Planners across the Commonwealth have embraced the principles of infill and mixed development, and have worked hard to enact a regulatory framework to allow it. However, few of us understand the financial realities of achieving a successful small scale mixed use development, including the underwriting criteria utilized by lenders, and the considerations of the residential and commercial tenants. In this discussion developers and underwriters will discuss their process and keys to success.

1. FINANCING SMALL
MIXED USE PROJECTS
A Case Study of 47 Railroad Street, Great Barrington
Massachusetts Association of Planning Directors
2017 Annual Conference, Pittsfield, MA
Chris Kinne, Vice President, Commercial Lending, Lee Bank
Ian Rasch, Principal, Alander Construction & Framework Properties
Angus Jennings, AICP, AG Jennings, LLC
Christopher Rembold, AICP, Town of Great Barrington

2. • To understand the financial realities of successful development
• To understand what lenders look for
• To understand what developers do
• To understand the planner’s role in a successful development
By focusing on a case study in Great Barrington
Objectives
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3. A. Overview
• The development feasibility process
• Great Barrington’s downtown development goals and objectives
B. The Lender:
• The Lender’s perspective / the lending process: underwriting criteria,
“bankability,” red flags they look for, and the process
C. The Developer:
• 47 Railroad Street mixed-use development
• Meeting the Town’s goals, the Lender’s goals, and making it happen
D. The Planner:
• The Planner’s role in the development process
• The role of zoning… including what zoning should and should not do
Outline
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4. • 4 Components
• Physical Feasibility
• Market Feasibility
• Legal Feasibility
• Financial Feasibility
• Not a linear process. Rather, it’s highly iterative. Each of the above
informs the other and happen more or less simultaneously.
• Which components should the Planners care about? The Lenders?
The Developers?
• Which can we actually influence?
The Feasibility Process
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5. • Rental income must cover the cost of Operating Expenses + Debt Service +
Debt Service Coverage
• Development Budget:
• Uses of funds
• Preconstruction costs
• Acquisition (including cleanup, etc.)
• Design costs and permitting costs
• Legal, project management, and other costs
• Construction costs (the “bricks and mortar”)
• Fees
• Loan fees and interest
• Developer fees
• Sources of funds
• Equity
• your cash or (preferably somebody else’s), maybe a grant (investor’s need a return for their money)
• Debt
• The construction loan. Borrowing a sum up front, and paying it back over time – how much you can borrow depends
on how much income you have to pay it back)
Basic Development Economics

6. • Rental income must cover the cost of Operating Expenses + Debt Service +
Debt Service Coverage
• Operating Budget:
• Expenses
• All of the costs to operate a building, e.g. utilities, management, taxes, reserves, etc.) as well
as the monthly payment on your debt (mortgage)
• Income
• Monthly rents (or proceeds from sales)
• Ideally, income should be 1.25 more than expenses
(if the ratio is lower, like 1.1, then your loan rates may be higher, or you might not get a loan)
Basic Development Economics

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Downtown Great Barrington

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Downtown Great Barrington

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Downtown Great Barrington

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11. • Core Initiatives of our Master Plan
• Character:
• Direct development and growth into the village centers…
• Protect the special places and features that contribute to downtown’s character…
• Facilitate development of existing structures and redevelopment of built sites
• Encourage infill…
• Commerce:
• Promote economic development appropriately scaled to downtown…
• Our zoning implements these initiatives…
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Downtown Great Barrington

12. • Downtown Business District zoning
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Downtown Great Barrington

13. • Village Center Overlay District zoning
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Downtown Great Barrington

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The Lender’s Perspective

15. • Looking for an experienced developer with a strong architect,
general contractor, and legal counsel
• Does the borrower have cash behind them? Does the borrower
personally have “ skin in the game”?
• Is there a market? Are the rents achievable?
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The Lender’s Perspective

16. • Debt Service Coverage (DSC) is the main driver
• A debt service coverage ratio is one of the most classic and most important
underwriting ratios. It gives the bank a quick and easy way to look into the
borrower’s cash flow thus their ability to service the debt.
• Debt Service Coverage Ratio = Net operating income / Debt
Service
• minimum DSC of 1.25x for most mixed used properties. For more specialized
properties like hotels, banks will want strong DSC ratios of say 1.40x or
greater.
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The Lender’s Perspective

17. • Factors Banks consider when looking at DSC and cash flow:
• Beyond real estate taxes, insurance, etc. the bank needs to also make sure
that vacancy, management fees and replacement reserves are considered
• Vacancy – How much vacancy is applied to the rents really depends on the
location, the market, etc. It can range from 3% to 15% depending upon the
property with the most common being 6% vacancy rate. Conservative
lenders will estimate on the high side and aggressive lenders will use a
lower vacancy. (If they really want the deal)
• Management fees – Another underwriting expense that is taken out even if
a borrower plans to manage the property themselves. The amount depends
on the leases and how they are structured but anywhere from 2%-5%. Again
this is subjective based upon the lenders perception and risk/desire to lend
• Replacement reserves- Another expense that needs to be considered. It
covers general repair costs that may incur going forward. On multi-family
properties it is usually a dollar amount per unit and on other properties,
such as retail or office is 1% to 3% of gross rents.
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The Lender’s Perspective

