Agenda Packet 10-17-18 Work Session

Home Browse Search

PNW Economics Page 6 Prepared for: City of Eugene Prepared by: PNW Economics Response to MUPTE Citizen Advisory Committee Questions: Obie Companies Application on-Cash Return” as “Before Tax Cash Flow divided by development equity,” stating that it was “also known as Return on Equity * * *.” Report at 17. Why is it not appropriate to include payments towards principal in the cash on cash return or return on equity? Consultant Response: For project evaluation purposes, either calculation is acceptable and are virtually the same. Cash-on-cash return is a benchmark of importance for evaluating early-year payback risk for equity investors. Early year debt service in an amortization schedule is virtually all interest and very little principal payback. Therefore in early-year (years 1-2) cash-on-cash return analysis, including miniscule payment on principal according to the amortization schedule or not including it are insignificantly different. 17.Why is it not appropriate to include appreciation in value in calculating the return? In your Table 11, without MUPTE and without any amenity income, the property achieves a 10th year value of $39,276,580, which is an increase of $8,470,999 over the year 2 value, a 27.5% increase. Appreciation in Table 11 adds a 3.1% annual return (not including from years 1-2) to the cash flow return and to the return from payments to principal. Consultant Response: All appreciation in value in the pro forma is based purely on rent escalation vs. expense escalation as time progresses. Ultimately, as an income property, escalation in net income from this differential is what determines the market value of the property based on standard, income- based valuation. 18.The applicant and you used a 6% interest rate. Would a lower rate such as 5.5% be justified, given current lower rates? Consultant Response: Alternative interest rates for the project are speculative at best. PNW Economics critically evaluated application assumptions as documented by the Applicant. We traditionally utilize conservative assumptions which would include a bias towards a higher interest rate rather than a lower one to model less optimistic cash flow risk. Further, the project will be constructed on leased land and, therefore, permanent financing will likely view this as higher risk with slightly higher interest rate rather than lower risk with lower interest rate. 19.I would like to go through the applicant’s building costs on page 38, line by line, with the consultant, to see if they are reasonable. Specifically, contractor and owner contingencies seem excessive at $4,355,989 and developer costs and incentives at $1,256,100 seems excessive in lieu of receiving a MUPTE. I would like to make sure there is no duplication in the building costs. Certainly, the moderate-income housing fee should be eliminated for all proformas that do not include MUPTE. Consultant Response: PNW Economics admits to not being the best qualified consultant for a detailed audit of every individual development cost assumption for the Obie Companies project, like a general contractor or architect would be. We can say, however, that the total development costs and different individual cost categories in the expected development cost spreadsheet are credible based on our experience reviewing other projects. For comparability, we would specifically cite the 5-story apartments component of the Independence Landing mixed-use project in Independence, Oregon that October 17, 2018, Work Session – Item 2