Improving Communities
Enhancing Lives
NDC is the nation’s
oldest non-profit
provider of community
development technical
assistance and training
A Powerful Mission
Increasing the flow of capital for
investment, jobs and community
development to distressed urban and
rural communities throughout the U.S.
Partners in Community
Development Since 1969
NDC works in
partnership with
local and state
governments and
non-profit
organizations to
help them build
their communities
and economies
The Pub Group in Portland, OR
Partners in Community Development
Technical Assistance
NDC defines, designs and
executes development and
business finance strategies,
programs and projects
NDC identifies, secures and
structures public and private
financing and develops
project from concept to
completion
Bijou Theatre in Bridgeport, CT
Partners in Community Development
NDC Training &
Professional Certification
NDC offers courses designed
to give participants the skills
and knowledge they need to
successfully facilitate
housing and economic
development in the
communities where they
live and work
NDC’s Chuck Depew teaching
Mixed-Use Real Estate Finance
Partners in Community Development
NDC Corporate Equity Fund
As an equity
investor, NDC
finances affordable
housing and
historic
preservation
Dublin Road Townhomes in Mankato, MN
Partners in Community Development
NDC Grow America Fund
NDC creates jobs and economic
development with direct small
business lending with a focus on
women and minority-owned
businesses
Red Barn Pet Products
in Long Beach, CA
Partners in Community Development
NDC Housing and Economic
Development Corporation
NDC finances and
builds community
and public facilities
on behalf of our
client communities
Redmond City Hall in Redmond, WA
Partners in Community Development
HEDC New Markets
As one of the leading nonprofit participants in the
New Markets Tax Credits
program, NDC provides
technical assistance and
NMTC financing for
economic and community
development projects
YMCA in Albany, NY
Evaluating A Project’s Need for
Public Gap Financing
11
Evaluating A Project’s Need for
Public Gap Financing
• A project’s financing gap is defined as the difference
between projected costs (uses) and the debt and
equity (sources) it can reasonably attract as follows:
Project Costs
- Bank Loan
- Equity
= Gap
12
Defining the Financing Gap
Project Costs – are they reasonable & adequate?
- Bank Loan – maximized?
- Equity – fair return without undue enrichment?
= Gap – are there public sources available to close?
13
A Fundamental Problem in
Real Estate Finance
• Project Costs Often Greater Than Completed Value
• But...debt and equity are a function of value, not
cost
• Where project costs exceed fair market value, there
will likely be a need for federal, state and/or local
economic development resources to get the
project done
14
Cost-Value Differential Example
Mixed-Use Development: Planned Improvements
Residential Units
Commercial Retail Space
Project Costs
$20,000,000
Project Costs
Debt (75% of FMV)
Other Sources Needed
60
40,000
Fair Market Value
$10,000,000
$20,000,000
$7,500,000
$12,500,000
15
Why Do Economic Development Projects
Require Public Sector Assistance?
• Project Costs > FMV
• Investors see inadequate Return on Investment
(ROI)
• Lenders see unacceptable Level of Risk
16
Investor’s Perspective
• Investors are seeking to maximize economic
benefits and minimize equity investment
•
•
Looking to invest in projects yielding the highest
Return On Investment (ROI)
Concerned about the liquidity of the investment
(can it be sold to free up equity for next
opportunity)
17
Lender’s Perspective
• Lenders are risk limiters, not profit maximizers
• Lending is a low-margin, high-volume business
• No “upside" for lenders
• Marginal return on investment (interest)
• Expected return of investment (principal)
• Fixed returns
• Will participate but want to mitigate all risks
18
Project Sources and Uses
•
Structuring the Project
• Sources of funds must be equal to uses of fund
• Identify all project costs (uses)
• Acquisition
• Construction
• Soft costs and Reserves
• Identify all project sources
• Debt
• Equity
• Public Gap Financing
• If uses are greater than sources, find additional sources
19
Sources
Bank
Equity
Sources
and Uses
Uses (Project Cost Summary)
Land
Site Improvements
Construction – Shell
Parking
Architect and Engineering
Tenant Improvements
Legal and Accounting
Permanent Loan Fees
Construction Loan Fees
Organizational Expenses
Construction Interest
Marketing
Property Taxes
Lease-up Reserves
Developer Fee
Contingency
Total Project Cost
$ 6,000,000
2,335,000
$ 8,335,000
$ 100,000
200,000
5,000,000
50,000
200,000
1,000,000
50,000
90,000
120,000
40,000
300,000
60,000
25,000
600,000
200,000
300,000
$ 8,335,000
20
Lender Underwriting / Debt Capacity
• The maximum loan amount will be
determined by the lender’s primary
underwriting criteria:
• Debt Coverage Ratio (DCR)
• Loan to Value Ratio (LTV)
21
Permanent Lender Underwriting (cont.)