18. • RED FLAGS
• Developer stretching in terms of expected rents to meet the 1.25X DSC ratio
• Developer stretching in terms of expenses in order to meet the 1.25X DSC to
obtain financing
• Borrower puts very little of their own money into the deal “skin in the
game”
• Unwillingness to provide a personal guarantee
• Not willing or unable to put funds aside to meet capital or reserve
requirements
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The Lender’s Perspective

19. • The Construction Process
• Bank provides an interest only construction period which gives the borrower time to build
and then time to get tenants into the project and begin paying rents.
• The borrower is expected to inject all of their equity into the project before the bank
begins to disburse the loan proceeds. This way the bank knows that they are holding
enough money to complete project
• Upon the request of the developer for funds and depending upon the size and complexity
of the project the bank may send out a project supervisor to ensure that the works is
coming along as planned. Approve of the advance of funds.
• If any time there are cost overruns the bank and
developer should have a discussion as to how this will
be handled. COMMUNICATION IS THE KEY!
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The Lender’s Perspective

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The Developer’s Perspective

21. • 47 Railroad Street case study
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Location

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Location

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Existing Conditions

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Existing Conditions

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Town Facades

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Storefronts

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Signage

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Lighting

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47 Railroad Street

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47 RR: Redevelopment Program
• Gross Square Footage: 26,000 SF
• Residential Area: 67%
• Commercial Area: 33%
• 1 Bedroom Units: 10
• 2 Bedroom Units: 3
• Retail Units: 4
• Total # of Units: 17
• Zoning and Use: B District, Village Center Overlay District
• Permitting: Special Permit Required Substantial Renovation

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Site Plan

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Floor Plans

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Floor Plans

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Floor Plans

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Floor Plans

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Floor Plans

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Elevations

39. • Does the market need my project?
• Will the municipality want my project?
• Can I bear the cost of getting the project to the point of construction?
• Scheduled tasks and costs
• Sources of funding for each task
• Will the project, if built, be profitable?
• Overall profitability based on project value less project cost
• Amount of debt, amount of equity
• Project Return is expressed in many different ways
• Gross Rent Multiplier
• Cash-on-Cash
• Return on Costs
• Return on Equity
• Net Present Value
• Internal Rate of Return
• Hurdle Rate
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Key Project Planning Questions

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47 RR: Funding Program
Conventional Financing Proposed
• Acquisition $2,350,000
• Permanent Debt 70% $1,645,000
• Equity 30% $705,000
• Improvements $4,407,660
• Permanent Debt 70% $3,085,362
• Equity 30% $1,322,298
Total Development $6,757,660
• Total Debt $4,730,362
• Total Equity $2,027,298

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47 RR Development Budget Summary

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47 RR Operating Pro Forma & Income Statement

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47 RR Operating Pro Forma & Income Statement

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The Developer’s Perspective
• Town’s Goals
• Village center zoning:
• Pedestrian focus
• Mixed use
• Historic buildings
• Economic revitalization
• Meet the Planner early – do the back of the envelope proforma, initial “Go”
or “No Go” decision
• And then talk to the Planner again!
• Lender’s Goals
• Development capacity / Financial capacity / Viable project
• No project without all three
• Proforma: rent levels, vacancy, debt service coverage ratio

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The Developer’s Perspective
• Things that make it feasible
• Building was 75% vacant at purchase – converted to residenital/retail
• Increased the density with 10,000 sf addition, 75% lot coverage
• GB is a high rent market
• Owner/developer/builder – a cost efficient “all in one shop”
• VCOD zoning and a community lender
• 100% market rate, and traditional debt/equity structure
• Reasonable 2.5 year timeline from acquisition to lease up

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The Developer’s Perspective
• Things that make it difficult
• Low rent market: Howard and Onota buildings in Pittsfield
• Tax credits: historic, new market, LIHTC, TIFF
• Long timelines of 4 or 5 years
• Levels of fees for Owners, Contractors, Design Team
• Construction costs and Soft costs: relative stability across secondary and
tertiary markets. The variables are the land cost and the rent
• Rents are the biggest driver
• Things that would make it better:
• Increase in density to 4 or 5 stories
• Less than 30 units – very tough to pencil out
• More flexible zoning
• Work with developers to make sure your zoning bylaws work

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The Planner’s Role

77. • Planner’s role before purchase, and during the feasibility process
• Explaining the permitting process and the Town’s goals for the area
• Helping developer understand the risks
• Zoning
• The importance of getting the zoning right
• What zoning should do to increase possibility of small mixed-use projects /
how good zoning can increase feasibility
• What zoning should not do / how bad zoning can decrease feasibility
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The Planner’s Role

78. Christopher Rembold, AICP
Great Barrington Town Planner
413-528-1619. x7 crembold@townofgb.org
Chris Kinne, Vice President, Commercial Lending
Lee Bank
413-243-9295 ckinne@leebank.com
Ian Rasch, Principal, Alander Construction & Framework Properties
ifrasch@gmail.com
Angus Jennings, AICP
AG Jennings, LLC agjennings@icloud.com
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Thank You!