Agenda Packet 9-11-19 Work Session

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PAGE | 2 B.ASSUMPTIONS Several assumptions must be made in order to evaluate the viability of the development program. The applicant’s income assumptions are viewed as aggressive but defensible within the downtown Eugene market. The average residential lease rate is assumed at $1,224 per month, escalated at an average annual rate of 2.5%. This assumption is pretty typical in recent proformas we have seen, with annual income escalations assumed at between 2.5 and 3.0%. Operating cost assumption at 38% for residential uses with property taxes assumed and are within market norms for a project of this scale with interior corridors. Permanent financing was assumed at 5.50% for a thirty-year term and a debt coverage ratio (DCR) of 1.20. This is somewhat aggressive, and a DCR of 1.25 may be required by a lender. The return parameters used in our analysis to determine viability are not impacted by the financing terms used. Construction costs were derived from the application and reflect a total cost of just over $8.274 million for the project. This reflects a per unit cost of $165,500, which is below what we would expect in the current market. The applicant is using a local contractor with extensive local experience, and we are assuming the cost estimates are reliable. C.VIABILITY OF PROJECT Baseline Scenario Our baseline scenario reflects the development program based on the outlined assumptions and does not assume any benefit from the MUPTE. The project would cost an estimated $8.275 million to develop, with a stabilized Net Operating Income (NOI) of $437,720. The net operating income reflects income from property after operating expenses have been deducted, but before deducting income taxes and financing expenses. Based on the revenue assumptions outlined the supportable debt on the project would be $5.35 million, with required equity of over $2.9 million. The applicant assumes they would contribute 20% equity, but under this scenario the projected net income of the project would not support enough debt, increasing the required equity contribution. A lending institution will typically use a debt coverage ratio (DCR) to calculate the amount of supportable debt on a real estate project. For our analysis we assumed a DCR of 1.20, which ref lects net operating income in the first stabilized year after taxes at 120% of the scheduled debt service payment. While achievable in some cases, this is an aggressive assumption as DCR requirements will often be higher at 1.25 to 1.30. When evaluating the viability of a project we use a series of financial return measures. The definition of these is included as a glossary at the end of this memorandum. Individual developers vary with respect to which returns they use in evaluating projects, so we include several alternative measures. The return on cost under the baseline scenario would be 5.29%, with the leveraged return on equity at only 5.03%. The internal rate of return assuming a 10-year hold and calculating the reversion value (sale of the asset at the end of the period) based on a terminal cap rate of 6.0% (the capitalization rate used to calculate the value at sale) would be 10.5%. Land Acquisition $592,416 Hard Costs Construction $5,396,207 Other Cost/Contingency $903,005 Soft Costs A&E $314,961 SDC $203,958 Development Fee $283,465 Interest $193,897 Loan Fees $64,632 Taxes $11,161 Marketing $65,000 Legal $25,000 Other Fees $96,248 Contingency $125,000 Total Development Costs $8,274,950 ASSUMED DEVELOPMENT COSTS SOURCES Total % Required Equity $2,921,344 35% Serviceable Debt $5,353,606 65% Total $8,274,950 100% RETURN MEASURES Total Development Costs $8,274,950 Stabilized NOI $437,720 Return on Cost 5.29% Return on Equity 5.03% IRR 10.5% Targeted Return on Cost 6.50% GAP $1,540,804 September 11, 2019, Work Session – Item 1