Agenda Packet 10-17-18 Work Session

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Page 16 Prepared for: City of Eugene Prepared by: PNW Economics, LLC Market & Financial Analysis of Gordon Lofts MUPTE Program Application Financial Feasibility Analysis: Two Scenarios to Compare Rent Income Assumptions Introduction to Terms To evaluate whether or not a project is financially feasible, that is whether or not the project meets investment rates of return benchmarks, a pro forma analysis is conducted. A pro forma is simply a financial modeling exercise to examine how a development project performs as a business investment over a specified period of time. Variables that are modeled, or estimated, in this report are as follows: Apartment Rent Income: The annual rent income if all apartment units in a project were occupied and charging full, assumed market rent. This grows by 3% each year. Retail Lease Income: The annual lease income if all retail space in a project were occupied and charging full, assumed market lease rate. This grows by 3.5% each year. Amenity Income: The Applicant assumes that beginning in Year 1 of the project, $563,211 in additional rent will be earned due to unique features of different apartments. Section 2 of this report discusses the plausibility of earning such premiums, finding that they are unreasonable given the prevailing downtown Eugene apartment market. Two pro forma scenarios are considered, one beginning on page 18 which assumes unlikely Amenity Income is not earned. The second scenario, which begins on page 20, aggressively assumes that the market accepts such a high rent premium. When included, this increases by 3% annually. Misc. Income: This represents other income from managing apartments and retail space, including application fees, cleaning fees, deposits kept for damage, and other non-primary project income. This increases by 3% annually. Gross Project Income: The sum of Apartment Rent Income, Retail Lease Income, Amenity Income (when included), and Misc. Income. This increases annually due to each income stream escalating on their own at different rates. Vacancy: 5% of apartment space and retail space is assumed to always be vacant and represent income loss. Absorption Vacancy & Concessions: This category of expense reflects different sources of loss to revenue as a result of project vacancy and discounts to apartment rents to realize and keep an average 5% vacancy rate. •In year 1 of the project only, PNW Economics assumes a 20% loss in potential rent income will occur due to new units being vacant prior to first occupancy (“absorption”). We would note that this differs from the “Loss to Lease” assumption by the Applicant in their application pro forma analysis. Projects during lease-up, even if it only takes a year, will tend to have lease-up vacancy higher than assumed by the Applicant. •During assumed 1-year lease-up to stabilized occupancy, a model unit will remain vacant in order to market the project to potential renters. This represents unique, first-year rent income loss. October 17, 2018, Work Session – Item 2