated
only
for
the
recently
Communities and Development.
TELLER
program
by
Executive
the
As such,
under
the
Office
been
of
the program does not
have an extensive track record in the state.
issued
have
program was recently
The first bond
completed
by
the
Springfield Housing Authority,
and applications for a total
of
with
3000
units
are
pending
authorities.
In
addition,
Communities
and
Development
65
the
is
other
local
Executive
gearing
up
housing
Office
to
of
provide
technical assistance to local housing authorities.
The only limitation on the availability of TELLER bonds
is
the
tax
proposal
Administration,
all
newly
which
constructed,
recently
submitted
remaining
the
Reagan
eliminates tax-exempt financing
rental housing
projects.
Administration's bill is approved with this
only
by
federal initiative
for
If
the
provision,
the
to reduce the
cost
of
state
of
capital for rental housing will disappear.
MHFA TAX-EXEMPT FINANCING
The
final
alternative
available from
the
Massachusetts
is to access tax-exempt financing through the
Massachusetts
Housing Finance Agency (MHFA) without a SHARP
subsidy.
The rate on long term
tax-exempt bonds issued
by
MHFA is in the range of 9.5% to 10%.[34] To date, the agency
has issued tax-exempt bonds for rental housing projects only
when a SHARP subsidy is also available.
anticipates
that
legislation
pending
However, the agency
presently
statehouse will enable it to issue tax-exempt bonds
in
the
without
a SHARP subsidy in the near future.
Program Benefits
The basic features of the program sponsored by MHFA are
similar to the TELLER program.
The benefit of securing tax-
exempt financing through MHFA is that,
can
perform
as a coinsurer, they
the underwriting analysis required to
66
receive
insurance
than
under
the 221(d)(4) program
more
the Federal Housing Administration.
necessary
to
process
significantly.
In
an
application
addition,
the
expeditiously
The
time
can
be
reduced
has
to
developer
approximately two points upfront to the Agency,
period
pay
as compared
to between six and ten points under the TELLER program.
Program Restriction
The
MHFA
program
will
incorporate
restrictions of the TELLER program,
against
However,
conversion
until
many
of
the
such as the prohibition
the end of the
lock-in
period.
the Agency plans to impose additional restrictions
which makes this option less economically feasible from
the
perspective of the developer. These restrictions are: 1) the
developer will be required to invest equity into the project
equal to 10% of the overall cost, excluding the cost of land
acquisition
or
developer's
fee;
alternatively,
2)
the
or forego this amount as
annual return
received
by
a
the
developer will be limited to 6% of his equity investment for
fifteen years
selling
most
and 3) the developer will be restricted
the bonds until the end of the fifteenth year.
serious of these three restrictions is the
on return on equity to 6%.
and
from
As a result,
67
limitation
the before tax NPV
IRR will be significantly less than with
through the TELLER program.
The
bonds
issued
FINANCIAL FEASIBILITY OF PROJECT WITH PUBLIC FINANCING
This
chapter
financial
will
conclude with an analysis
feasibility of the
SHARP,
TELLER
return
to
proposed
and MHFA financing.
the developer will be
project,
of
the
utilizing
The financial risks and
identified,
as
well
as
compared to the benefits forthcoming if private financing is
utilized.
Project Feasibility with SHARP Financing
If
a
combination
financing
is
feasible.
The
utilized,
table
loan
with
at
SHARP
the project
below
returns generated using:
bonds
of
funds
and
tax-exempt
becomes
economically
compares the cash
losses
1) SHARP subsidies and
an interest rate of 10% and 2) a
10% with a reduction in project
tax-exempt
participation
costs
(discussed
earlier in the chapter as Alternative #3).
Table 7:Comparison of SHARP and Participation Financing
Alternative
#4: SHARP w/
bonds at 10%
Cash Losses
Percentage Change
Period of Cash Losses
$20,384
92%
1 year
Tax Losses During
First Four Years
$1,343,672
Before Tax NPV
After tax NPV
Before Tax IRR
$68,279
$1,103,168
29.83%
68
and
#3: Participation
10% w/costs reduced
$259,315
4 years
$1,155,978
($55,339)
$831,491
12.81%
The overall financial picture changes dramatically when
SHARP
financing
largely
$259,315
is used.
eliminated,
as
to $20,384.
The risks to the
developer
the operating deficits
drop
While the SHARP program requires
developer to make an equity investment of $507,814,
developer
agrees
to forego his fee of $422,313,
if
his
are
from
the
the
cash
equity drops to $85,501.
Although
the
entire
the
developer's return is limited to 6%
holding
period,
this
limitation
does
for
not
negatively affect the net present value or rate of return of
the
project.
While the developer must repay $1,449,757
in
SHARP funds upon sale, the after tax NPV rises to $1,103,168
under this scenerio. The before tax rate of return of 29.83%
exceeds the developer's expectations of 20%.
The
greatest benefit of using SHARP financing is
elimination of those complications associated with
a
participation loan,
The
to achieve financial feasibility,
financing from a secondary lender.
are
to
compete
project
or secure
However,
awarded on a competitive basis,
willing
securing
as discussed earlier in the chapter.
developer is not required to syndicate the
order
the
interim
as SHARP funds
the developer must
with other projects in
in
the
state
be
of
Massachusetts.
Project Feasibility with TELLER Bonds
Unfortunately, the project is not economically feasible
69
if TELLER bonds with an interest
discussed
secure,
is
above,
credit
rate of 9% is used. As was
enhancement will be difficult
to
although the most feasible option for the developer
to
secure mortgage insurance
program.
If
through
HUD's
221(d)(4)
the
effective
this alternative was utilized,
rate for the tax-exempt bonds would be approximately 9%.
Table 8: Comparison of SHARP and TELLER Financing
Alternative
#4:SHARP w/
bonds at 10%
Cash Losses
Period of Cash Losses
Tax Losses During
pay-in period
#5:TELLER bonds
at 9%
$20,384
1 year
$761,670
7 years
$671,839
during 1st 4 yrs.
$1,991,757
during 1st 7 yrs.
Before Tax NPV
After Tax NPV
$68,279
$1,103,168
($140,219)
$786,716
Before Tax IRR
29.83%
13.04%
Similar
earlier,
at
9%
the
to
the private sector alternatives
losses generated with the use of TELLER bonds
are so large as to make the
finance.
The
losses
continue
for
project
seven
constitutes a majority of the holding period.
of
impossible
years,
to
which
The magnitude
these losses is a direct result of the annual subsidy of
$30,720,
income
the
discussed
necessary
tenants.
reduced
addition,
to make the units affordable
to
lower
This subsidy paid by the developer offsets
interest
rate on
the
tax-exempt
bonds.
the added cost of credit enhancement in the
70
In
form
of
an annual insurance premium of 50 basis points increases
the effective rate on the bonds.
The
only
developer
project
was
is
other
to
type
of
option
available
simultaneously reduce the
costs
and the interest rate on the tax-exempt
outlined earlier,
developer chooses to:
to
the
of
the
bonds.
As
project costs can be reduced if
the
1) forego his development fee of
5%;
2) reduce building costs from $64 per square foot to $58 per
square
foot
and
3) reduce his land cost
per
unit
from
$10,000 to $5,000.
In addition,
could
able
the interest rate on the tax-exempt bonds
be lowered to approximately 8%,
to
partner
secure
as
if the developer was
credit enhancement from
opposed
to
a
financing this fee
joint
on
venture
an
annual
basis.
For instance,
either
Harvard University or MIT in the project as a source
if the developer was able to interest
of student housing, these institutions might be able to lend
their
of
the
credit rating to the project and guarantee
bonds
additional
to
the
bondholders.
In
this
cost of credit enhancement would
repayment
event,
be
the
eliminated
and the bonds would carry a rate of 8%.
The
table below summarizes the financial feasibility of
the project when project costs and the interest rate on
TELLER bonds are simultaneously reduced.
alternative
is
compared
Alternative
TELLER bonds at an interest rate of 9%.
71
In addition,
#5,
which
the
this
utilizes
Table 9: Comparison of TELLER Bonds at 9% and TELLER Bonds
at 8% with a Reduction in Project Costs
Alternative
#6: TELLER bonds at
8% w/costs reduced
TELLER bonds
#5:
at 9%
Cash Losses
Precentage Chang
Period of Losses
$761,670
77%
7 years
$173,011
4 years
Tax Losses during
Pay-in Period
$1,991,757
$882,658
Before Tax NPV
($140,219)
$786,716
$338,192
$1,255,234
After Tax NPV
Before Tax IRR
The
13.04%
project
44.55%
feasibility improves
this last alternative.
dramatically
under
Cash losses are reduced by 77%,
the before tax NPV becomes positive.
and
The before tax rate of
return of 44.55% is the highest to date.
The
project is clearly financially feasible under this
alternative,
terms
of
and
reducing
difficulty
for
partner,
such
willing
to
institutions
creating
is second only to the SHARP
cash
operating
scenerio
losses.
The
the developer is to secure a joint
as MIT or Harvard University,
guarantee
may
not
additional
repayment
percieve
of
that
the
their
student housing extends
this guarantee.
