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