• Debt Coverage Ratio (DCR)
DCR = NOI
D/S
• Measures project's ability to repay loan from revenues
(lender's "first way out“)
• Higher the DCR, lower the risk
• Typical DCRs: 1.10 to 1.35
22
Permanent Lender Underwriting (cont.)
• Loan-to-Value Ratio (LTV)
LTV =
Loan Amount
FMV (Fair Market Value)
• Measures project's ability to repay loan from sale of the
asset (lender's "second way out")
• Lower the LTV, lower the risk
• Typical historical LTV: 75%
23
Sizing Equity: Three Benefits of Investing
in Real Estate
•
Investors/developers seek three benefits when
investing in real estate:
• Cash Flow
• Tax Benefits
• Appreciation
• Investors want all three benefits, but cash flow
requirement is first because it is the most
immediate and tangible benefit
National Development Council
Benefits of Owning Real Estate (cont.)
• Cash Flow
Income
- Operating Costs
- Debt Service
= Cash Flow
25
Benefits of Owning Real Estate (cont.)
• Tax Benefits – two main benefits
• Income tax deferral from depreciation
• Income Tax Reduction from Tax Credits
•
•
•
•
(Historic) Rehabilitation Tax Credits
Low-Income Housing Tax Credits
New Markets Tax Credits
(Renewable Energy) Investment Tax Credit
National Development Council
26
Benefits of Owning Real Estate (cont.)
• Appreciation
Selling Price
- Purchase Price
= Appreciation in Value
27
28
Time Value of Money
• Investors demand a return on their money given their
perception of:
•
•
•
Risk
Inflation
Opportunity Costs
• These three factors determine the discount rate. The
discount rate converts a future value to a present value
• The discount rate is the same as the investor's desired
rate of return
29
Valuing Investor Benefit 15% Discount Factor
After-Tax
Cash Flow
Total Benefits
After Taxes
144
30
574
.870
495
2
144
28
172
.756
130
3
144
26
170
.658
112
4
144
24
168
.572
96
5
144
22
166
.497
82
6
144
20
164
.432
71
7
144
18
162
.376
61
8
144
16
160
.327
52
9
144
14
158
.284
45
10
144
12
156
.247
39
1,440
210
2,050
Year
RTC
1
400
400
LIHTCs
Discount
Factor
PV
1,187
PV is what an investor who demands a 15 percent return would be willing to invest in
equity to receive the prospective benefits stream outlined above.
Filling the Gap: The Public Toolbox
•
Reduce Development Costs
• Discounted or donated properties
• Fund infrastructure and site work through general obligation
bonds
•
Reduce Cost of Capital
• Lower price and longer term
•
Make Capital more Readily Available
• Subordinated (junior) financing
• Stretch debt
• Reduce equity
• Loan guarantees
30
Filling the Gap: The Public Toolbox (cont.)
• Decrease Operating Costs to Expand Borrowing
Capacity and Equity Attraction
• Tax abatements or Payments in Lieu of Taxes (PILOTs)
• Utility savings
• Attract outside Equity
• State and federal tax credits in exchange for equity
• Types of federal credits
•
•
•
•
Low-Income Housing Tax Credits
Historic Rehabilitation Tax Credits
New Market Tax Credits
Investment (Renewable Energy) Tax Credits
31
Filling the Gap: The Public Toolbox (cont.)
• Attract Grants
• Less commonly available these days
• Always tied to public benefit standards
• Monetize Tax Increment
• Tax Increment Financing (TIF)
• Using future tax increment to finance up-front capital
costs, especially infrastructure
32
For More Information
Tom Jackson, Director
tjackson@nationaldevelopmentcouncil.org
New York Office
708 Third Avenue, Suite 710
New York, NY 10017
212-682-1106 0ffice
Training Division
927 Dudley Road
Edgewood, KY 41017
859-578-4850 Office
www.nationaldevelopmentcouncil.org