72
major
venture
who would
bonds.
interest
to
in
be
These
in
providing
Project Feasibility with MHFA Financing
The
rate
for
tax-exempt
presently
in the range of 9.5%,
than
rate
the
bonds
issued
MHFA
or 50 basis points
for TELLER bonds that are
HUD's 221(d)(4) program.
by
higher
insured
through
As was analyzed above, the project
is economically infeasible when TELLER bonds at 9% are
(Alternative
economically
#5).
is
Therefore,
the
project
feasible under MHFA's program,
used
cannot
be
which provides
financing at a higher cost.
CONCLUSION
While
the
economic
feasibility of
the
project
was
doubtful using a participation loan from the private sector,
the project is feasible if public sector financing is
The
SHARP program and the TELLER program (with an
rate
of
healthy
carry
several
8%)
will minmize operating losses and
return to the
the
additional
the next chapter,
between
risk to the
However,
developer
interest
provide
these
a
options
that,
months of negotiations with public and/or
profit institutions,
In
developer.
used.
after
not-for-
the financing will not be forthcoming.
the author will discuss the
the risks and rewards under these two
tradeoff
options,
as
well as present recommendations for action to the developer.
73
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
The
previous
obstacles
which
chapters
many
have
rental
described
a
number
confront a developer who wishes
multi-family housing.
financing
have
to
of
build
Because the costs of construction and
risen faster than income and
rent
housing projects have been pushed out
levels,
of
the
conventional financing market. They have proceeded only when
the
developer
initiatives,
has utilized an array of federal
created
and
to fulfill the public goal of
state
making
rental housing available to middle and low income persons.
The
proposed 45 unit rental housing project in Central
Square is no exception to this overall trend.
The obstacles
to achieving market, political and financial feasibility are
significant,
large
and
the developer will be required to make
investment of time and energy if these obstacles
a
are
to be overcome.
As
feasibility
has
of
been
the
discussed
project may be
financial feasibility.
of
the
city,
significant
neighborhood
neighborhood
the
earlier,
more
the
political
attainable
than
Given the existing political climate
developer
may
need
to
allocate
amount of time to negotiations with
organizations.
activists
are
74
However,
city
supportive
of
a
appropiate
officals
and
residential
development.
As a result, the author has concluded that the
probability is high that public approval and support for the
project will be forthcoming.
With
the
regard to the market feasibility of the
author believes that a desirable segment of the
income housing market can be attracted to the site.
discussed
housing
in
Chapter Two,
the growing demand
for
project,
middle
As
was
rental
in Cambridge helps to mitigate against the negative
image of the site and Central Square. However, the developer
must
discount the rents by approximately $200 per month
in
order to effectively compete with alternatives available
in
the more desirable sections of the city. In summary, while a
desirable market for the project can be attracted given rent
levels of $820 for a one bedroom and $1000 for a two bedroom
at
the time of lease-up,
the
revenue stream generated
by
these discounted rent levels make the project more difficult
to finance.
The author sought to analyze the key issue of financial
feasibility
using
alternatives.
continuim
capital
that
These
a
variety
alternatives
identifies
subsidies
and
of
public
and
can be laid out along
the cost
of
operating
the corresponding level
intervention in the project.
private
of
a
and/or
public
The most traditional financing
source, a conventional mortgage, provides the least economic
return to the developer.
the
developer
can
However,
under this
pursue his objective of
75
alternative,
receiving
one
hundred percent of the cash flow and residuals upon sale
or
refinance.
On the opposite extreme,
annual
the
the SHARP program provides an
operating subsidy to the project,
gap between net operating income and debt
the early years of the project.
must
service
In exchange,
regulated
developer
amount
for
must
of
units
to
and his rate of return on the project
fifteen
years.
As
significantly,
compete with other projects for
funding,
in
the developer
agree to provide twenty five percent of the
lower income persons,
is
and thereby fills
and
the project has no
a
the
limited
guarantee
of
receiving the amount of SHARP funds requested.
The
The
TELLER program falls within these
level
program,
of
and
there
annual return.
financial
subsidy is not as deep as
two
under
are no limitations on the
the
SHARP
developer's
However, in order for the project to acheive
feasibility,
the
developer must be
forego a development fee of 5%,
willing
as well as reduce the
costs from $10,000 per unit to $5,000 per unit.
developer
extremes.
land
In sum, the
is making a significant equity contribution.
developer's
to
criterion to minimize his equity investment
The
is
not met.
In addition,
if TELLER bonds are used,
the
developer
must identify a partner who can supply the necessary "credit
enhancement"
bonds.
and thereby reduce the rate on the tax-exempt
As was outlined earlier, the developer could attempt
76
to
interest
Harvard or MIT as a joint venture
provide the credit enhancement.
with
either
require
a
of
However,
the
these institutions may be
substantial
committment
on
partner
to
negotiations
protracted
the
part
and
of
the
developer.
The
which
author
can
program
has concluded that
ensure
financially
the
only
feasiblity
alternatives
are
the
SHARP
and the TELLER program with an interest rate of
8%
and reduced project costs. If the developer is unwilling to:
1) forego his fee and accept a lower land cost on a per unit
basis
or 2) invest substantial time in competing for
funds,
the
pursued.
project
If
complications
SHARP
is
these
not
feasible and
alternatives
are
should
SHARP
not
acceptable,
the
and contingencies associated with TELLER
financing should be furthur
explored.
and
Specifically,
discussions should be initaited with the both MHFA and
to
be
EOCD
determine whether the project has a reasonable chance of
recieving
SHARP
financing
in
the
spring
of
1986.
In
addition, the developer should initiate discussions with MIT
to
determine
whether the University is interested
in
the
project as a source of student housing and if their interest
extends to the provision of credit enhancement.
The
record
present
in
projects.
to
invest
owner
of the site does
financing and constructing
Therefore,
if
substantial
77
have
multifamily
he does proceed,
time and
not
energy
track
housing
he will be required
in
learning
the
intricacies of public programs,
such as SHARP or TELLER. In
addition, he will have to learn how public agencies interact
and
negotiate
with
the
private
interested in developing
future,
the
timely,
given
"learning
sector.
Unless
he
is
additional housing projects in the
curve"
may be
too
expensive
and
his ability to pursue additional development
opportunities.
However,
desire
project
for
the developer has recognized the
new
rental housing,
and the
benefit
perserve
development,
this link between residential
but
be
unwilling
the
zoning
The developer may desire
to
and
invest
"learning curve" associated with the project.
to
of
in negotiations with the City Council for a
amendment for the adjacent parcel.
to
community's
commercial
in
the
steep
His option is
enter into a joint venture or sell the site to a housing
developer who has the necessary expertise.
Many
of these housing developers are willing to
bear
both the risks of a housing project that generates operating
losses in the early years,
as well as the transaction costs
associated
with a complicated financial
instances,
these developers do not expect that their return
on
package.
In
many
investment will be generated by the project's cash flow.
Future
provide
syndication
and
sales
proceeds
them with their equity return.
developers
are
familiar
with
the
for
the
In addition,
"language"
of
project
these
public
finance programs, as well as the negotiating style of public
78
off icals.
The site has significant value to these developers.
is
located
housing
in a market with
and
foreseeable
a
demand
future.
a limited
that
will
supply
not
of
decline
While the project is not
It
rental
in
the
economically
feasible in the initial phase, it generates large cash flows
in the later years.
proceeds,
If the revitalization of Central Square
the developer could convert the rental units into
condominiums
in
the
later years and
earn
a
significant
return.
The
present
carefully.
zoning
The
that
subject site.
sell
the
consider
these
options
for
the
adjacent
parcel
without
In this event,
that
to
a
the owner may not be able
housing
developer
he will construct a
without
a
multifamily
a
some
a housing project will be developed on
site
committment
should
City Council may be unwilling to provide
amendment
guarantee
owner
the
to
firm
housing
project. The second option of a joint venture may require an
excessive
amount
negotiate
a joint venture agreement,
of the owner's time (and legal
given the
fees)
to
relatively
small size of the project.
The
final alternative available to the developer is to
maintain the site in its present condition as a parking lot.
The
developer may conclude that the costs
joint
If
of
development,
venture or sale are prohibitive at the present
he chooses this option,
79
he can proceed at a later
time.
date
when
the
project
image
can
of
compete
Central Square has
more
favorably
locations in the city of Cambridge.
80
improved
with
and
the
alternative
81
APPENDIX EXHIBITS
82
83
EXHIBIT THREE
LIST OF COMPARABLES
NAME,LOCATION AND AGE
NO.OF UNITS/ELEVATOR
6 stories
1.Austin Court
30 units
12 Inman Street
Cambridge,Ma.
(2 blocks from Central Sq.)
Studios: $400-$500
One Bed.: S500-$600
Two Bed.: $750-$900
Cambridge, Ma.
(Located NW within one
Twenty two covered parking spaces which rent for
$25 per month. A deck and sauna are located on
the roof. Gas heat is included in the rent.
Converted to condominium; roughly one third of
the units are currently rented.
12 years old
2. 16-18 Trowbridge St.
AMENITIES
MONTHLY RENT/ SQ. FEET
stories
28 units
Studios: $400-$435
One Bed.: $595-$625
Twenty eight parking spaces under the deck area
for $25 per month. Gas heat in included in the
Two Bed.: $800-$850
rent.
