2.1-Financial_Overview.ppt

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Proposal Evaluation:
Financial Analysis
Presented by: Ralph Basile, Principal, BBP
Date: August 4, 2004

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Overview
To provide a summary of the financial and business
analyses completed during the evaluation of a
developer’s proposal for a housing privatization
project under a one-step solicitation (Volume I:
Part A and Volume II - Factor 4 - Subfactor 4.1)

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Agenda
• Volume I: Project Proposal Submittal
– Part A: Financial
• Subfactor 1.1: Project Financing
– Element 1.1.1: Project Financing Strategy and Approach
– Element 1.1.2: Financing Competition
• Subfactor 1.2: Project Financial Viability and Sustainment
– Element 1.2.1: Financial Pro Forma
– Element 1.2.2: Financial Sustainability
• Volume II: Qualifications Submittal
– Factor 4: Qualifications
• Subfactor 4.1: Financial Capabilities
• Assignment of Ratings

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Subfactor 1.1: Project Financing

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Element 1.1.1: Project Financing Strategy and Approach
• Offerors provide a description of their strategy for
financing the project on a long-term basis
including anticipated financing costs, discussion
of the risks and benefits of the structure, and why
this strategy is the most advantageous to the
Government
• Proposals shall address the amount and timing of:
– Private equity
– Private debt
– Government Direct Loan (GDL), if required

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Private Equity
• A minimum amount of equity will be required by
the RFP, most likely 2% to 5% of Total
Development Costs (TDC) as defined by the RFP
• Must be a direct cash contribution at the time of
project closing unless an irrevocable letter of
credit is provided
• Cash equity contributions may be made pro rata
with specific phases of construction
• The initial equity contribution must be fully
funded prior to the GDL being funded

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Private Debt
• Provide amount and timing of private debt
– Financial closing must occur no later than transaction
closing
• Offerors must provide additional information
under Element 1.1.2 – Financial Competition (see
slides 10 and 11)

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Government Contribution
• If a GDL is required, the Offeror shall submit the
following:
– The expected principal amount, terms and timetable for
disbursement and repayment of Government funds
• The maximum principal amount, interest rate(s) and term are provided
in the RFP
• The GDL may be funded in phases but will only be funded based on the
percent complete of the project and after evidence that all equity has
been funded in full
– Justification for the use of any GDL
– Evidence of the ability to meet an annual combined debt
service coverage ratio of not less than 1.05 for each year

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Government Contribution (cont)
What we look for:
• Do the terms or amount of the GDL violate those
provided in the RFP?
• Is the combined annual debt service coverage
ratio at least 1.05 for each year?
• Has the Government contribution been justified
and minimized?

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Element 1.1.2: Financing Competition
• Offerors provide financing proposals from at least three (3) financing firms and
identify the selected firm
– A list of firms is provided in Appendix O
– Offerors may include financing proposals from other firms IN ADDITION TO at
least 3 firms from Appendix O
– Financing proposal includes letters of interest and Term Sheets
• Offerors provide an evaluation summary of each financing proposal that
includes, but is not limited to (see the RFP for more details):
– Relevant experience and prior experience between the financing firm and the
Offeror
– Proposed financing structure and terms
– Schedule to closing, including when interest rates will be locked
– Rating agency requirements
– Form of credit enhancement / insurance / cost of surety policy
• Additionally, Offerors shall provide a complete Quantitative Financing
Evaluation Chart (see Appendix P) showing the Offeror calculation of an All-In
Cost of Financing for each proposal.

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Element 1.1.2: Financing Competition (cont)
What we look for:
• What type of debt has been proposed (conventional loan or bond)?
• Are the points and fees required by the lender reasonable?
• Are any conditions provided in the lender’s proposal
unreasonable?
• Is the debt secured at transaction closing, as required by the RFP?
• Is the interest rate reasonable?
• Has the risk of interest rate fluctuation been mitigated?
• Has the offeror maximized use of all private funds in order to
minimize government contribution and risk?

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Subfactor 1.2: Project Financial Viability
and Sustainment

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Subfactor 1.2 Evaluation
• BBP creates several tables in which all
information found in the Volume III submissions
for every offeror is dissected and organized for
evaluation

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Element 1.2.1: Financial Pro Forma
• Financial Pro forma includes:
– Statement of Operating Revenues and Expenditures
– Development Budget

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Operating Revenues & Expenditures Analysis
GENERAL DATA
Total Units
BAH Inflator
Expense Inflator
Property Tax Inflator
RENTAL REVENUE
BAH
Utility Allowance
Gross Potential Rent
Vacancy Allowance
Other Income
Total Rental Revenue
PROPERTY OPERATING EXPENDITURES % of BAH
% of total
expenses
% of BAH
% of total
expenses
Administrative Expenditures
Marketing Expenditures
Professional Fees
Utilities
Personnel Costs
Contract Services
Cleaning & Decorating
Repairs & Maintenance
Taxes & Insurance
Total Operating Expenditures
Excess of Operating Revenues Over
Expenditures 0.0%
Offeror A Offeror B
0.0%

