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C8 financing affordable rental projects p pt - obie baker

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This workshop will explore how organizations can utilize various federal, state, and private financing sources combined with innovative ideas to create affordable rural rental housing for veterans, seniors, and families. Participants will learn to analyze project cash flow, maximize private investment, leverage tax credits, and bridge financing gaps.

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C8 financing affordable rental projects p pt - obie baker

  1. 1. Financing Affordable Rural Rental Projects Housing Assistance Council Building Rural Communities Since 1971 The 2012 National Rural Housing Conference December 7, 2012 by Obediah G. Baker, Jr. Project Feasibility INTRODUCTION TO PROJECT FEASIBLILTY• In the development process for any real estate project, planning is critical and determining the type of financing to be used for the project is an essential piece of the planning process.• The complexity of the financing structure is determined by the type of project the developer pursues and the availability of funding resources in the community to develop the project. 1
  2. 2. INTRODUCTION TO PROJECT FEASIBILITY• Because of tax status, the nonprofit developer has a tool kit of development resources and capital that are not typically available to a traditional real estate developer.• This discussion addresses the stages of the development process and the resources available to the developer during a particular stage of development. INTRODUCTION TO PROJECT FEASIBILITY• When serving a particular income, nonprofit sponsors/developers must thoroughly understand the affordability equation.• Housing developments, whether single family or multi-family which serve low to moderate income residents require specific funding programs which lower the costs associated with the development and operation of the property.• Therefore, the nonprofit developer must be knowledgeable of all resources available.INTRODUCTION TO PROJECT FEASIBILITYA. Developing your financial feasibility package:• Know your local needs and market• Take a conservative approach to costs; do not underestimate to make project “work”• Identify needed partners• Prepare proposals and apply for funding• Project the best, prepare for “worst” 2
  3. 3. INTRODUCTION TO PROJECT FEASIBILITYB. Feasibility Determination Sponsor should indicate whether there is a funding gap; especially, for predevelop- ment loans. Provide the rate, term, current status and any loan conditions that might affect a funding source’s willingness to close or disburse. INTRODUCTION TO PROJECT FEASIBILITYC. Identification of take-out financing Sponsors/borrowers must be aware of commitment conditions regarding closing and disbursement. Sponsors/borrowers need to describe any condition that could potentially be an impediment to closing and fund disbursement. INTRODUCTION TO PROJECT FEASIBILITY D. Creation of multi-year financial projections Include financial projections, or proformas that demonstrate long-term feasibility. Integral part of loan request and must be consistent with the narrative. 3
  4. 4. FINANCIAL FEASIBILITY ANALYSIS FINANCIAL FEASIBILITY ANALYSISA. Project Financial Spreadsheets Fully completed spreadsheets will enhance the funding source’s understanding of a project. Assumptions such as sources and uses of funds, terms and conditions, primary and secondary financing as well as long term affordability are vital. FINANCIAL FEASIBILITY ANALYSISB. Creating Financial Proformas• The primary tool in assessing the financial feasibility of a project is the creation of various financial proformas.• These financial tools assist the developer in: estimating the total cost of the project, identifying the proposed financing vehicles and projecting the reasonable cost of operating the project. 4
  5. 5. FINANCIAL FEASIBILITY ANALYSIS• The concept of these financial tools may range from simplistic to highly complex, depending on the financial structure of each project.• Affordable housing project proformas are typically complicated considering they often have several layers of financing. FINANCIAL FEASIBILITY ANALYSIS• The development team for each project is able to determine the following by using spreadsheets:• Value of the project (as-is and completed)• The total development cost (TDC) of the project• The cash flow generated by the project• The ongoing operational expenses of the property FINANCIAL FEASIBILITY ANALYSIS• After this information has been obtained, the developer (working cooperatively with the investor and/or lender) can assess the financial needs of the project: the amount of equity, debt, grants, subsidy or sales proceeds necessary to support the development strategy of the project. 5
  6. 6. FINANCIAL FEASIBILITY ANALYSISC. Development Budget• This financial tool reflects the total development cost which consists of the anticipated expenses the developer will incur to complete the project.• The development budget typically include the project “hard and soft costs” FINANCIAL FEASIBILITY ANALYSIS The following line items should be included in a multifamily housing development budget spreadsheet:• Operating Expenses Administrative Superintendent, maintenance staff Payroll Taxes Legal Audits Taxes Insurance Management Fee Office Supplies FINANCIAL FEASIBILITY ANALYSIS• Interest Reserve Should be calculated and tested on each project submitted for funding For predevelopment and/or acquisition loan interest is calculated on the full outstanding principal of the loan. For construction loans, with periodic construction draws, the average outstanding principal for the term of the loan and multiplied by the current interest rate. 6