One Bed.: $650
Covered parking is included in the rents.Tenant
pays for oil fired baseboard hot water and heat.
Converted to condominiums in 1981; a number of
block of Mass. Ave)
Constructed in the 1970's
3. The Cambridge House
1643 Cambridge Street
7 story
36 units
Two Bed.:$800-$950
Cambridge, Ma.
(located near Harvard Square)
the units are currently rented.
Constructed in 1970
4.1600 Massachussetts Ave
Cambridge, Ma.
5 years old
5 stories
60 units
Two Bed.: $950
1000 s.f./$0.95 s.f.
Tenant pays for all utilities. Units include two
bathrooms. All units contain balconies and
fireplaces. Building is located adjacent
to Harvard Law school.
Rent includes heat and hot water. Children's
center and play area available. Garage parking
5. Soldiers Field Park
70 studios
Studio:$465-$552
Soldiers Field Road
186 One Bed.
One Bed.:$620-$759
Boston, Ma.
198 Two Bed.
available for $60 per month; uncovered parking
Two Bed.: $820-$1090
Three Bed.: $1226-$1273 available for $45 per month. Harvard owned
26 Three Bed.
and affiliated.
6. Peapody Terrace
Memorial Drive
Cambridge, Ma.
89 Studios
226 One Bed.
161 Two Bed.
22 Three Bed.
Studios: $366-399
One Bed.: $470-571
Two Bed.: $630-$744
Three Bed.: $1017
Heat and hot water are included in the rent.
The complex also includes a convenience store
and children's center. Garage parking available
for $60 per month. Harvard owned and
affiliated.
7. 115 Highland Street
Somerville, Ma.
3 years old
3 stories
14 units
7 Two Bed.: $700
900 s.f./$0.78 psf
7 Three Bed.: $800
Heat, hot water, A/C, laundry, wall-to-wall carpeting
and one parking space are included in the monthly rent.
1000 s.f./$.80 psf
8. 425 Broadway
Somerville, Ma.
6 stories
24 units
10 years old
12 One Bed.: $600
650 s.f./$0.92 p.s.f.
12 Two Bed.: $730
Heat, hot water, A/C, balconies, views and one
parking space included in the monthly rent.
900 s.f./$0.81 psf
9. 14 Spring Street
Somerville, Ma.
4 stories
6 Two Bed.: $750
6 units
875-900 s.f./$.83 psf
Heat, hot water,A/C, wall to wall carpeting,laundry
facilities and one parking space included in the rent.
6 stories
36 units
19 One Bed.:$600
650 s.f./$0.92 psf
17 Two Bed.: $700
Heat, hot water, A/C, laundry facilities, wall
to wall carpeting and one parking space are
included in the monthle rent.
App. one year old
10. 278 Beacon Street
Somerville, Ma.
App. 7 years old
900 s.f./$0.78 psf
EXHIBIT IV: BASE CASE / FINANCIAL FEASIBILITY WITH CONVENTIONAL FINANCING
ALTERNATIVE #1
DEVELOPMENT PROFORMA: TOFIAS PROJECT
EXHIBIT A: GENERAL INFORMATION
DATE OF PROJECTION:
PROJECT NAME:
LOCATION:
NUMBER OF UNITS:
EST. START DATE:
COMPLETION DATE:
CONSTRUCTION TIME:
August 1,1985
CSR
Cambridge, Ma.
45
4/1/1988
1/1/1990
20 months
A. SITE INFORMATION
Sqaure Footage of Parcel:
B. UNIT CHARACTERISTICS
27,376
Number of Units:
Total Sq. Feet:
Bld. Gross Sqaure Footage:
Bid. Net Square Footage:
Building Efficiency:
No. of Parking Spaces:
No. of Studios:
Sq. Ft. per unit:
No. of (1) bedrm.
47,400
38,520
81%
45
Sq. Ft. per unit:
No. of (2) bedrm.:
Sq. ft. per unit:
No. of (3) bedrm.:
Sq. Ft. per unit:
45
47,400
0
0
9
0
36
0
0
0
BASIS FOR PROJECTIONS
OPERATIONS PHASE
DEVELOPMENT PHASE
Land
Site Improvements
Building Construction
Parking
Consultants
Architectural & Engineering
Architectural Supervision
Development Fee
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Organizational Costs
$10,000.00
$0.00
$50,000.00
$64.00
$5,000.00
per
per
per
per
per
unit
unit
uni t
sq. feet
uni t
MONTHLY REVENUES
Studio:
(1) bedroom:
(2) Bedroom:
(3) bedroom:
Parking Spaces:
TOTAL ANNUAL REVENUES:
$10,000
3.75% of const. cost
1.25% of const. cost
5.00% of const cost
$60,000
$0
$0
$50,000
$50,000
$50,000
$217,290 5% of total costs
$0
$820
$1,000
$0
$50
$547,560
per
per
per
per
per
unit
unit
unit
unit
space
ANNUAL EXPENSES
Administrative
Management:
Maintenance:
Real Estate Taxes:
Utilities:
(Comon Area)
Utilities:
(Units)
Security:
$0
$0
p.
85
$5,000
$27,378
$10,951
$50,000
$10,000
$0
$30,000
5.00% of revenues
2.00% of revenues
$0.00 per unit
Working Capital (Operating Deficits)
Letters of Credit Fees
Commissions
$0
$0
$50,000
Water:
TOTAL EXPENSES:
Replacement Res.
$3,073.98 per unit
$45,000
LEASING
SALE:
Stabilized Cap Rate:
Disposition Cap Rate:
Sales Expense:
$5,000
$138,329
11.0%
9.0%
6.0%
Vacancy Rate:
(Annual)
Revenues: Lease-Up
Year
Reveues:Stabilized
Year
5% of gross revenues
100.00% of gross revenues
100.00% of gross revenues
TAXATION:
Ordinary Income:
Capital Gains:
50%
20%
STABILIZED YEAR:
2
GROWTH FACTORS:
Market Rents
Operating Expenses
HOLDING PERIOD:
6% per annum
4% per annum
10
(years)
GENERAL PARTNER RATE OF RETURN
Before Tax:
After Tax:
20%
10%
LIMITED PARTNER RATE OF RETURN
Before Tax:
After Tax:
CONVENTION:
25%
12%
End of Year
DISTRIBUTION TO LIMITED PARTNERS
50%
Percent of Cash Flow:
50%
Percent of Tax Benefits:
50%
Percent of Residuals:
EXHIBIT B: PROJECT COST ESTIMATE
YEAR
YR. 1
CONSTRUCTION
YR. 2
LEASING
COST PER SQUARE FOOT
ITEM COST ESTIMATE
Land
$450,000
Improvements
Building
Parking
Site Improvements
Arch. & Eng.
Architectural Supervision
$3,033,600
$225,000
$0
$122,198
$40,733
$0
$0
$0
$0
$0
$64.00
$4.75
$0.00
$2.58
$0.86
Total Improvements
$3,871,530
$0
$81.68
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1.27
$0.00
$0.00
$1.05
$1.05
$1.05
$4.58
$0.00
$3.44
$0.00
$0.00
$1.05
$0.87
$9.17
$0
Consultants
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Development Fee
Organizational Costs
Working Capital (Operating Deficits)
Commissions
Points
Construction Interest
Letters of Credit
$10,000
$60,000
$0
$0
$50,000
$50,000
$50,000
$217,290
$0
$162,930
$0
$0
$50,000
$41,332
$434,579
$0
$0
$0
$0
Total Indirect Costs
$1,116,131
$0
$23.55
TOTAL ESTIMATED COSTS
$4,987,661
$0
$105.22
EXHIBIT C: MORTGAGE SCHEDULE
1
$4,987,661
12.00%
15
30
$615,644
Financing Alternative:
Perm. Mortg.Balance:
Interest Rate:
Term:
Amortization Period:
Mortgage Payment:
YEAR
ACTIVITY
LOAN BALANCE
AMORTIZATION
Total Amortization
1
.2
Construction Operations
3
Operations
4
Operations
$4,987,661
11.00%
1.00%
50%
0.00%
0.00%
Const. Mort. Balance:
Construction Interest:
Construction Points:
Average out. Balance:
Cash Flow/Lender:
Residual/Lender:
6
5
Operations
Operations
7
Operations
8
Operations
9
Operations
10
Operations
$4,987,661 $4,969,562 $4,949,167 $4,926,186 $4,900,290 $4,871,110 $4,838,229 $4,801,178 $4,759,429 $4,712,384
11
Sale
$4,659,373
$18,099
$20,395
$22,981
$25,896
$29,180
$32,881
$37,051
$41,750
$47,045
$53,011
$597,545
$595,250
$592,663
$589,749
$586,464
$582,764
$578,594
$573,895
$568,600
$562,633
$328,288
INTEREST
--------------------------------------------------------------------------------------------------------EXHIBIT D: PROJECTED STATEMENT OF INCOME AND EXPENSES
---------------------------------------------------------------------------------------------------------------------------YEAR
ACTIVITY
1
Construction
GROSS REVENUES
LESS VACANCY RESERVE
2
3
Operations Operations
4
5
6
7
8
9
10
Operations
Operations
Operations
Operations
Operations
operations
Operations
$872,727
11
Sale
$925,091
$547,560
$580,414
$615,238
$652,153
$691,282
$732,759
$776,724
$823,328
$27,378
$29,021
$30,762
$32,608
$34,564
$36,638
$38,836
$41,166
$43,636
$46,255
$878,837
NET REVENUES
$520,182
$551,393
$584,476
$619,545
$656,718
$696,121
$737,888
$782,161
$829,091
LESS OPERATING EXPENSES
$138,329
$143,862
$149,396
$154,929
$160,462
$165,995
$171,528
$177,061
$182,595
$188,128
LESS REPLACEMENT RESERVE
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
NET OPERATING INCOME
MINUS PROJECT COSTS
$0
$4,987,661
$0
$6,282,297
PLUS SALES PROCEEDS
($4,987,661)
CASH FLOW BEFORE DEBT
SERVICE
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$6,928,006
CONSTRUCTION MORTGAGE
Principal Amount
Points
Interest
$4,987,661 ($4,987,661)
$0
$0
PERMANENT MORTGAGE
$4,987,661
$0
$615,644
Principal Amount
Points
Fixed Debt Service
C.F.Before Part.