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Operating Revenues & Expenditures Analysis (cont)
What we look for in Operating Revenues &
Expenditures:
• Are all assumptions reasonable?
• How does the starting vacancy rate assumed in
the pro forma compare to the current base
demographics included in the RFP?
• Is the assumed BAH and expense inflation rate
reasonable? Is one inflated faster than the other?
• Are any expenses too high/too low?
• Are the proposed fees reasonable?

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Development Budget Analysis – Hard Costs
ITEM Total ($M) Per Unit Per SF Total ($M) Per Unit Per SF
Hard Costs - Each Neighborhood or Site
Land Cost
Land Development/Infrastructure
Demolition
Construction
Landscaping/Recreational Amenities
Contingency
Total - Offeror's Proposed Off-base Site
Hard Costs - Total
Land Cost
Land Development/Infrastructure
Demolition
Construction
Renovation
Landscaping/Recreational Amenities
Contingency
Total - Hard Costs
Offeror B
Offeror A

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Development Budget Analysis – Hard Costs (cont)
What we look for in Hard Costs:
• Are the costs reasonable based on the project proposed?
– RS Means is one source that is used to test for reasonableness,
as well as a cost estimator that assists us in our evaluation
• Has an offeror budgeted too little or too much for a
specific line item?
• Has the offeror included sufficient contingency funds to
help ensure the project is completed?
• Are the contingency funds simply included in the budget
or are they deposited into an account that can be drawn
upon if necessary?

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Development Budget Analysis – Soft Costs
ITEM
Soft Costs Total Per Unit Per SF Total Per Unit Per SF
Construction Period Interest
Architect/Engineering Design Fees
Legal and Accounting
Insurance
Consultant Fees
Development Fees
Financing Transaction Fees
Reserves
Contingency
R/E Tax
Credit Support Costs
Commissions
Environmental Analysis
Surveys, Permits, Inspections, Other
Total - Soft Costs
Total Project Costs $0.0 $0 $0.00 $0.0 $0 $0.00
Total Soft Costs as % of Total Hard Costs #DIV/0! #DIV/0!
Differences may occur due to rounding
Offeror A Offeror B

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Development Budget Analysis – Soft Costs (cont)
What we look for in Soft Costs:
• Has the offeror budgeted the correct line items?
– Some line items that are sometimes overlooked are real estate
taxes and impact fees, especially if some portion of the project
is not located on gov’t land
• What are soft costs as a percentage of hard costs?
– This helps to identify whether the offeror’s proposed soft costs
are high
• What are the proposed fees and are they reasonable?
• Has the offeror included sufficient contingencies?

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Element 1.2.2: Financial Sustainability
• Financial Sustainability includes:
– Statement of Development Sources and Uses of Funds
• Includes equity and returns analysis
– Property Management (building component
replacement schedule and cost)
• Includes an escrow account analysis

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Sources & Uses of Funds Analysis
Item
Sources:
$M % $M %
Developer Equity Contribution
cash
deferred fees or profits
Developer Financing
Senior Loan Proceeds
Construction Loan Proceeds
Government Direct Loan Proceeds
Interest Earnings on Construction Escrow Account
Total Sources
Developer
Excess of Revenues over Expenditures during
construction period
Offeror A Offeror B

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Sources & Uses of Funds Analysis (cont)
Item
Uses: $M % $M %
Pre-Development Costs
Land Aquistion Costs
Land Development Costs
Demolition Costs
Hard Construction Costs
Soft Construction Costs
Financing Costs
construction period interest
Debt Service
Other/Contingency
Total Uses
Total Sources in Excess of Total Uses $0.0 $0.0
Offeror A Offeror B

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Sources & Uses of Funds Analysis (cont)
What we look for in Sources & Uses of Funds:
• Are sources equal to or greater than uses? (You’d be surprised to
know some offerors have failed this test!)
• Has the offeror maximized use of net operating income and all
sources of private funding?
• Has the offeror contributed at least the minimum amount of equity
as required by the RFP?
• Does the developer defer fees? Under what conditions?
• Has the offeror maximized use of all private funds in order to
minimize government contribution and risk?
• Can all uses be identified in the development budget and vice
versa?

