Agenda Packet 10-17-18 Work Session

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Gordon Lofts MUPTE Application MUPTE REVIEW PANEL MINORITY REPORT 100518 III. Conclusions Based Upon Modiﬁcations to Consultant’s Revised Pro Formas The consultant has deﬁned ﬁnancial viability as requiring a 6% cash-on-cash “cash ﬂow return” and a 1.20 DCR (debt service coverage ratio). Report at 17. Making the above changes to the Consultant’s pro formas, including full amenity income, and using cash ﬂow return, results in the project being ﬁnancially viable and not needing MUPTE. Table 1. Making the changes, including full amenity income and using cash ﬂow return, but without the construction contingencies limitation and the property tax discount, still results in the project not needing MUPTE. Table 2. These returns are signiﬁcantly enhanced when considering cash-on-cash “return on equity,” which includes payments to principal as part of the return. 3 Tables 1 & 2. Making the above changes, with 1/2 amenity income, and 10% construction contingencies, results in only a Year 1 need for MUPTE, using Year 1 cash ﬂow return of 4.9%, Year 2 cash ﬂow return of 6.6%, and a Year 1 DCR of 1.20. Table 3. No MUPTE would be needed using the return on equity of 9.2% in Year 1. Table 3. Thus, using 30 year amortization, removing the moderate income fee, adjusting commercial lease income, using Year 1 vacancy of 5%, with 10% contingencies, and 1/2 amenity income, should result in a ﬁnancially viable project with no need for MUPTE. Making the above changes, with 1/2 amenity income, but with 15% contingencies, results in the project needing MUPTE for two years, using cash ﬂow return or for one year using return on equity. Table 4. Removing the construction contingencies limitation and property tax discount, with 1/2 amenity income, results in the project needing MUPTE for three years, using cash ﬂow return, and for one or two years using return on equity. Table 5. Thus, using 30 year amortization, removing the moderate income fee, adjusting the commercial lease income, using ﬁrst year vacancy of 5% and using 1/2 amenity income, results in only a need for up to a 3 year MUPTE. Making the above changes, without any amenity income, and using cash ﬂow return, results in the project needing MUPTE for 5 years with 10% contingencies (Table 6), for 6 years with 15% contingencies (Table 7), and for 7 years without the limitation on construction contingencies. (Table 8). Making the above changes, without any amenity income, and using return on equity, results in the project needing MUPTE for 3 years with 10% contingencies (Table 6), for 4 years with 15% contingencies (Table 7), and for 5 years without the limitation on construction contingencies. (Table 8). Cash-on-cash “cash ﬂow return” is the before tax cash ﬂow divided by development equity, 3 which in this case is $7 million. This return “usually needs to be at least 6% in early years of a project to be a satisfactory investment for equity partners . . .” Consultant Report at 17. Cash- on-cash “return on equity” is the before tax cash ﬂow plus payments to principal divided by development equity. Johnson Economics in its Olive Lofts report, deﬁned “return on equity” as the “net cash ﬂow after interest costs divided by the developer equity,” excluding payments to principal from the debt service. Olive Lofts report at 7. Both PNW Economics and Johnson Economics consider the “return on equity” to be a valid measure of return. PNW Economics stated that “[f]or project evaluation purposes, either calculation is acceptable and are virtually the same,” and that “in early-year (years 1-2) cash-on-cash return analysis, including minuscule payment on principal according to the amortization schedule or not including it are insigniﬁcantly different.” 8/29/18 PNW Memo at 6. Compare to returns in Tables 1-8. Page