$615,644
$615,644
$615,644
$615,644
$0
($278,792)
$0
$0
($253,114)
$0
$0
($225,564)
$0
$0
($196,028)
$0
$0
($164,389)
$0
$0
($130,519)
$0
$0
$0
$615,644
$615,644
$615,644
$615,644
$615,644
$615,644
$0
($278,792)
($253,114)
($225,564)
C.F.Participation
Debt Payment Upon Sale
Residual Participation
TOTAL DEBT SERVICE
$615,644
$615,644
$615,644
$615,644
($94,285)
$0
$0
($55,544)
$0
$0
($14,148)
$0
$0
$6,312,361
$6,312,361
$0
$4,659,373
$615,644
$615,644
$615,644
$5,275,017
($94,285)
($55,544)
($14,148)
$1,652,989
$615,644
(debt service,c.f.
and residual part.)
CASH FLOW AFTER DEBT
SERVICE
($196,028) ($164,389)
($130,519)
Debt Coverage Ratio
Breakeven Occupancy
Breakeven Occupancy w/
0.55
1.51
0.59
1.44
0.63
1.37
0.68
1.30
0.73
1.24
0.79
1.18
0.85
1.12
0.91
1.07
0.98
1.02
11.25
0.97
Partner Contribution
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
0.97
6
7
8
9
10
EXHIBIT E: AFTER TAX ANALYSIS
YEAR
2
3
4
5
Operations
Operations
Operations
Operations
Operations
Operations
Operations
Operations
Operations
$0
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
$0
$597,545
$595,250
$592,663
$589,749
$586,464
$582,764
$578,594
$573,895
$568,600
$562,633
$215,085
$215,085
$215,085
$215,085
$215,085
$215,085
$215,085
$215,085
$215,085
$215,085
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$5,000
$43,458
$100,000
$0
1
ACTIVITY
NET OPERATING INCOME
Construction
11
Sale
DEDUCTIBLE EXPENSES
Less: Interest Payments
Interest
Less: Depreciation
Construction Period
Taxes
Interest
Leasing/Mkt.
Indirect Expenses
Legal & Acc't.
Appraisals
Insurance
Permits
Consultants
$60,000
$0
$50,000
$0
$10,000
Financing Fees
Const. Loan Fee
Const.Loan Points
Perm. Loan Points
TOTAL DEDUCTIBLE
$0
$0
$2,755
$271,213
TAX LIABILITY (50%)
TAX SHELTER (50%)
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$858,962
$856,047
$852,763
$849,062
$844,892
$840,193
$834,898
$828,932
$863,844
$861,548
($0)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($271,213)
($481,991)
($454,018)
($423,881)
($391,431)
($356,507)
($318,936)
($278,532)
($235,093)
($188,402)
($138,223)
$0
$135,607
$0
$240,995
$0
$227,009
$0
$211,940
$0
$195,715
$0
$178,253
$0
$159,468
$0
$139,266
$0
$117,547
$0
$94,201
$0
$69,111
PLUS REPLACEMENT RESERVE
TAXABLE INCOME (LOSS)
$2,755
CAPITAL GAINS TAX
Sales Proceeds
$6,282,297
Basis
Land
$450,000
$1,720,680
Building
Unamortized Expense
Points
Leasing Comissions
$11,022
$0
Net Gain
$4,100,595
Tax Liability (20%)
$820,119
AFTER-TAX CASH FLOW
(Leveraged)
Without Tax Benefits
With Tax Benefits
$0
$135,607
NET PRESENT VALUE
Without Tax Benefits
With Tax Benefits
($542,003)
$479,894
INTERNAL RATE OF RETURN
Without Tax Benefits
With Tax Benefits
-8.16%
N.A.
($278,792)
($253,114)
($225,564)
($196,028)
($37,796)
($26,105)
($13,623)
($313)
($164,389)
($130,519)
($94,285)
($55,544)
($14,148)
$832,870
$13,865
$28,949
$44,981
$62,002
$80,053
$901,981
EXHIBIT V: FINANCIAL FEASIBILITY WITH A PARTICAPATION MORTGAGE
ALTERNATIVE #3
DEVELOPMENT PROFORMA: CENTRAL SQUARE HOUSING PROJECT
EXHIBIT A: GENERAL INFORMATION
DATE OF PROJECTION:
PROJECT NAME:
LOCATION:
NUMBER OF UNITS:
EST. START DATE:
COMPLETION DATE:
CONSTRUCTION TIME:
August 1,1985
CSR Project
Cambridge, Ma.
45
4/1/1988
1/1/1990
20 months
A. SITE INFORMATION
Sqaure Footage of Parcel:
27,376
Bid. Gross Sqaure Footage:
BLd. Net Square Footage:
Building Efficiency:
No. of Parking Spaces:
47,400
38,520
81%
45
B. UNIT CHARACTERISTICS
Number of Units:
Total Sq. Feet:
No. of Studios:
Sq. Ft. per unit:
No. of (1) bedrm.
Sq. Ft. per unit:
No. of (2) bedrm.:
Sq. ft. per unit:
No. of (3) bedrm.:
Sq. Ft. per unit:
45
47,400
0
0
9
660
36
905
0
0
BASIS FOR PROJECTIONS
DEVELOPMENT PHASE
Land
Site Improvements
Building Construction
Parking
Consultants
Architectural & Engineering
Architectural Supervision
Development Fee
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Organizational Costs
OPERATIONS PHASE
$5,000.00
$0.00
$50,000.00
$58.00
$5,000.00
perunit
er uni t
Fer uni t
persq. feet
peruni t
$10,000
3.75% of const. cost
1.25% of const. cost
0.00% of const cost
$60,000
$0
$0
$50,000
$50,000
$50,000
$182,962 5% of total costs
$0
$0
p.
91
MONTHLY REVENUES
Studio:
(1) bedroom:
(2) Bedroom:
(3) bedroom:
Parking Spaces:
TOTAL ANNUAL REVENUES:
ANNUAL EXPENSES
Administrative
Management:
Maintenance:
Real Estate Taxes:
Utilities:
(Common Area)
Utilities:
(Units)
Security:
$0
$820
$1,000
$0
$50
$547,560
$5,000
$27,378
$10,951
$50,000
$10,000
$0
$30,000
per
per
per
per
per
uni t
uni t
unit
unit
space
5.00% of revenues
2.00% of revenues
$0.00 per unit
Working Capital (Operating Deficits)
Letters of Credit Fees
Commissions
$0
$0
$50,000
Water:
TOTAL EXPENSES:
Replacement Res.
SALE:
Stabilized Cap Rate:
Disposition Cap Rate:
Sales Expense:
11.0%
9.0%
6.0%
TAXATION:
Ordinary Income:
Capital Gains:
50%
20%
STABILIZED YEAR:
-2
HOLDING PERIOD:
(years)
10
LEASING
Vacancy Rate:
(Annual)
Revenues: Lease-Up
Year
Reveues:Stabilized
Year
$5,000
$138,329
$3,073.98 per unit
$45,000
5% of gross revenues
100.00% of gross revenues
100.00% of gross revenues
GROWTH FACTORS:
GENERAL PARTNER RATE OF RETURN
Before Tax:
After Tax:
10%
25%
LIMITED PARTNER RATE OF RETURN
After Tax:
CONVENTION:
FINANCING:
25%
End of Year
Participation Mtg.; lender shares 50%
of cash flow and residuals
Market Rents
Operating Expenses
6% per annum
4% per annum
DISTRIBUTION TO LIMITED PARTNERS
Percent of Cash Flow:
Percent of Tax Benefits:
Percent of Residuals:
45%
45%
45%
EXHIBIT B: PROJECT COST ESTIMATE
YEAR
YR. 1
CONSTRUCTION
COST PER SQUARE FOOT
YR. 2
LEASING
ITEM COST ESTIMATE
Land
$225,000
Improvements
Building
Parking
Site Improvements
Arch. & Eng.
