This document provides an overview of financial analysis for planners and discusses how to conduct a pro forma analysis of development projects. It defines key terms like gross income, effective income, operating expenses, net operating income, debt service coverage ratio, and internal rate of return. It then walks through an example pro forma for a mixed-use development project, showing how to calculate items like income, expenses, debt service, cash flows, debt service coverage ratio, and internal rate of return. The document stresses that financial analysis is important to determine if a project is financially feasible and discusses what to do if a project does not work from a numbers perspective.

1. Presented at:
CDRPC 2018 Spring Workshop
April 26, 2018
1
Financial Analysis for Planners

2. 2
Outline
1.Introduction to Financial Analysis
2.Pro Forma Review and Hand Out
3.Case Studies
4.Question and Answer

3. 3
Financial Analysis:
An Overview

4. Financial Analysis
4
What:
• Way to measure the financial feasibility of a particular project or
development concept.
Who:
• Planners, economic development professionals, public officials, developers,
property owners…. everyone involved in the project.
Why:
• To determine if a project will be viable as planned or whether there are
“gaps” that need to be addressed.
When:
• After a development concept has been created but before public
investment or commitments have been made.
How:
• Its simple!

5. Financial Analysis
5

6. Back to Basics – Key Terms
6
Gross Income
• Total potential income from a property – all rental income
Effective Income
• Actual income from a property after subtracting vacancy and credit loss
Operating Expenses:
• Expenses related to operation (taxes, utilities, management, maintenance),
but limited only to what the property owner pays
Net Operating Income (NOI):
• Effective income minus operating expenses
Debt Service Coverage Ratio:
• NOI/Debt service payment (i.e. ratio of net income to payment
requirement) – it better be >1!!!
Internal Rate of Return:
• The implied interest rate the developer “earns” on his/her equity outlay

7. Pro Forma Checklist
7
 Project
 What is the development concept?
 How much will it cost to purchase the property?
 How much will construction cost?
 Income
 Average rental rates
 How much will the project sell for after 10 years?
 Expenses
 What is the average vacancy rate?
 Who will pay utilities, taxes and other charges
 Debt Service
 How much of the project will be financed?
 What is the interest rate?

8. Pro Forma Example
8
Construction
Construction Cost Units
· 50,000 SF Residential @$135/SF $4,171,500 40
· 12,500 SF Restaurant @ $135/SF $1,687,500 1
· Site Work $600,000
· Total $6,459,000
Total Construction $6,459,000
Property Sale Price $45,000
General Assumptions
1-year construction period
Target market - Urban Pioneers
Assume smaller units, mix of 1-2 bedroom
No Remediation Costs
Tip: Use assessed
value as a proxy
for sale price if
unknown.

9. Pro Forma Example
9
Income
Residential
Total Residential Units 40
Monthly Rent (SF) $1,500
Total Monthly Rental Income $60,000
Annual Rent Increase 3%
Year 1 Gross Annual Income (Monthly x 12) $720,000
Commercial
Total Commercial Units 1
Total Size (SF) 12,500
Annual Rent (SF) $15.00
Annual Rent Increase 3%
Year 1 Gross Annual Income $187,500Tip: Check
LoopNet or online
listings to get
typical rent rates

10. Pro Forma Example
10
Operating Expenses Year 0 Year 1
Taxes (Residential) $2,196 $252,174
Insurance (Residential) $5.50 per 1,000 of mortgage $0 $10,732
Repairs & Maintenance (Residential) 3% Effective Gross Income $0 $20,052
Management 5% Effective Gross Income $0 $41,775
Utilities $0 $34,200

