Improving Communities Enhancing Lives

1
(No Transcript)
2
Improving Communities Enhancing Lives

• NDC is the nations
• oldest non-profit
• provider of community
• development technical
• assistance and training

3
A Powerful Mission

• Increasing the flow of capital for
• investment, jobs and community
• development to distressed urban and
• rural communities throughout the U.S.

4
Partners in Community Development Since 1969

• NDC works in partnership with local and state
  governments and non-profit organizations to help
  them build their communities and economies

The Pub Group in Portland, OR
5
Partners in Community DevelopmentTechnical
Assistance

• NDC defines, designs and executes development and
  business finance strategies, programs and
  projects
• NDC identifies, secures and structures public and
  private financing and develops project from
  concept to completion

Bijou Theatre in Bridgeport, CT
6
Partners in Community DevelopmentNDC Training
Professional Certification

• NDC offers courses designed to give participants
  the skills and knowledge they need to
  successfully facilitate housing and economic
  development in the communities where they live
  and work

NDCs Chuck Depew teaching Mixed-Use Real Estate
Finance
7
Partners in Community DevelopmentNDC Corporate
Equity Fund
As an equity investor, NDC finances affordable
housing and historic preservation
Dublin Road Townhomes in Mankato, MN
8
Partners in Community DevelopmentNDC Grow
America Fund

• NDC creates jobs and economic development with
  direct small business lending with a focus on
  women and minority-owned businesses

Red Barn Pet Products in Long Beach, CA
9
Partners in Community Development NDC Housing
and Economic Development Corporation
NDC finances and builds community and public
facilities on behalf of our client communities
Redmond City Hall in Redmond, WA
10
Partners in Community Development HEDC New
Markets
As one of the leading non-profit participants in
the New Markets Tax Credits program, NDC provides
technical assistance and NMTC financing for
economic and community development projects
YMCA in Albany, NY
11

• Evaluating A Projects Need for Public Gap
  Financing

12
Evaluating A Projects Need for Public Gap
Financing

• A projects financing gap is defined as the
  difference between projected costs (uses) and the
  debt and equity (sources) it can reasonably
  attract as follows
• Project Costs
• - Bank Loan
• - Equity
• Gap

13
Defining the Financing Gap

• Project Costs are they reasonable adequate?
• - Bank Loan maximized?
• - Equity fair return without undue enrichment?
• Gap are there public sources available to
  close?

14
A Fundamental Problem in Real Estate Finance

• Project Costs Often Greater Than Completed Value
• But...debt and equity are a function of value,
  not cost
• Where project costs exceed fair market value,
  there will likely be a need for federal, state
  and/or local economic development resources to
  get the project done

15
Cost-Value Differential Example
16
Why Do Economic Development Projects Require
Public Sector Assistance?

• Project Costs gt FMV
• Investors see inadequate Return on Investment
  (ROI)
• Lenders see unacceptable Level of Risk

17
Investors Perspective

• Investors are seeking to maximize economic
  benefits and minimize equity investment
• Looking to invest in projects yielding the
  highest Return On Investment (ROI)
• Concerned about the liquidity of the investment
  (can it be sold to free up equity for next
  opportunity)

18
Lenders Perspective

• Lenders are risk limiters, not profit maximizers
• Lending is a low-margin, high-volume business
• No upside" for lenders
• Marginal return on investment (interest)
• Expected return of investment (principal)
• Fixed returns
• Will participate but want to mitigate all risks

19
Project Sources and Uses

• Structuring the Project
• Sources of funds must be equal to uses of fund
• Identify all project costs (uses)
• Acquisition
• Construction
• Soft costs and Reserves
• Identify all project sources
• Debt
• Equity
• Public Gap Financing
• If uses are greater than sources, find additional
  sources

20
Sources and Uses

• Sources
• Bank 6,000,000
• Equity 2,335,000
• 8,335,000
• Uses (Project Cost Summary)
• Land 100,000
• Site Improvements 200,000
• Construction Shell 5,000,000
• Parking 50,000
• Architect and Engineering 200,000
• Tenant Improvements 1,000,000
• Legal and Accounting 50,000
• Permanent Loan Fees 90,000
• Construction Loan Fees 120,000
• Organizational Expenses 40,000
• Construction Interest 300,000
• Marketing 60,000
• Property Taxes 25,000