Architectural Supervision
$2,749,200
$225,000
$0
$111,533
$37,178
$0
$0
$0
$0
$0
$58.00
$4.75
$0.00
$2.35
$0.78
Total Improvements
$3,347,910
$0
$70.63
Consultants
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Development Fee
Organizational Costs
Working Capital (Operating Deficits)
Commissions
Points
Construction Interest
Letters of Credit
$10,000
$60,000
$0
$0
$50,000
$50,000
$50,000
$182,962
$0
$0
$0
$0
$50,000
$41,332
$365,924
$0
Total Indirect Costs
$850,218
$0
$17.94
$4,198,128
$0
$88.57
TOTAL ESTIMATED COSTS
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1.27
$0.00
$0.00
$1.05
$1.05
$1.05
$3.86
$0.00
$0.00
$0.00
$0.00
$1.05
$0.87
$7.72
$0
EXHIBIT C: MORTGAGE SCHEDULE
4
$4,198,128
10.00%
15
30
$442,099
Financing Alternative:
Perm. Mortg.Balance:
Interest Rate:
Term:
Amortization Period:
Mortgage Payment:
YEAR
ACTIVITY
LOAN BALANCE
AMORTIZATION
Total Amortization
2
1
Construction
Operations
3
Operations
4
Const. Mort. Balance:
Construction Interest:
Construction Points:
Average out. Balance:
Cash Flow/Lender:
Residual/Lender:
5
Operations Operations
6
7
Operations Operations
$4,198,128
11.00%
1.00%
50%
50.00%
50.00%
8
Operations
9
Operations
10
Operations
$4,198,128 $4,174,792 $4,149,012 $4,120,532 $4,089,070 $4,054,314 $4,015,918 $3,973,502 $3,926,644 $3,874,880
11
Sale
$3,817,695
$23,336
$25,780
$28,480
$31,462
$34,756
$38,396
$42,416
$46,858
$51,764
$57,185
$418,762
$416,319
$413,619
$410,637
$407,343
$403,703
$399,683
$395,241
$390,335
$384,914
7
8
9
10
$380,434
INTEREST
EXHIBIT D: PROJECTED STATEMENT OF INCOME AND EXPENSES
YEAR
ACTIVITY
1
2
Construction Operations
3
4
5
Operations
Operations
$547,560
$580,414
$615,238
$652,153
$27,378
$29,021
$30,762
NET REVENUES
$520,182
$551,393
LESS OPERATING EXPENSES
$138,329
$45,000
$336,853
$362,531
GROSS REVENUES
LESS VACANCY RESERVE
LESS REPLACEMENT RESERVE
NET OPERATING INCOME
MINUS PROJECT COSTS
$0
$4,198,128
6
Operations Operations
Operations
Operations
Operations
Operations
$691,282
$732,759
$776,724
$823,328
$872,727
$925,091
$32,608
$34,564
$36,638
$38,836
$41,166
$43,636
$46,255
$584,476
$619,545
$656,718
$696,121
$737,888
$782,161
$829,091
$878,837
$143,862
$149,396
$154,929
$160,462
$165,995
$171,528
$177,061
$182,595
$188,128
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$390,081'
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
Sale
$0
PLUS SALES PROCEEDS
CASH FLOW BEFORE DEBT
($4,198,128)
SERVICE
11
$6,282,297
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$6,928,006
CONSTRUCTION MORTGAGE
Principal Amount
Points
Interest
$4,198,128 ($4,198,128)
$0
$0
PERMANENT MORTGAGE
$4,198,128
$0
$442,099
Principal Amount
Points
Fixed Debt Service
C.F.Before Part.
$0
C.F.Participation
Debt Payment Upon Sale
Residual Participation
$0
($105,246)
$0
$0
TOTAL DEBT SERVICE
$0
$442,099
$0
($105,246)
$442,099
$442,099
$442,099
($79,568)
$0
$0
($52,018)
$0
$0
($22,483)
$0
$0
$442,099
$442,099
$442,099
($79,568)
($52,018)
($22,483)
$442,099
$442,099
$442,099
$442,099
$442,099
$442,099
$9,157
$9,157
$4,578
$43,027
$43,027
$21,513
$79,261
$79,261
$39,630
$118,001
$118,001
$59,001
$159,398
$159,398
$79,699
$6,485,907
$2,668,212
$1,334,106
$3,817,695
$446,677
$463,612
$481,729
$501,099
$521,798
$5,593,900
$4,578
$21,513
$39,630
$59,001
$79,699
$1,334,106
(debt service,c.f.
and residual part.)
CASH FLOW AFTER DEBT
SERVICE
0.76
1.19
0.82
1.14
0.88
1.08
0.95
1.03
1.02
1.10
Breakeven Occupancy
0.99
0.94
1.18
0.90
1.27
0.86
1.36
0.82
15.67
0.78
Breakeven Occupancy w/
Partner Contribution
1.00
1.00
1.00
1.00
0.99
0.94
0.90
0.86
0.82
0.78
4
5
6
7
8
9
Debt Coverage Ratio
EXHIBIT E: AFTER TAX ANALYSIS
1
YEAR
ACTIVITY
2
3
Construction Operations Operations
NET OPERATING INCOME
Operations
Operations
Operations
operations
Operations
Operations
10
Operations
11
Sale
$0
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
$0
$418,762
$416,319
$413,619
$410,637
$407,343
$403,703
$399,683
$395,241
$390,335
$384,914
$0
$185,995
$0
$185,995
$0
$185,995
$0
$185,995
$4,578
$185,995
$21,513
$185,995
$39,630
$185,995
$59,001
$185,995
$79,699
$185,995
$1,334,106
$185,995
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
$5,000
$36,592
DEDUCTIBLE EXPENSES
Less: Interest Payments
Interest
Contingent interest
Less: Depreciation
Construction Period
Taxes
Interest
Leasing/Mkt.
Indirect Expenses
Legal & Acc't.
Appraisals
Insurance
Permits
Consultants
$5,000
$36,592
$100,000
$60,000
$0
$50,000
$0
$10,000
$0
Financing Fees
Const. Loan Fee
Const.Loan Points
Perm. Loan Points
TOTAL DEDUCTIBLE
$0
$0
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$264,348
$649,105
$646,662
$643,962
$640,980
$642,264
$655,560
$669,656
$684,585
$700,376
$1,949,363
($0)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($264,348)
($267,253)
($239,131)
($208,881)
($176,364)
($146,008)
($125,434)
($103,296)
($79,485)
($53,880)
($1,258,654)
$0
$132,174
$0
$133,626
$0
$119,566
$0
$104,441
$0
$88,182
$0
$73,004
$0
$62,717
$0
$51,648
$0
$39,742
$0
$26,940
PLUS REPLACEMENT RESERVE
TAXABLE INCOME (LOSS)
TAX LIABILITY (50%)
TAX SHELTER (50%)
$0
$629,327
CAPITAL GAINS TAX
$6,282,297
Sales Proceeds
Basis
Land
BuiLding
Unamortized Expense
Points
Leasing Comissions
$225,000
$1,487,960
$11,022
$0
$4,558,315
Net Gain
$911,663
Tax LiabiLity (20%)
AFTER-TAX
AFTER-TAX CASH FLOW
(Leveraged)
Without Tax Benefits
With Tax Benefits
- -CASH- -FLOW----------------------------------------------------------------------------------------------------------------
$0
$132,174
NET PRESENT VALUE
Without Tax Benefits
With Tax Benefits
$39,675
$355,747
INTERNAL RATE OF RETURN
Without Tax Benefits
With Tax Benefits
12.81%
N.A.
($105,246)
$28,380
($79,568)
$39,997
($52,018)
$52,423
($22,483)
$65, 699
$4,578
$77,583
$21,513
$84,230
$39,630
$59,001
$79,699
$91,279
$98,743
$106, 639
$422,443
$1,051,770
EXHIBIT VI: FINANCIAL FEASIBILITY WITH SHARP AND TAX-EXEMPT FINANCING
ALTERNATIVE #4
DEVELOPMENT PROFORMA: CENTRAL SQUARE HOUSING PROJECT
EXHIBIT A: GENERAL INFORMATION
DATE OF PROJECTION:
PROJECT NAME:
LOCATION:
NUMBER OF UNITS:
EST. START DATE:
COMPLETION DATE:
CONSTRUCTION TIME:
August 1, 1985
CSR Project
Cambridge, Ma.
45
4/1/1988
1/1/1990
20 months
A. SITE INFORMATION
Sqaure Footage of Parcel:
B. UNIT CHARACTERISTICS
27,376
Number of Units:
Total Sq. Feet:
No. of Studios:
Sq. Ft. per unit:
BLd. Gross Sqaure Footage:
BLd. Net Square Footage:
Building Efficiency:
No. of Parking Spaces:
47,400
38,520
81%
45
No. of (1) bedrm.
Sq. Ft. per unit:
No.
Sq.
No.
Sq.
of (2) bedrm.:
ft. per unit:
of (3) bedrm.:
Ft. per unit:
45
47,400
0
0
9
660
36
905
0
0
BASIS FOR PROJECTIONS
OPERATIONS PHASE
DEVELOPMENT PHASE
Land
Site Improvements
Building Construction
Parking
Consultants
Architectural & Engineering
Architectural Supervision
Development Fee
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Organizational Costs
$10,000.00
$0.00
$50,000.00
$58.00
$5,000.00
per
per
per
per
per
MONTHLY REVENUES
Studio:
(1) bedroom:
(2) Bedroom:
(3) bedroom:
Parking Spaces:
TOTAL ANNUAL REVENUES:
unit
unit
unit
sq. feet
unit
$10,000
3.75% of const. cost
1.25% of const. cost
10.00% of const cost(SH ARP
$60,000
$0
$0
$50,000
$50,000
$50,000
$207,599 5% of total costs
$0
$0
ANNUAL EXPENSES
Administrative
Management:
Maintenance:
Real Estate Taxes:
Uti Lities:
(Common Area)
Utilities:
(Units)
Security:
p.
