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Page 17 <br />Prepared for: City of Eugene <br />Prepared by: PNW Economics, LLC <br />Market & Financial Analysis of Gordon Lofts MUPTE Program Application <br />•Concessions represent average rent discounts every year as part of setting rents to entice or <br />ensure vacancy does not exceed 5%. Concessions grow by 3% annually. <br />Effective Gross Income: Gross Project Income less Vacancy and Absorption Vacancy & Concessions. <br />Apartment Operating Expense: Annual operating expenses of $6,153 per apartment unit starting in <br />year 1 and growing by 3% annually thereafter. In year 1 only, apartment operating expenses are <br />reduced by the 20% absorption vacancy described in the Absorption Vacancy & Concessions <br />definition. <br />Retail Operating Expense: Annual operating expenses documented by the Applicant, starting at <br />$55,758 in Year 1 and growing by 3% annually thereafter. <br />MUPTE: When included, MUPTE is a 10-year exemption from local property taxes levied on the value <br />of the improvement constructed in place, in this case the Gordon Lofts project. Based on an estimated <br />cost-of-replacement of $34 million and a local, existing total property tax rate of $0.0186901, the <br />estimated MUPTE exemption beginning in year 1 would be $378,636. This would increase by an <br />assumed 3% annually, consistent with the annual maximum under Oregon property tax law. <br />Net Operating Income (NOI): Effective Gross Income less Apartment Operating Expense less Retail <br />Operating Expense plus the MUPTE (if assumed). <br />Debt Service: The annual, fixed debt service payment made by the developer for permanent debt <br />financing of the project. <br />Before Tax Cash Flow: Net Operating Income Less Debt Service. <br />Cash-on-Cash Return: Before Tax Cash Flow divided by development equity ($7 million in this <br />analysis). Cash-on-Cash Return is also known as Return on Equity and usually needs to be at least 6% <br />in early years of a project to be a satisfactory investment for equity partners in a project. This can vary <br />depending upon developer and equity partners, however. <br />Value: The estimated market value of the development based on the “income valuation method.” <br />Calculated as Net Operating Income divided by a Capitalization (“Cap”) Rate, which is a measure of <br />development risk for a future stream of business income over a period of time. A higher cap rate <br />signifies a higher risk investment and vice versa. The assumed cap rate in this analysis is 6%. <br />Loan-To-Cost (LTC): The amount of debt a project can take on as a percentage of its cost to develop. <br />This analysis assumes a 79% LTC ratio consistent with the Applicant. <br />Loan-To-Value (LTV): An alternative measure of maximum debt that a project can take on, calculated <br />as a percentage of the Value calculated utilizing Net Operating Income. 75% LTV is common. <br />Debt Coverage Ratio (DCR): Another alternative measure of maximum debt that a project can take on, <br />calculated by dividing stabilized Net Operating Income (when occupancy is at 95%) by a factor such as <br />1.20, a common debt coverage ratio. The resulting quotient is the maximum annual debt service <br />obligation a project can take on. <br />Equity: The share of total development cost that is funded by invested dollar assets rather than by <br />debt. <br />October 17, 2018, Work Session – Item 2