11. Pro Forma Example
11
Debt Service
A Project Cost (Land & Construction) $6,504,000
B % Equity 40%
C Equity Contribution (A x B) $2,601,600
D Amount Financed for Construction (A - C) $3,902,400
Construction Period (Year 0)
E Construction Rate 4.5%
F Construction Period Interest (D x E) $175,608
Operation Period (Year 1+)
G Loan Origination Fee % 1.5%
H Loan Origination Fee (D x G) $58,536
I Total Financial Costs (F + H) $234,144
J % Financing of Financial Costs 60%
K Amount Financed for Financial Costs (I x J) $140,486
L Interest Rate 6.0%
M Term 30
N Principal (Amount Financed = D + K) $4,042,886
O Annual Debt Service Payment $293,711

12. Pro Forma Example
12
Debt Service
A Project Cost (Land & Construction) $6,504,000
B % Equity 40%
C Equity Contribution (A x B) $2,601,600
D Amount Financed for Construction (A - C) $3,902,400
Construction Period (Year 0)
E Construction Rate 4.5%
F Construction Period Interest (D x E) $175,608
Operation Period (Year 1+)
G Loan Origination Fee % 1.5%
H Loan Origination Fee (D x G) $58,536
I Total Financial Costs (F + H) $234,144
J % Financing of Financial Costs 60%
K Amount Financed for Financial Costs (I x J) $140,486
L Interest Rate 6.0%
M Term 30
N Principal (Amount Financed = D + K) $4,042,886
O Annual Debt Service Payment $293,711
To figure out annual debt service payments using Excel:
Formula: PMT(Rate,Nper,PV)
Rate: permanent financing interest rate (6%)
Nper: number of payments or term (30)
PV: present value or amount being mortgaged ($4,042,886)
Result: fixed debt service payments ($293,711)

13. Pro Forma Example
13
Project X Cash Flow Analysis
Year 0 Year 1 Year 2
Residential (3% annual increase) -$ 720,000$ 741,600$
Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$
-$ 907,500$ 934,725$
Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$
Commercial (0% vacancy because one user) -$ -$ -$
-$ 835,500$ 860,565$
Taxes (Residential) 2,196$ 252,174$ 259,739$
Insurance (Residential) -$ 10,732$ 11,054$
Repairs & Maintenance (Residential) -$ 20,052$ 20,654$
Management -$ 41,775$ 43,028$
Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$
Permanent Financing Draw 4,042,886$
Add: Inflow (Debt Service)
Add: Income
Gross Income
Less: Vacancy and Credit Loss
Effective Income
Less: Operating Expenses
Net Operating Income
Tip: Take the
Cash Flow
Analysis out to
Year 10

14. Pro Forma Example
14
Taxes (Residential) 2,196$ 252,174$ 259,739$
Insurance (Residential) -$ 10,732$ 11,054$
Repairs & Maintenance (Residential) -$ 20,052$ 20,654$
Management -$ 41,775$ 43,028$
Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$
Permanent Financing Draw 4,042,886$
Construction Financing Draw 3,902,400$ (3,902,400)$
Sale Proceeds
3,902,400$ (153,225)$ (293,711)$
Land Cost 45,000$
Construction & Site Prep 6,459,000$
Loan Origination Fee 58,536$
Construction Period Interest 175,608$
Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$
Add: Inflow (Debt Service)
Less: Capital Outlays
Less: Operating Expenses
Net Operating Income
Project X Cash Flow Analysis
Year 0 Year 1 Year 2
Residential (3% annual increase) -$ 720,000$ 741,600$
Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$
-$ 907,500$ 934,725$
Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$
Commercial (0% vacancy because one user) -$ -$ -$
-$ 835,500$ 860,565$
Taxes (Residential) 2,196$ 252,174$ 259,739$
Insurance (Residential) -$ 10,732$ 11,054$
Repairs & Maintenance (Residential) -$ 20,052$ 20,654$
Management -$ 41,775$ 43,028$
Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$
Add: Inflow (Debt Service)
Add: Income
Gross Income
Less: Vacancy and Credit Loss
Effective Income
Less: Operating Expenses
Net Operating Income

15. Big Questions
15
Bank wants to know…will
this project make enough
money to repay the loan?
Developer wants to
know… will this project
make me enough
money that it is worth
the risk?
What is the debt service
coverage ratio?
What is the internal rate
of return?