97
$0 per
$820 per
$1,000 per
$0 per
$50 per
$547,560
$5,000
$27,378
$10,951
$50,000
$10,000
$0
$30,000
unit
uni t
unit
unit
space
5.00% of revenues
2.00% of revenues
$0.00 per unit
Working Capital (Operating Deficits)
Bond Issuance Costs
Commissions
$0
2.00% of total costs
$50,000
Water:
TOTAL EXPENSES:
Replacement Res.
SALE:
$5,000
$138,329
$3,073.98 per unit
$45,000
LEASING
Stabilized Cap Rate:
Disposition Cap Rate:
Sales Expense:
11.0%
9.0%
6.0%
Vacancy Rate:
(Annual)
Revenues: Lease-Up
Year
Reveues:Stabilized
Year
5% of gross revenues
100.00% of gross revenues
100.00% of gross revenues
TAXATION:
Ordinary Income:
Capital Gains:
50%
20%
STABILIZED YEAR:
2
HOLDING PERIOD:
10
GROWTH FACTORS:
Market Rents
Operating Expenses
6% per annum
4% per annum
DISTRIBUTION TO LIMITED PARTNERS
Percent of Cash Flow:
Percent of Tax Benefits:
Percent of Residuals:
0%
0%
0%
(years)
GENERAL PARTNER RATE OF RETURN
20%
10%
Before Tax:
After Tax:
LIMITED PARTNER RATE OF RETURN
After Tax:
CONVENTION:
FINANCING:
20%
End of Year
Tax-exempt bonds w/ SHARP subsidy
10%, 30 years
EXHIBIT B: PROJECT COST ESTIMATE
YEAR
YR. 1
CONSTRUCTION
YR. 2
LEASING
COST PER SQUARE FOOT
ITEM COST ESTIMATE
Land
$450,000
Improvements
Building
Parking
Site Improvements
Arch. & Eng.
Architectural Supervision
$2,749,200
$225,000
$0
$111,533
$37,178
$0
$0
$0
$0
$0
$58.00
$4.75
$0.00
$2.35
$0.78
Total Improvements
$3,572,910
$0
$75.38
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1.27
$0.00
$0.00
$1.05
$1.05
$1.05
$4.38
$0.00
$8.25
$0.00
$0.00
$1.05
$0.00
$6.52
$0
Consultants
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Development Fee
Organizational Costs
Working Capital (Operating Deficits)
Commissions
Points
Construction Interest
Bond Issuance Costs
$10,000
$60,000
$0
$0
$50,000
$50,000
$50,000
$207,599
$0
$390,958
$0
$0
$50,000
$0
$309,069
$95,011
$0
$0
$0
Total Indirect Costs
$1,262,636
$0
$24.63
TOTAL ESTIMATED COSTS
$4,835,546
$0
$100.01
EXHIBIT C: MORTGAGE SCHEDULE
2
$4,365,497
10.00%
15
30
$459,724
Financing Alternative:
Perm. Mortg.Balance:
Interest Rate:
Term:
Amortization Period:
Mortgage Payment:
YEAR
1
ACTIVITY
Construction
LOAN BALANCE
AMORTIZATION
Total Amortization
2
Operations
3
Operations
4
Operations
$4,365,497 $4,341,230
$4,314,422
$24,267
$26,808
$29,615
$435,457
$432,916
$430,109
Const. Mort. Balance:
Construction Interest:
Construction Points:
Average out. Balance:
Cash Flow/Lender:
Residual/Lender:
5
6
Operations
Operations
$4,284,807 $4,252,091
7
$4,365,497
11.00%
1.00%
50%
50.00%
50.00%
8
Operations Operations
9
Operations
10
Operations
11
Sale
$4,215,949
$4,176,022
$4,131,915
$4,083,189
$4,029,361
$3,969,896
$32,716
$36,142
$39,926
$44,107
$48,726
$53,828
$59,465
$427,008
$423,582
$419,798
$415,617
$410,998
$405,896
$400,260
7
8
9
10
11
$395,600
INTEREST
EXHIBIT D: PROJECTED STATEMENT OF INCOME AND EXPENSES
YEAR
1
ACTIVITY
Construction
GROSS REVENUES
LESS VACANCY RESERVE
2
3
Operations
Operations
$547,560
$580,414
4
5
6
Operations Operations
Operations
Operations Operations
Operations
Operations
Sale
$615,238
$652,153
$691,282
$732,759
$776,724
$823,328
$872,727
$925,091
$36,638
$38,836
$41,166
$43,636
$46,255
$27,378
$29,021
$30,762
$32,608
$34,564
NET REVENUES
$520,182
$551,393
$584,476
$619,545
$656,718
$696,121
$737,888
$782,161
$829,091
$878,837
LESS OPERATING EXPENSES
$138,329
$143,862
$149,396
$154,929
$160,462
$165,995
$171,528
$177,061
$182,595
$188,128
LESS REPLACEMENT RESERVE
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$0
$336,853
$362,531
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
$4,835,546
$0
NET OPERATING INCOME
MINUS PROJECT COSTS
$390,081
PLUS SALES PROCEEDS
CASH FLOW BEFORE DEBT
SERVICE
$6,282,297
($4,835,546)
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$6,928,006
CONSTRUCTION MORTGAGE
Principal Amount
Points
Interest
$4,365,497 ($4,365,497)
$0
$0
PERMANENT MORTGAGE
Principal Amount
Points
Fixed Debt Service
C.F.Before Part.
$4,365,497
$0
$459,724
($470,050)
C.F.Participation
Debt Payment Upon Sale
Residual Participation
TOTAL DEBT SERVICE
($122,872)
$0
$0
$459,724
$459,724
$459,724
($97,194)
$0
$0
($69,643)
$0
$0
($40,108)
$0
$0
$459,724
($8,468)
$0
$0
$459,724
$459,724
$459,724
$459,724
$459,724
$25,402
$25,402
$0
$61,636
$61,636
$0
$100,376
$100,376
$0
$141,772
$141,772
$0
$6,468,282
$6,468,282
$0
$3,969,896
$0
$459,724
$459,724
$459,724
($122,872)
($97,194)
($69,643)
($40,108)
$55,788
$178,505
$187,430
$0
$55,788
$178,505
$384,232
$0
$55,788
$153,634
$564,760
$0
$55,788
$124,099
$723,302
$0
$55,788
$92,459
$856,549
$0
($154)
$25,523
$28,203
$28,203
$28,203
$28,203
$5,848
$28,203
$28,203
$1,353,357
1.00
1.00
1.06
0.96
1.06
0.96
1.06
0.96
1.06
0.96
1.06
0.96
1.01
0.99
1.10
0.94
1.19
0.89
14.95
0.85
1.00
0.96
0.96
0.96
0.96
0.96
0.99
0.94
0.89
0.85
4
5
6
7
8
9
10
$459,724
$459,724
$459,724
$459,724
$459,724
$459,724
$4,429,621
$25,402
$61,636
$100,376
$141,772
$2,498,385
$55,788
$55,788
$55,788
$55,788
$0
$0
$0
$58,589
$960,896 $1,008,940 $1,059,387 $1,095,153
$0 $1,043,003 $1,037,372
$0
$55,788
(debt service,c.f.
and residual part.)
CASH FLOW AFTER DEBT
SERVICE AND EQUITY
Maximum Publi Subsidy
Minus Rental Assistance
Plus Public Subsidy
($470,050)
($79,092)
$178,505
$0
(Accrued SHARP p. & i.)
Sharp Repayment
CASH FLOW AFTER PUBLIC
SUBSIDY AND RENT.ASSIST.
($79,092)
Debt Coverage Ratio
Breakeven Occupancy
Breakeven Occupancy w/
Partner Contribution
($8,468)
$0
$1,089,240
$1,089,240
EXHIBIT E: AFTER TAX ANALYSIS
YEAR
1
ACTIVITY
NET OPERATING INCOME
2
Construction Operations
3
Operations
Operations
operations
Operations
Operations
Operations
Operations
Operations
11
Sale
$0
$281,065
$306,743
$334,293
$363,828
$395,468
$429,338
$465,572
$504,312
$545,709
$589,921
$0
$435,457
$432,916
$430,109
$427,008
$423,582
$419,798
$415,617
$410,998
$405,896
$400,260
$198,495
$198,495
$198,495
$198,495
$198,495
$198,495
$198,495
$198,495
$198,495
$198,495
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
DEDUCTIBLE EXPENSES
Less: Interest Payments
Interest
Less: Depreciation
Construction Period
Taxes
Interest
$5,000
$30,907
$5,000
$30,907
Leasing/Mkt.
$100,000
Indirect Expenses
Legal & Accit.
