PROJECT FEASIBILITY 2

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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

• Managing Property

• Selling the Asset

• Starting Over

Sponsored by:

U S Department of Housing and Urban

DevelopmentTDA, Inc

Presented by:

Session Rules

Keep it informal

Ask questions

Share your experience

Use your manual - take notes on the pages

Enjoy the number crunching

Module 1

Market Risk

• Rent-up risk

• Maintenance of occupancy & rents

• Maintenance of collateral value

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 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

Five C’s of Borrower Risk

Cash: Equity & Liquidity

• How much equity is committed

• Timing, amount & source of equity

– 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

• Loan payment history

• Current debt load

• Current performance

• Discrepancies

• 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

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

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

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

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

Public Financing Issues

• Computing maximum public subsidy

General Financing Issues

Case Study Steps 1 & 2

Gross/Net Income (Steps 1 & 2)

Divide by: Mortgage constant / _

Public Loan(s) - Total$

Gap

• Review of highlights

• Next Steps

• Questions

Thank you for your time and attention.