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Page 13 <br />Prepared for: City of Eugene <br />Prepared by: PNW Economics, LLC <br />Market & Financial Analysis of Gordon Lofts MUPTE Program Application <br />3. Financial Feasibility Analysis <br />Financial Feasibility (“Pro Forma”) Assumptions <br />Debt vs. Equity & Project Financing <br />Table 9 provides a summary of Applicant project permanent financing assumptions taken from the <br />Gordon Lofts MUPTE application. 79% of project development cost is expected to be financed, with a <br />21% equity split. This would be below the typical maximum of 80% of cost project cost (loan-to-cost <br />ratio or “LTC”), but only slightly. <br /> <br />Table 9 – Gordon Lofts Project Permanent Debt Finance Assumptions <br /> <br />PNW Economics views the assumption as reasonable and utilizes these assumptions in its own pro <br />forma analysis of the project with and without MUPTE benefit. But we do mention the following: <br />• The MUPTE application incorrectly states that the term for the loan would be 30 years. In later <br />confirmation with the City of Eugene, Obie Properties clarified that the term is expected to be <br />25 years for an annual debt service payment of $2,087,537. If the term was 30 years, PNW <br />Economics calculates that annual debt service would be $1,942,544. This would have the effect <br />of modestly increasing Before Tax Cash Flow and modestly increasing cash-on-cash return for <br />the project, the key measure of investment return for equity (dollar investment instead of <br />debt) partners. However, because the effects would be modest, conclusions reached in the pro <br />forma analysis section of this report would not meaningfully change. Both financial terms are <br />given greater explanation beginning on page 16. <br />• Development of Gordon Lofts will be on land leased from Lane County. The developer, Obie <br />Companies, does not own the underlying land fee simple. Permanent, long-term lending to <br />real estate development on leased land is less common, but it frequently happens and is <br />growing in use. But for the lender to commit to a loan, the process involving the lessor (Lane <br />County), lessee (Obie Companies), and the unnamed lender is more complicated with a longer <br />list of legal assurances, and any perception of increased risk due to the arrangement could <br />have the following effects: <br />o Increase the interest rate to reflect a risk premium for the lender; <br />o Reduce the LTC ratio and ultimately the size of the loan, requiring the developer to <br />seek additional equity or a “mezzanine” loan, which simply fills any equity gap but will <br />almost certainly charge an interest rate higher than the primary loan. <br />Total Development Cost $34,000,000 <br />Permanent Loan $27,000,000 <br />Equity $7,000,000 <br />Percent Financed 79% <br />Annual Interest Rate 6.00% <br />Term 25 <br />Annual Permanent Debt Service ($2,087,537) <br />October 17, 2018, Work Session – Item 2