Agenda Packet 10-17-18 Work Session

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Gordon Lofts MUPTE Application MUPTE REVIEW PANEL MINORITY REPORT 100518 II. General Analysis A. Analysis Should Use 30 Rather than 25 Year Amortization The application indicated use of 30 year “amortization” (p. 43). The debt service amounts used in the application, however, were based upon 25 year amortization. The application says nothing about the “term” of the loan (length in years). The consultant stated that the applicant assumes a 25 year “term,” but says nothing about “amortization” (Report at 13). At the panel meeting the Consultant acknowledged that “amortization” is different than “term” of the loan, and that use of 30 rather than 25 year “amortization,” as opposed to “term,” should not impact the interest rate. To justify a 30 year amortization, the consultant later cited a project in Independence, Oregon, which assumed a 5.5% interest rate and 30 year amortization. 9/11/18 Memo at 7. The consultant opined that the Gordon Lofts project was different because 1) it will be on leased land, 2) rates have increased and 3) Obie Companies lack the track record of the developer for the Independence project. The consultant then asserted that “a 25-year amortization and 6.0% annual rate is a reasonable assumption for Obie Companies under the circumstances.” These factors may justify a 6% interest rate, but they do not necessarily justify a shorter amortization period. The consultant did not say that a 30-year amortization would be unreasonable, or that a bank would require 25 rather than 30 year amortization. A bank receives somewhat more interest on a loan with 30 versus 25 year amortization. A project is more likely to be successful from the bank’s perspective, with adequate DCR, if it has less debt service associated with a 30 versus 25 year amortization. It is thus unclear why a bank would require a 25 rather than 30 year amortization for the same term loan. Conventional private commercial real estate loans can have terms of 5, 7 or 10 years, etc., but are often amortized at 25 or 30 years. The Olive Lofts MUPTE application projected a 10 year loan term amortized over 30 years. The last three MUPTE applications approved by the City, including Olive Lofts, used 30 year rather than 25 year amortization. 1 Use of 30 rather than 25 year amortization for the same term loan decreases the annual debt service (principal and interest payments on the debt), projecting signiﬁcantly more cash on cash, cash ﬂow return. The consultant stated “All things equal, a 30-year term for debt would decrease annual debt service by order of magnitude observed in the question and would generally enhance cash ﬂow and cash-on-cash return under all scenarios.” 8/29/18 Memo at 1. Ten year property tax exemption applications should be evaluated using the longest amortization period available so as to fairly analyze whether the project could be built without the exemption. A shorter amortization period makes the project appear less ﬁnancially viable since it increases the debt service. MUPTE applications should be considered using 30 rather than 25 year amortization. Olive Lofts Application at 24 (“30-year amortization, rate adjustments at 5 years, balloon 1 payment at 10 years.”); Core Campus MUPTE Agenda Item at 23 (“Debt service is based on a 30-year ﬁxed loan at 5.75%.”); Capstone MUPTE Agenda Item at Attachment F (“Debt service is based on a 30-year ﬁxed loan at 6.5% from Fannie Mae.”). The four MUPTE applications prior to these three apparently were analyzed by City staff using 25 year amortization. Page