Appraisals
Insurance
Permits
Consultants
$60,000
$0
$50,000
$0
$10,000
Financing Fees
Const. Loan Fee
Const.Loan Points
Perm. Loan Points
TOTAL DEDUCTIBLE
$0
$0
$0
$0
$255,907
$669,859
PLUS REPLACEMENT RESERVE
TAXABLE INCOME (LOSS)
TAX LIABILITY (50%)
TAX SHELTER (50%)
$0
$0
$667,318
$0
$664,511
$0
$0
$0
$0
$0
$661,410
$657,984
$654,200
$650,019
$645,400
$640,298
$634,662
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($217,516) ($179,862)
($139,447)
($96,088)
($49,590)
$259
$0
$69,724
$0
$48,044
$0
$24,795
$130
$0
($0)
($45,000)
($45,000)
($45,000)
($45,000)
($255,907)
($343,795)
($315,576)
($285,218)
($252,582)
$0
$127,953
$0
$171,897
$0
$157,788
$0
$142,609
$0
$126,291
$0
$108,758
$0
$89,931
$0
$0
CAPITAL GAINS TAX
Sales Proceeds
$6,282,297
Basis
Land
Building
Unamortized Expense
Points
Leasing Comissions
$450,000
$1,587,960
$0
$0
Net Gain
$4,244,337
Tax Liability (20%)
$848,867
AFTER-TAX CASH FLOW
(Leveraged)
Without Tax Benefits
With Tax Benefits
($79,092)
$48,862
NET PRESENT VALUE
Without Tax Benefits
With Tax Benefits
$184,514
$1,236,930
INTERNAL RATE OF RETURN
Without Tax Benefits
With Tax Benefits
42.67%
N.A.
($154)
$171,743
$25,523
$28,203
$28,203
$28,203
$28,203
$5,848
$28,203
$28,203
$1,353,227
$183,311
$170,812
$154,494
$136,961
$118,134
$75,571
$76,247
$52,998
$1,353,227
EXHIBIT VII: FINANCIAL FEASIBILITY WITH TELLER BONDS
ALTERNATIVE #6
DEVELOPMENT PROFORMA: CENTRAL SQUARE HOUSING PROJECT
EXHIBIT A: GENERAL INFORMATION
DATE OF PROJECTION:
PROJECT NAME:
LOCATION:
NUMBER OF UNITS:
EST. START DATE:
COMPLETION DATE:
CONSTRUCTION TIME:
August 1,1985
CSR Project
Cambridge, Ma.
45
4/1/1988
1/1/1990
20 months
A. SITE INFORMATION
B. UNIT CHARACTERISTICS
Sqaure Footage of Parcel:
27,376
Bid. Gross Sqaure Footage:
Bld. Net Square Footage:
47,400
38,520
81%
45
Building Efficiency:
No. of Parking Spaces:
Number of Units:
Total Sq. Feet:
No. of Studios:
Sq. Ft. per unit:
No. of (1) bedrm.
Sq. Ft. per unit:
No.
Sq.
No.
Sq.
of (2) bedrm.:
ft. per unit:
of (3) bedrm.:
Ft. per unit:
45
47,400
0
0
9
660
36
905
0
0
BASIS FOR PROJECTIONS
OPERATIONS PHASE
DEVELOPMENT PHASE
Land
Site Improvements
Building Construction
Parking
Consultants
Architectural & Engineering
Architectural Supervision
Development Fee
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Organizational Costs
$5,000.00
$0.00
$50,000.00
$58.00
$5,000.00
per
per
per
per
per
unit
unit
unit
sq. feet
unit
$10,000
3.75% of const. cost
1.25% of const. cost
0.00% of const cost'
$60,000
$0
$0
$50,000
$50,000
$50,000
$178,396 5% of total costs
$0
$0
MONTHLY REVENUES
Studio:
(1) bedroom:
(2) Bedroom:
(3) bedroom:
Parking Spaces:
TOTAL ANNUAL REVENUES:
ANNUAL EXPENSES
Administrative
Management:
Maintenance:
Real Estate Taxes:
Utilities:
(Common Area)
Uti lities:
(Units)
Security:
p.10 3
$0
$820
$1,000
$0
$50
$547,560
$5,000
$27,378
$10,951
$50,000
$10,000
$0
$30,000
per
per
per
per
per
uni t
unit
unit
unit
space
5.00% of revenues
2.00% of revenues
$0.00 per unit
Working Capital (Operating Deficits)
Bond Issuance Costs
Commissions
SALE:
Stabilized Cap Rate:
Disposition Cap Rate:
Sales Expense:
$0
7.00% of total costs
$50,000
TOTAL EXPENSES:
$5,000
$138,329
Replacement Res.
$45,000
Water:
$3,073.98 per unit
LEASING
11.0%
9.0%
6.0%
TAXATION:
Ordinary Income:
Capital Gains:
50%
20%
STABILIZED YEAR:
2
Vacancy Rate:
(Annual)
Revenues: Lease-Up
Year
Reveues:Stabilized
Year
5% of gross revenues
100.00% of gross revenues
100.00% of gross revenues
GROWTH FACTORS:
Market Rents
Operating Expenses
6% per annum
4% per annum
10
HOLDING PERIOD:
(years)
GENERAL PARTNER RATE OF RETURN
20%
10%
Before Tax:
After Tax:
DISTRIBUTION TO LIMITED PARTNERS
Percent of Cash Flow:
Percent of Tax Benefits:
Percent of Residuals:
LIMITED PARTNER RATE OF RETURN
After Tax:
CONVENTION:
FINANCING:
20%
End of Year
Tax-exempt TELLER bonds, 8%
30 years
39%
39%
39%
EXHIBIT B: PROJECT COST ESTIMATE
YEAR
YR. 1
CONSTRUCTION
YR. 2
LEASING
COST PER SQUARE FOOT
ITEM COST ESTIMATE
Land
$225,000
Improvements
Building
Parking
Site Improvements
Arch. & Eng.
Architectural Supervision
$2,749,200
$225,000
$0
$111,533
$37,178
$0
$0
$0
$0
$0
$58.00
$4.75
$0.00
$2.35
$0.78
Total Improvements
$3,347,910
$0
$70.63
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1.27
$0.00
$0.00
$1.05
$1.05
$1.05
$3.76
$0.00
$0.00
$0.00
$0.00
$1.05
$0.87
$6.52
$0
Consultants
Legal and Accounting
Appraisal Fees
Permits
Marketing/Leasing
Insurance during Const.
R.E. Taxes during Const.
Contingency
Construction Loan Fee
Development Fee
Organizational Costs
Working Capital (Operating Deficits)
Commissions
Points
Construction Interest
Bond Issuance Costs
$10,000
$60,000
$0
$0
$50,000
$50,000
$50,000
$178,396
$0
$0
$0
$0
$50,000
$41,332
$309,069
$290,269
Total Indirect Costs
$1,079,066
$0
$16.64
TOTAL ESTIMATED COSTS
$4,426,976
$0
$87.27
EXHIBIT C: MORTGAGE SCHEDULE
Financing Alternative:
Perm. Mortg.Balance:
Interest Rate:
Term:
Amortization Period:
Mortgage Payment:
2
1
YEAR
ACTIVITY
LOAN BALANCE
Operations
Construction
3
Operations
6
5
4
Operations
$4,426,976
11.00%
1.00%
50%
50.00%
50.00%
Const. Mort. Balance:
Construction Interest:
Construction Points:
Average out. Balance:
Cash Flow/Lender:
Residual/Lender:
Operations
Operations
7
operations
9
8
Operations Operations
10
Operations
$4,426,976 $4,389,995 $4,349,944 $4,306,569 $4,259,594 $4,208,720 $4,153,623 $4,093,954 $4,029,332 $3,959,346
AMORTIZATION
Total Amortization
2
$4,426,976
8.00%
15
30
$389,803
11
Sale
$3,883,552
$36,981
$40,051
$43,375
$46,975
$50,874
$55,097
$59,670
$64,622
$69,986
$75,794
$352,822
$349,752
$346,428
$342,828
$338,929
$334,706
$330,133
$325,181
$319,817
$314,009
$543,424
INTEREST
.....................................................................................................................
EXHIBIT 0: PROJECTED STATEMENT OF INCOME AND EXPENSES
1
YEAR
ACTIVITY
2
Construction Operations
$547,560
GROSS REVENUES
5
3
6
7
9
8
10
11
Sale
Operations
Operations
Operations
Operations
Operations
Operations
Operations
Operations
$580,414
$615,238
$652,153
$691,282
$732,759
$776,724
$823,328
$872,727
$925,091
$46,255
$27,378
$29,021
$30,762
$32,608
$34,564
$36,638
$38,836
$41,166
$43,636
NET REVENUES
$520,182
$551,393
$584,476
$619,545
$656,718
$696,121
$737,888
$782,161
$829,091
$878,837
LESS OPERATING EXPENSES
$138,329
$143,862
$149,396
$154,929
$160,462
$165,995
$171,528
$177,061
$182,595
$188,128
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$45,000
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$645,709
LESS VACANCY RESERVE
LESS REPLACEMENT RESERVE
$0
NET OPERATING INCOME
MINUS PROJECT COSTS
$4,426,976
$0
$6,282,297
PLUS SALES PROCEEDS
($4,426,976)
CASH FLOW BEFORE DEBT
SERVICE
I............................~..................................