  7. 7. FINANCIAL FEASIBILITY ANALYSIS• Property Expense Review Cost of land Indicate the terms of purchase. What percentage of the project cost does it represent?• Hard Construction costs Site development (including infrastructure) Construction costs (labor, materials, profit) Utilities (electricity, gas, sewer, telephone) Appliances Contingency (should always be at least 10%) FINANCIAL FEASIBILITY ANALYSIS• Soft Costs Building permits Surveys Soil test/concrete tests Appraisal Surety Bonds Architect/Engineer (design and inspect) Taxes Financing Costs (construction and permanent) FINANCIAL FEASIBILITY ANALYSIS Insurance Advertising Marketing Overhead (should not exceed 15%) Contingency (should always be at 10%) 7
  8. 8. FEASIBILITY DETERMINATION ANALYSIS MaintenanceExterminatingPaintingPermits and feesGround MaintenanceRepairsElevatorReserves FEASIBILITY DETERMINATION ANALYSIS UtilitiesHeat (oil, gas, other)Gas and Electric not paid by occupantsWater and Sewer charges FINANCIAL FEASIBILITY ANALYSISD. Sources and Uses• This statement matches the projected Total Development Costs against the anticipated funding sources.• The primary purpose of this statement is to determine whether there are any projected funding gaps, or anticipated costs that cannot be funded through the currently identified process. Example: Developer may not be able to meet the lender’s equity requirements prior to funding the loan. The developer will need to identify other types of lenders who will “bridge” their equity contribution. 8
  9. 9. FINANCIAL FEASIBILITY ANALYSISE. The Operating Proforma• This document projects the proposed income on the property less the anticipated expenses.• These expenses include such items a property management fees, staffing cost, repair and maintenance, administrative charges, property taxes, insurance, etc. (After the project is actually in operation, this information is considered the Operating Statement)• In effect, the income generated by the project must cover the associated costs with its operation or it is deemed infeasible. FINANCIAL FEASIBILITY ANALYSIS• The Operating Proforma (cont’d)• Line items of a typical Operating Budget on a rental housing project:• Operating expenses: Superintendent Painting Handy-Person Permits and Fees Payroll taxes Extermination Office Supplies Repairs Real Estate Taxes Reserves Replacement Management Fee Utilities Marketing Heat Insurance Gas Maintenance Water/Sewer Charges Ground Maintenance FINANCIAL FEASIBILITY ANALYSIS• The Operating Proforma (Cont’d)• After the income and expenses on the property are estimated, the developer should have cashflow (preferably, positive) available to service the debt against the project.• Debt Service Coverage Ratio (DSCR) is reflected as follows:• DSCR=Cash Flow $175,000 1.17 (1.17:1) Debt Service $150,000 1.0 9
  10. 10. FINANCIAL FEASIBILITY ANALYSIS• The Operating Proforma (Cont’d)• If a project’s cash flow does not cover debt service the ratio will be less than 1.0/1/0 Cashflow $125,000 .83 Debt Service $ 150,000 1.0 or .83:1.0 In this scenario, the lender would be justifiably concerned at the repayment of the loan FINANCIAL FEASIBILITYANALYSISF. The Cash Flow Statement• The cash flow statement tells the developer the cash needs of the property at any point in the development or operating period• A cash basis operating statement will be developed to reflect the cash received in a particular (typically monthly) and the actual expenses that are paid and yielding the “cash flow” during the operating period.• During the construction or operating period, the developer should look at how the various financing sources (which convert to cash into the project), equity and/or grants flow into a project over a given period of time.• By matching theses funding sources during a given period, against anticipated expenses, the developer can determine whether the cash needs of the project can be met as well as identify any funding gaps.• The creation of this tool can be of great assistance to the organization in the development process and proves essential when approaching traditional lenders. CONSTRUCTION LOAN CLOSINGA. Contractor selection/contract negotiation• Obtain related permits, approvals, accounting arrangements.• Set up system for requisitions• Prepare EEO/AA/Section 3 Plan• Obtain insurance for owner & contractor 10
  11. 11. CONTRUCTION LOAN CLOSINGB. Final Approval to Proceed to Closing & Acquisition• All parties involved in the transaction are informed of the decision. CONSTRUCTION LOAN CLOSINGC. Initial Project Closing• Prepare closing documents and meet closing requirements.• Prepare updated final project budget.• Initial preconstruction conference.• Initial closing meeting regarding rent-up and occupancy.• Obtain closing documents and distribute. CONSTRUCTION STAGED. Construction Start• Fifty percent (50%) completion• Substantial Completion• Equity pay-in• Punch list completion 11