16. Bank – Debt Service Coverage Ratio
16
What is the debt service
coverage ratio?
= Net Operating Income
Debt Service
Must be greater than 1.25
Debt Service Coverage Ratio
Year 1 Year 2 Year 3 Year 4 Year 5 Ye
Net Operating Income 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 55$
Debt Service 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 29$
Debt Service Coverage (1.25 min) 1.62 1.67 1.72 1.77 1.83

17. Developer – Internal Rate of Return
17
What is the internal rate
of return?
Year 10 - Sale of Project
Net Operating Income Year 10 $621,813
Cap Rate 8.0%
Sale Value $7,772,658
Sale Commission Rate 6.0%
Sale Commission $466,359
Remaining Principal on Debt $3,368,845
Sale Proceeds $3,937,453

18. 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
5,591 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$
3,711) (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ 3,643,741$
- -$ -$ -$ -$ -$ -$ -$
1,879 227,047$ 242,670$ 258,761$ 275,335$ 292,407$ 309,990$ 4,265,554$
Developer – Internal Rate of Return
18
What is the internal rate
of return?
Internal Rate of Return
Year Year 0 Year 1 Year 2 Year 3 Year 4
Net Operating Income (2,196)$ 476,568$ 490,865$ 505,591$ 520,7$
Debt Service and Other 3,902,400$ (153,225)$ (293,711)$ (293,711)$ (293,7$
Capital Outlays (6,738,144)$ -$ -$ -$ $
Pre Tax Cash Flow (2,837,940)$ 323,343$ 197,153$ 211,879$ 227,0$
Interal Rate of Return (IRR) 11%
IRR = 11%
Don’t
retreat!
Reload!

19. The Numbers Don’t Work–What Now?
19
Consider different uses
Tax abatements
Tax credit programs
Grant programs for specific uses
Low interest loans
Loan terms – lower equity
contribution

20. Why Pro Formas Matter in the
Planning Process…

21. Putting the Pro Forma to Work:
Testing Project Feasibility
• Master Plans
• Site Specific Development
• Funding

22. • Avoid Un-Buildable Projects

23. Applying the Pro Forma to Create
Opportunity

24. The Grand Hotel…looking not so grand

25. A “grand” vision identified…

26. But would it work?

28. A “grand” result!

29. Vision:
Downtown Hotel
Master Plan:
56 units
$120 / night
60% occupancy
Reality:
Viable project!
Location,
programming
& marketing
key to
success

30. It’s Not Always Good News…but
Best to Know the Truth
• City of Lockport
• City of Binghamton
• Steuben County

31. Vision:
Waterfront
Mixed Use
Master Plan:
25 residential
units and a
single
occupant
restaurant
Reality:
Low rate of
return, Tax
abatements
needed

32. • Re-evaluate mix of uses
• Weigh pros and cons of making building taller, to
accommodate more residential units
• Negotiate price of land purchase
• Research potential abatement and incentive programs,
such as 421-m
Now What?

33. The Site Today

34. Future Vision

35. • Re-evaluate use
• Financing
• Tax abatements
Project to be further evaluated, with
alternatives considered
Now What?

36. Potato Vodka Distillery
Craft farm distillery producing premium vodka made
with unused potatoes from Steuben County

37. Benefits
• Direct and Indirect
Jobs
• Payments to Potato
Farmers
• Tourism
But…
• Numbers Don’t Add Up

38. • Grant funding from CFA
• Preferential financing
• Free or reduced rent
Pro Forma provided direction to County and
stakeholders for future CFA application
Now What?

39. 39
Thank You
Michael N’dolo, CEcD
Vice President, Camoin Associates
michael@camoinassociates.com
518-899-2608 x103
Kimberly Baptiste, AICP
Municipal Practice Leader, Bergmann
Associates
kbaptiste@BERGMANNPC.com
585-498-7770