...................
................................
$336,853
$362,531
$390,081
$419,616
$451,256
$485,126
$521,360
$560,100
$601,497
$6,928,006
CONSTRUCTION MORTGAGE
Principal Amount
Points
Interest
$4,426,976 ($4,426,976)
$0
$0
PERMANENT MORTGAGE
$4,426,976
$0
$389,803
Principal Amount
Points
Fixed Debt Service
C.F.Before Part.
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$278
$278
$0
$29,813
$29,813
$0
$61,453
$61,453
$0
$95,323
$95,323
$0
$131,557
$131,557
$0
$170,297
$170,297
$0
$211,694
$211,694
$0
$6,538,203
$6,538,203
$0
$3,883,552
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$389,803
$4,273,355
$278
$29,813
$61,453
$95,323
$131,557
$170,297
$211,694
$2,654,651
$30,720
$30,720
$30,720
$30,720
$30,720
$30,720
$30,720
$30,733
$64,603
$100,837
$139,577
$180,974
$2,623,931
$0
($52,950)
$0
$0
($27,272)
$0
$0
$0
$389,803
$389,803
CASH FLOW AFTER DEBT
SERVICE
$0
($52,950)
($27,272)
Minus Rental Assistance
Plus Public Subsidy
$0
$30,720
$30,720
$30,720
($83,670)
($57,992)
($30,442)
C.F.Participation
Debt Payment Upon Sale
Residual Participation
TOTAL DEBT SERVICE
(debt service,c.f.
and residual part.)
CASH FLOW AFTER PUBLIC
SUBSIDY AND RENT. ASSISTANCE
Debt Coverage Ratio
Breakeven Occupancy
Breakeven Occupancy w/
Partner Contribution
($907)
0.79
1.16
0.85
1.11
0.92
1.05
1.00
1.00
1.08
0.95
1.17
0.91
1.26
0.86
1.36
0.82
1.46
0.79
1.61
0.75
1.00
1.00
1.00
1.00
0.95
0.91
0.86
0.82
0.79
0.75
5
6
7
8
9
10
EXHIBIT E: AFTER TAX ANALYSIS
YEAR
2
3
4
Operations
Operations
Operations
$0
$306,133
$331,811
$359,361
$388,896
$0
$352,822
$349,752
$346,428
$185,995
$185,995
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$100,000
$0
1
ACTIVITY
NET OPERATING INCOME
Construction
Operations Operations
11
Operations
Operations
Operations
Operations
$420,536
$454,406
$490,640
$529,380
$570,777
$614,989
$342,828
$338,929
$334,706
$330,133
$325,181
$319,817
$314,009
$185,995
$185,995
$185,995
$185,995
$185,995
$185,995
$185,995
$185,995
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
$5,000
$30,907
Sale
DEDUCTIBLE EXPENSES
Less: Interest Payments
Interest
Less: Depreciation
Construction Period
Taxes
Interest
Leasing/Mkt.
Indirect Expenses
Legal & Acc't.
Appraisals
Insurance
Permits
Consultants
$60,000
$0
$50,000
$0
$10,000
Financing Fees
Const. Loan Fee
Const.Loan Points
Perm. Loan Points
TOTAL DEDUCTIBLE
$0
$0
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$2,755
$577,479
$574,410
$571,085
$567,485
$563,586
$559,364
$554,791
$549,838
$544,475
$538,666
($0)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($45,000)
($258,662)
($226,346)
($197,599) ($166,724)
($133,589)
($98,050)
($59,958)
($19,151)
$24,542
$71,302
$0
$129,331
$0
$113,173
$0
$66,794
$0
$49,025
$0
$29,979
$12,271
$0
$35,651
$0
$258,662
PLUS REPLACEMENT RESERVE
TAXABLE INCOME (LOSS)
TAX LIABILITY (50%)
TAX SHELTER (50%)
$0
$98,799
$0
$83,362
$0
$9,575
$121,323
$60,661
$0
CAPITAL GAINS TAX
$6,282,297
Sales Proceeds
Basis
Land
Building
Unamort ized Expense
Points
Leasing Comissions
$225,000
$1,487,960
$11,022
$0
Net Gain
$4,558,315
Tax Liability (20%)
$911,663
AFTER-TAX CASH FLOW
(Leveraged)
Without Tax Benefits
With Tax Benefits
$0
$129,331
NET PRESENT VALUE
Without Tax Benefits
With Tax Benefits
$338,192
$1,255,234
INTERNAL RATE OF RETURN
Without Tax Benefits
With Tax Benefits
44.55%
N.A.
($83,670)
($57,992)
($30,442)
$60,223
$71,527
$83,640
($907)
$96,608
$30,733
$64,603
$100,837
$127,306
$145,323
$2,563,270
$110,478
$125,302
$141,132
$158,026
$176,043
$1,682,327
109
NOTES
1. Interview with Donald Tofias of Central
Trust on May 16, June 20 and July 19,1985.
Plaza
2. Letter from Stephen I. Burr of Herrick and
Arnold B. Tofias, June 10,1985.
Realty
Smith
to
3. Interview with Donald Tofias, June, 20,1985.
4. Interview with Fred Kramer of ADD, Inc., June 22,1985.
Telephone interview with Anne Whittington, Program
5.
Officer, Cambridge Community Development Department, August
3,1985.
6. Telephone interview with Anne Whittington, August 3,1985.
Interview with Michael Rosenberg, Assistant Director for
7.
Housing, Cmabridge Community Development Department, June
26,1985.
a) Helen Moulton
8. Interivews with the following brokers:
Rally of with
Davis
b)
30,1985;
July
of Ellis and Andrews,
28,1985; and
July
Noonan,
c)
Brendan
15,1985;
Hunaman, July
Rettig and
Ingram,
of
Beatty
Tod
and
Ingram
4) O'Neil
Beatty, July 23, 1985.
9. Telephone interview with Susan Theil of the
Rent Control Office, July 28,1985.
Cambridge
Interview with Joseph Antenelli, Senior Site Evaluation
10.
Officer of Massachusetts Housing Financing Agency, July 11,
1985.
11. Interview with Leslie Watt, Project Manager for the Winn
Development Company, July 9, 1985.
1) Helen Moulton, July 30,1985; 22)
Interviews with:
12.
3) Brendan Noonan, July 28,1985
15,1985;
July
Rally,
Davis
985.
23,
July
Beatty,
and 4) Tod
Burr of Herrick and Smith to
Letter from Stephen I.
13.
and telephone interview with
10,1985
June
Tofias,
Arnold B.
13,1985.
August
Donald Tofias,
Telephone
14.
3,1985.
interview
with
110
Anne
Whittington,
August
Interview with Bobert Mervis, Staff Director of
15.
Cambridge Rent Control Office, July 19,1985.
the
Cambridge Election Commission, Rules for Counting
16.
of
City
Representation,
Proportional
under
Ballots
Cambridge, 1941.
17. Interview with Robert Mervis, July 19,1985.
members
Interview with Donald Tofias and
18.
Neighborhood Four Coalition, July 10,1985.
19.
of
the
Interview with Leslie Watt, July 9,1985.
Telephone interviews with Kent Hitechew, Assistant Vice
20.
President, Drexel Burnham Lambert, Inc., July 15, 1985 and
David Smith, Vice President, Boston Financial Technology
Group, August 5,1985.
21. Telephone interview with Kent Hitechew, July 15,
22.
Telephone interview with Kent Hitechew,
and David Smith, August 5,1985.
August
1985.
1,1985
23. Telephone Interview with David Smith, August 8,1985.
24.
Telephone interview with Tony Wallace, Multifamily
Representative, Department of Housing and Urban Development
Area Office, July 19,1985.
Interview with Mark
25.
Consultant, June 29, 1985.
Williams,
Mulitfamily
26. Interview with Mark Williams, June 29,
Housing
1985.
a)
27.
The following sources were used for this section:
telephone interviews with Paul Burbine, Director of Finance,
Massachussetts Housibf Finance Agency, July 17 and August 1,
July 29
b)
Interview with Mark Williams on July 14,
1985;
c) Massachussetts Housing Finance
and August 6, 1985;
Agency, Program Guidelines, State Housing Assistance for
Rental Production, January 25,1985.
a)
The following sources were used for this section:
28.
Program
Draiser,
Mark
with
interviews
Telephone
and
Communities
Office of
Executive
Representative,
Development, July 7, 1985 and July 25,1985; b) Interviews
c) Executive Office of
Mark Williams July 26;
with
Loans to
Communtiies and Development, Tax exempt Local
Encourage Rental Housing Program, April 19,1985.
29. Telephone interview with Kent Hitechew, July 15,
111
1985.
30. Telephone interview with Kent Hitechew, August 1,1985.
31. Telephone Interview with David Smith, August 6, 1985 and
Mark Williams, July 28,1985.
32.
Telephone interview with Stephen Wasco, Director of
Multifamily Housing,
Department of Housing and
Urban
Development, August 8,1985.
33. Telephone interview with Kent Hitechew, August 3,1985.
34. Interview with Mark Williams, July 18,1985.
35.The
following
source was used for this
section:
telephone interview with Paul Burbine, August 2,1985.
112