  12. 12. CONSTRUCTION COMPLETION STAGEE. Opening• Fifty percent (50%) Occupancy• Stabilized Occupancy• Equity Pay-in• Cost Certification• IRS Form 8609 delivery• Equity Pay-in• Final Permanent Loan Closing PUTTING THE DEAL TOGETHERWhat Works…. USDA Rural Development’s MPR Program. This works well with transfers especially if there are no other funding sources Debt deferral provides resources for making capital improvements as identified in CNA Hold meetings with Management and Owner to discuss MPR program and responsibilities  Helps them understand the CNA report  Review legal documents and requirements Loan Process1.Inquiry.2.Submission of loan application.3.Comprehensive underwriting process.4.Internal management review.5.Loan committee review (approval, rejection or deferral).6.If accepted, loan commitment issued.7.Pre‐closing conditions satisfied before disbursement of funds.8.Loan closing and disbursement.9.Servicing/monitoring loan throughout the term of the loan.10.Full repayment of loan. 12
  13. 13. Successful Property in Iowa• Nonprofit entity requested a PRLF loan of $400,000 to pay acquisition and rehabilitation costs for a 90- unit multifamily complex.• The transaction involved the consolidation of three existing USDA RD Section 515 financed properties located on an 8.25-acre site in a small community consisted of a population less than 5,000.• Construction involved the rehabilitation of a 90- unit complex that serves residents with incomes at 30% -60% of AMI.• All 90 units have either USDA RD or HUD Section 8 Rental Assistance Transaction Facts• USDA RD holds a first lien on the property for $495,584 with a 20- year debt service deferral through the MPR Program.• Applicant obtained a $900,000 Section 515 loan (MPR) using the proceeds to fund the rehabilitation.• Debt service on new Section 515 loan deferred.• HAC’s PRLF loan is secured with a third lien against the real estate.• The HAC $400,000 PRLF Loan is the only remaining debt service with a 5% interest rate and a 28 year repayment period.• The property is receiving 100% Rental Assistance.• Total development cost of the project was $1,300,000.• No Low Income Housing Tax Credit Equity involved.• Loan to value not to exceed 100%. Project Status• All loans have been closed for over 3 years.• LTV 17.21%• USDA Rural Development and PRLF accounts are current.• Replacement Reserve requirements are being met. 13
  14. 14. Successful Washington State Property• Applicant organization requested a HAC PRLF loan in the amount of $400,000 to acquire a 42-unit multi family property in Washington State.• The project will serve very low and low income tenants with 30% to 80% of area medium income. Transaction Facts• Washington Department Housing Trust Fund provided no-debt-service funding in the amount of $515,000.• Local county government provided $750,000 in grant funding.• USDA Rural Development approved an $800,000 transfer and assumption of the existing Section 515 loan secured by a first lien.• A new Section 515 loan in the amount of $800,000 secured by a second lien.• HAC’s $400,000 PRLF loan is secured with a third lien against the real estate.• An equity contribution was made in the amount of $2,411,198 from the syndication of Low Income Housing Tax Credits.• The total funding from all sources amounted to $4,876,198 which is the total development cost.• The total rehabilitation cost per unit was $116,195.• Loan to value not to exceed 100%. Project Status• All loans have been closed for over 2 years.• LTV 23.48%• USDA Rural Development and PRLF accounts are current.• Replacement Reserve requirements are being met.• Rehabilitation complete.• Occupancy is 100%. 14
  15. 15. Rural Rental Housing Sample Transaction Tanglewood Apartments Franklin, Virginia Assumptions:• The applicant has site control via sales contract from the existing Section 515 Borrower.• All zoning requirements have been met.• Market analysis indicates a moderate need for the proposed housing.• The appraised value does not reflect sufficient collateral for the loan.• There are no NIMBY issues.• Environmental Assessment results are favorable.• Operating Expense Budget reflects sufficient net income to debt service account engaging the existing financing strategy.• USDA Rural Development rental assistance is available for all of the units.• Cash flow pro forma statements reflect a positive cash position and a favorable debt service ratio. Conditions of Transaction• Seller requires $150,000 in equity payment.• There is an existing USDA-RD balance of $969,445 that must be assumed by new buyer.• Capital Needs Assessment (CNA) documents that there is $499,640 in immediate renovations needed.• Loan to value (LTV) may not exceed 100%.• There is $103,585 in back taxes owed and needs to be paid under this transaction.• A reserve account of $47,500 must be funded. 15
  16. 16. Financial Information: • $800,000 Appraised value” As Renovated • +$736,000 • $1,536,000 +Appraised Subsidy Value =Appraised Value of the Property • -$969,445 -RD Loan (est)to be assumed • -$69,085 -Projected real estate property taxes • -$34,500 for 2011: Reserve Account - • -$47,500 Immediate rehab needs per CNA • -$499,640 Negative Equity • ($84,170) Lessons Learned Tanglewood Apt. Outcomes:• Application not ready for USDA-RD review because: No financing committed Higher debt requirement because seller did not pay taxes and maintain a replacement reserve. Inadequate collateral to support loans. LTV exceeds 100% Equity to seller not viable due to negative equity amount. RD will not fund. Other lender will likely not fund because would increase rents above comparable units ((CRCU). 16
  17. 17. Contact Information Housing Assistance Council 1025 Vermont Avenue, N.W. Suite 606 Washington, D.C.Karin KlusmanLoan Fund DirectorKarin@ruralhome.orgExt. 118Dierdra Pressley Obediah G. Baker, Jr.Loan Officer ConsultantDierdra@ruralhome.org obediahbaker@aol.comExt. 154 703-494-4278 17

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