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Equity Contribution & Return Analysis
Developer
10-Year IRR
Calculation
50-Year IRR
Calculation
Offeror A
Equity Contributed
Expected Return
Offeror B
Equity Contributed
Expected Return

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Equity Contribution & Return Analysis (cont)
What we look for in the Equity Contribution & Returns:
• Is the developer’s return reasonable?
• Is at least 50% of net cash flow deposited to the
Reinvestment Account and at least 50% of sale or
refinance proceeds provided to the Government, as
required by the RFP?
• Is the AF split conditioned on the developer first
receiving a preferred return? If so, does the developer
offer to “cap” the preferred return?

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Property Management Analysis
Building
Component
Carpeting
Floor Covering
Roofing
HVAC System
Water Heater
Appliances (specify)
Refrigerator
Range
Dishwasher
Garbage Disposal
Exterior Painting
Utility & Structural System
Landscaping
Recreational Areas
Other
Whole House Renovation
Unit Cost (Base
Year)
Offeror A Offeror B
Estimated
Life
Unit of
Measure
Unit Cost (Base
Year) Estimated Life
Unit of
Measure

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Property Management Analysis (cont)
What we look for in the Property
Management Analysis:
• Are all costs reasonable and is the estimated
life of each component reasonable?
– A cost estimating firm that is a subcontractor to us
will assist us with this function

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Escrow Account Analysis
Developer
NPV (5.1%) of Unit
Investments NPV per unit Total Average
Offeror A
ACCOUNT ACTIVITY
Replacement Reserve Account
Beginning Balance $0 $0 $0 #DIV/0!
Interest Proceeds $0 $0 $0 #DIV/0!
Deposits $0 $0 $0 #DIV/0!
Withdrawals $0 $0 $0 #DIV/0!
Ending Balance $0 $0 $0 #DIV/0!
Reinvestment Account
Subtotal $0 $0 $0 #DIV/0!
Offeror B
ACCOUNT ACTIVITY
Replacement Reserve Account
Reinvestment Account
Subtotal $0 $0 $0 #DIV/0!

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Escrow Account Analysis (cont)
What we look for in the Escrow Account Analysis :
• Is enough money deposited into the accounts to cover the
proposed expenditures?
• When are deposits made (before or after debt service and/or
preferred return)?
• If interest is earned, is the interest rate reasonable?
• Is money left in the accounts each year after expenditures to
provide for a cushion every year?
• What is the net present value of the expenditures on the units?
• How are out-year renovations financed (i.e. is a refinance of the
project assumed or are all improvements paid for using escrow
account funds)?

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Subfactor 4.1: Financial Capabilities

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Factor 4: Subfactor 4.1
Financial Capability involves an analysis of
the financial statements provided for all
significant parties

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Financial Statements Analysis
• Offerors submit audited financial statements for
the latest 3 years for all significant parties.
• The financial statements are analyzed for three
purposes:
– Provide evidence of financial backing and capability
to carry out the program
– Demonstrate financial strength to develop/complete
the program
– Demonstrate possession of financial resources and
access to financing sufficient both for project
completion and long-term O&M of the project.

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Financial Statements Analysis (cont)
• Two sets of ratio analyses are performed by BBP in order
to determine whether offerors have met the RFP
requirements
• Set 1: Offeror’s Ability to Contribute the Estimated
Amount of Equity
– The first set of ratios tests the offerors’ ability to contribute the
estimated amount of equity
• Set 2: Overall Financial Strength
– The second set of ratios tests the overall financial strength of
the companies

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Set 1: Offeror’s Ability to Contribute the
Estimated Amount of Equity
The following four ratios are performed on each equity partner:
1.Net Worth / Partner’s Proposed Share of Equity (equity share x
total equity contribution)
2.Net Worth / Entire equity contribution
3.Current Assets / Partner’s Proposed Share of Equity (equity share x
total equity contribution)
4.Current Assets / Entire equity contribution

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Set 2: Overall Financial Strength
Four ratios are calculated to determine the overall financial
strength:
1. Total Debt / Equity
2. Long-term Debt / Equity
3. Current Ratio (defined as Current Assets / Current
Liabilities)
4. Quick Ratio (defined as Quick, or Liquid, Assets /
Current Liabilities)

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RFP Requirements & Desired Features/Enhancements
• Every RFP requirement, desired
feature/enhancement and evaluation factor from
Sections 4 and 5 of the RFP are put into tables
• The requirements/enhancements from the RFP
are listed down the left-hand column in the tables
• The tables are then completed for each offeror to
show where in their proposal they have met, not
met or exceeded a RFP requirement

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Strengths & Weaknesses
• All of the information gathered using the methods
described in the previous slides is then used by
the PSC to develop strengths and weaknesses for
each offeror by subfactor
• The strengths and weaknesses are then used by
the Government evaluators to assign color ratings
for each offeror by subfactor

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Questions?
Proposal Evaluation:
Financial Analysis

2.1-Financial_Overview.ppt

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