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.

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.
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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
FEASIBILITY
A. 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”
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3. INTRODUCTION TO
PROJECT FEASIBILITY
B. 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 FEASIBILITY
C. 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.
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4. FINANCIAL FEASIBILITY
ANALYSIS
FINANCIAL FEASIBILITY
ANALYSIS
A. 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
ANALYSIS
B. 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.
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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.
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6. FINANCIAL FEASIBILITY
ANALYSIS
C. 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.
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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%)
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8. FEASIBILITY DETERMINATION
ANALYSIS
Maintenance
Exterminating
Painting
Permits and fees
Ground Maintenance
Repairs
Elevator
Reserves
FEASIBILITY DETERMINATION
ANALYSIS
Utilities
Heat (oil, gas, other)
Gas and Electric not paid by occupants
Water and Sewer charges
FINANCIAL FEASIBILITY
ANALYSIS
D. 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.
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9. FINANCIAL FEASIBILITY
ANALYSIS
E. 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
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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
FEASIBILITYANALYSIS
F. 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
CLOSING
A. 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
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11. CONTRUCTION LOAN
CLOSING
B. Final Approval to Proceed to
Closing & Acquisition
• All parties involved in the
transaction are informed of the
decision.
CONSTRUCTION LOAN
CLOSING
C. 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 STAGE
D. Construction Start
• Fifty percent (50%) completion
• Substantial Completion
• Equity pay-in
• Punch list completion
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12. CONSTRUCTION
COMPLETION STAGE
E. 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 Process
1.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.
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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.
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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%.
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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.
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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).
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17. Contact Information
Housing Assistance Council
1025 Vermont Avenue, N.W.
Suite 606
Washington, D.C.
Karin Klusman
Loan Fund Director
Karin@ruralhome.org
Ext. 118
Dierdra Pressley Obediah G. Baker, Jr.
Loan Officer Consultant
Dierdra@ruralhome.org obediahbaker@aol.com
Ext. 154 703-494-4278
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