PROJECT FEASIBILITY
“Does
the Input =the Output?”
or
“Can It Work?”
The Stages of the Development Process
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Creating the Concept
Testing the market
Evaluate Site Costs
Pro Forma
– Income
– Expenses
• Finding Tenants
• Permanent Financing
• Construction Finance
• “Gap” Financing
• Construction
– Under Budget
– Within schedule
• Managing Property
• Selling the Asset
• Starting Over
Sponsored by:
U. S. Department of Housing and Urban
Development
TDA, Inc.
Presented by:
Logistics
Agenda
Handouts
Breaks
Restrooms
Questions
“Parking Lot”
Who is here?
Introductions
Session Rules
Keep it informal
Ask questions
Share your experience
Use your manual - take notes on the
pages
Enjoy the number crunching
Module 1
Underwriting
What is Underwriting?
– Determining facts
– Making reasonable assumptions
– Analyzing risks
– Making recommendations to minimize
risks
Public v. Conventional
Conv. Lenders
consider:
• market risk
• borrower risk
• project risk
• portfolio risk
Public Lenders also
consider:
• public purpose
• regulatory compliance
• affordability
• gap analysis
Market Risk
• Rent-up risk
• Maintenance of occupancy & rents
• Maintenance of collateral value
Borrower Risk
The Five C’s:
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Cash
Capability
Creditworthiness
Character
Collateral
Project Risk
• Completion risk
• Financial feasibility risk
• Collateral risk
The Shift to “Market”
• Market v. jurisdiction/service area
• Customers v. clients
• Product v. service
• Demand v. needs
• if we build it, they will come
• LI housing doesn’t have to compete
Market Risks
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Rents above market
Rents unaffordable
Excess capacity; slow absorption
Competitive disadvantage
Market won’t sustain occupancy
Property won’t maintain value
Scope of Borrower Analysis
Assessing risks that the borrower will
complete the project, considering:
• Organizational structure
• Business experience & qualifications
• Financial condition & prospects
• General credit history
Key Borrower Questions
• What type of borrower?
– New v. existing entities
– For-profits v. not-for-profits
• Who are the “key principals”?
– Creditworthiness of principals
– Personal liability
– Recapture requirements
Five C’s of Borrower Risk
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Cash
Collateral
Creditworthiness
Capability
Character
Cash: Equity & Liquidity
• How much equity is committed
• Timing, amount & source of equity
– Cash
– Land
– Contribution of Fees
• What else is available...if needed?
Collateral
• Completion guarantee
• Operating guarantee
• Portfolio:
– Overall stability, profitability, liquidity &
vulnerability of other assets in portfolio
– Diversification of portfolio
– Other direct & contingent liabilities
– Cross-collateralization
What to Look at: Collateral
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Net worth
Schedule of real estate investments
Notes on contingent liabilities
Level of reserves/escrows
Potential refinancings (e.g., balloons)
Trends in property cash flows
Market factors
Creditworthiness
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Loan payment history
Current debt load
Current performance
Discrepancies
Capability
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Legal entity
Experience: projects of similar scope
Prior collaboration of team members
Loan history (incl. defaults)
Property management performance
Not-for-profit issues
How to look at Capability
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Financial statements: debt load
Credit report: payment history
Lender contacts
Property inspections
Character
• Subjective judgments:
– Likelihood to perform/stick with it
– Integrity/live up to commitments
• Look at:
– Past development performance
– Physical/management condition
– References on past debt performance &
problem resolution
Financial Statements
• Used to identify “current” problems
– losing $$ on operations
– not enough cash to meet obligations
• Used to identify “potential problems”
– look at trends
• Used to identify “source of problems”
Module 2
Analyzing Project Risk
Analyzing Project Risk
Development Budget
Budgets are...
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Estimates
Iterative
Dynamic
Linked
The Budgets
Development Budget
• Sources
Operating Budget
• Revenue
• Uses
• Expenses
• NOI
• Cash Flow
Development Cost Analysis
• Underwriters do their own estimates &
analyze variance from developer’s budgets
• All development costs analyzed:
• Acquisition cost
• Construction cost
• Soft costs, esp. developer fees
• Development Sources: gap analysis
Project Selection
• Look the gift horse...
• Watch out for problem sites
• unsuitable location
• topographical & subsoil conditions
• environmental problems & wetlands
• Beware complex projects
• You & me against the market...
• The neighbors
Acquisition: Cost v. Value
• Requiring an independent appraisal
• public $ often first in, used for acquisition
• often non-arms-length transactions
• Valuation methods
• Valuing low-income housing
• Loan-to-value issues
Construction Issues
• Environmental Issues
• Davis-Bacon Act
• Procurement Process
– M/WBE, EEO, Section 3
• Housing Quality
• Contingency
• Deadlines: readiness to proceed
Fee Analysis
• Fees are for services rendered; (return on
equity is separate)
• Use of consultants
• Program/Lender’s fee limits
• Split of fees in joint venture
• Identity of interest & non-arms-length
transactions
Other Soft Costs
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Marketing
Initial Operating Deficit
Capitalized reserves
Relocation
• The Operating Pro Forma
Operating Expenses
Rents & Revenue Issues
• Mix of incomes
• Rent Limits: CDBG,HOME, LIHTC,
Other
• Utilities & utility allowances
• Market issues:
• street rent v. limits
• vacancy/collection loss
• Affordability of rents
• Rent adjustments in the future
Debt Service
• Paid from income after expenses (NOI)
• Debt service coverage requirements
• Capitalize NOI to determine value and
maximum loan
Operating Analysis
Key Operating Measures:
• Net Operating Income (NOI)
• Cash flow (ROI/ROE)
• Debt coverage ratio
• Break-even ratio
Module 3
Analyzing Project Risk II:
Putting Together Sources of Funds
Balancing the Budgets
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Financial feasibility/viability analysis
“Front door” v. “back door” analysis
Closing the Gap
Gap funding source impacts
The Budgets
Development Budget
• Sources
Operating Budget
• Revenue
• Expenses
• Uses
• NOI
• Cash Flow
Public Financing Issues
• Computing maximum public subsidy
• affordability standard
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Layering
Regulatory overlap
Deferral terms
Enforcement & recapture mechanism
General Financing Issues
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Equity required
Firmness of other commitments
Inter-creditor issues
Rate/order of disbursements
Overruns
Balloons & other long-term issues
Case Study Steps 1 & 2
Gross/Net Income (Steps 1 & 2)
No. Rent - Util Revenue
1 BR
___ ____ ____ ______
2BR
___ ____ ____ ______
Gross Potential Income
=______
Vacancy/Coll. Loss
5%
-______
Effective Gross Income
=______
- Operating Expenses
-______
Net Operating Income (NOI)
=______
Step 3
Calculate 1st Mortgage Debt:
NOI
_______
Divide by: Debt Serv. Cov.
/_______
NADS
=_______
Divide by: Mortgage Constant /_______
Maximum Loan =_______
LTV Ratio (Loan/$370,000)
=_______
Step 3, cont..
Calculate Net Available for PRI Loan
NOI
_______
- 1st Mortgage Debt Service -_______
Net Available
=_______
Divide by: Mortgage constant /_______
Max. PRI Loan (<$50,000)
=_______
Step 4
Uses
Acq.
$15,000
Constr.
$285,000
Soft Costs $60,000
---------Total
$360,000
Sources
Equity
1st Mortgage
PRI
Public Loan(s)
--------Total$
Gap
Wrap-up
• Review of highlights
• Next Steps
• Questions
Evaluations
Thank you for your time and attention.