21
Lender Underwriting / Debt Capacity

• The maximum loan amount will be determined by the
  lenders primary underwriting criteria
• Debt Coverage Ratio (DCR)
• Loan to Value Ratio (LTV)

22
Permanent Lender Underwriting (cont.)

• Debt Coverage Ratio (DCR)
• DCR NOI
• D/S
• Measures project's ability to repay loan from
  revenues (lender's "first way out)
• Higher the DCR, lower the risk
• Typical DCRs 1.10 to 1.35

23

Permanent Lender Underwriting (cont.)

• Loan-to-Value Ratio (LTV)
• LTV Loan Amount
• FMV (Fair Market Value)
• Measures project's ability to repay loan from
  sale of the asset (lender's "second way out")
• Lower the LTV, lower the risk
• Typical historical LTV 75

24
Sizing Equity Three Benefits of Investing in
Real Estate

• Investors/developers seek three benefits when
  investing in real estate
• Cash Flow
• Tax Benefits
• Appreciation
• Investors want all three benefits, but cash flow
  requirement is first because it is the most
  immediate and tangible benefit

National Development Council
25
Benefits of Owning Real Estate (cont.)

• Cash Flow Income- Operating Costs- Debt
  Service Cash Flow

26
Benefits of Owning Real Estate (cont.)

• Tax Benefits two main benefits
• Income tax deferral from depreciation
• Income Tax Reduction from Tax Credits
• (Historic) Rehabilitation Tax Credits
• Low-Income Housing Tax Credits
• New Markets Tax Credits
• (Renewable Energy) Investment Tax Credit

National Development Council
27
Benefits of Owning Real Estate (cont.)

• Appreciation Selling Price- Purchase
  Price Appreciation in Value

28
Time Value of Money

• Investors demand a return on their money given
  their perception of
• Risk
• Inflation
• Opportunity Costs
• These three factors determine the discount rate.
  The discount rate converts a future value to a
  present value
• The discount rate is the same as the investor's
  desired rate of return

29
Valuing Investor Benefit 15 Discount Factor
Year RTC LIHTCs After-Tax Cash Flow Total Benefits After Taxes Discount Factor PV
1 400 144 30 574 .870 495
2 144 28 172 .756 130
3 144 26 170 .658 112
4 144 24 168 .572 96
5 144 22 166 .497 82
6 144 20 164 .432 71
7 144 18 162 .376 61
8 144 16 160 .327 52
9 144 14 158 .284 45
10 144 12 156 .247 39
400 1,440 210 2,050 1,187
PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above. PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above.
30
Filling the Gap The Public Toolbox

• Reduce Development Costs
• Discounted or donated properties
• Fund infrastructure and site work through general
  obligation bonds
• Reduce Cost of Capital
• Lower price and longer term
• Make Capital more Readily Available
• Subordinated (junior) financing
• Stretch debt
• Reduce equity
• Loan guarantees

31
Filling the Gap The Public Toolbox (cont.)

• Decrease Operating Costs to Expand Borrowing
  Capacity and Equity Attraction
• Tax abatements or Payments in Lieu of Taxes
  (PILOTs)
• Utility savings
• Attract outside Equity
• State and federal tax credits in exchange for
  equity
• Types of federal credits
• Low-Income Housing Tax Credits
• Historic Rehabilitation Tax Credits
• New Market Tax Credits
• Investment (Renewable Energy) Tax Credits

32
Filling the Gap The Public Toolbox (cont.)

• Attract Grants
• Less commonly available these days
• Always tied to public benefit standards
• Monetize Tax Increment
• Tax Increment Financing (TIF)
• Using future tax increment to finance up-front
  capital costs, especially infrastructure

33
For More Information

• Tom Jackson, Director
• tjackson_at_nationaldevelopmentcouncil.org
• New York Office Training Division
• 708 Third Avenue, Suite 710 927 Dudley Road
• New York, NY 10017 Edgewood, KY 41017
• 212-682-1106 0ffice 859-578-4850 Office
• www.nationaldevelopmentcouncil.org