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<br />These returns are assumed to be below what would be necessary for the market to develop this project. Assuming a
<br />targeted return on cost of 6.50%, the indicated viability gap as modeled would be $1.54 million without the MUPTE tax
<br />abatement. We will typically use return on cost as our preferred measure for acceptable returns, as it is least subject to
<br />variability in assumptions. The 6.50% used reflects a 100-basis point premium over an assumed current capitalization
<br />rate of 5.5%. Using this assumption, the project is worth 118% of cost at stabilization if the development follows the
<br />proforma projections.
<br />The following is a 10-year simplified pro forma for the project. As noted, a reversion value was assumed at the end of
<br />the period based on the projected NOI in year 11 divided by an assumed terminal cap rate of 6.0% and deducting the
<br />remaining principal balance from the primary loan. Under this scenario the net residual value is projected at $7.0 million
<br />at the end of year 10.
<br />Based on these estimates and forecasts we would not consider the project to represent a viable development program
<br />without the MUPTE program.
<br /> MUPTE Scenario
<br />The second scenario uses the same income and expense assumptions as
<br />the baseline scenario, with the addition of an assumed ten-year tax
<br />exemption. The use of the MUPTE reduces operating costs significantly
<br />during the first ten years (starting in year 1 in the cash flow table),
<br />increasing cash flow available for debt service. With the increased cash
<br />flow to cover debt service, the serviceable debt increases to $6.48
<br />million, reducing the equity requirement to $1.79 million (22% of costs).
<br />The return on cost at stabilization is estimated at 6.41%, just below the
<br />targeted return on cost of 6.50%. This yields an indicated gap of
<br />$120,188, or 1.4% of total cost. If a gap is this small relative to project
<br />cost, we typically assume that it can be addressed through value engineering and program refinement, and therefore
<br />we view the program to be viable under this assumption. The internal rate of return under this scenario is 15.8%, while
<br />SIMPLIFIED CASH FLOW
<br />10-YEAR CASH FLOW WO/MUPTE
<br />Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
<br />REVENUE
<br />Gross Rent Revenue $734,640 $734,640 $753,006 $771,831 $791,127 $810,905 $831,178 $851,957 $873,256 $895,088
<br />Misc. & Commercial $13,270 $13,270 $13,602 $13,942 $14,290 $14,648 $15,014 $15,389 $15,774 $16,168
<br />Less Vacancy ($166,799) ($37,396) ($38,330) ($39,289) ($40,271) ($41,278) ($42,310) ($43,367) ($44,451) ($45,563)
<br />Total Income $581,111 $710,515 $728,277 $746,484 $765,146 $784,275 $803,882 $823,979 $844,578 $865,693
<br />EXPENSES
<br />Operating Expenses $155,587 $155,587 $159,477 $163,464 $167,550 $171,739 $176,032 $180,433 $184,944 $189,568
<br />Insurance $5,114 $5,114 $5,242 $5,373 $5,507 $5,645 $5,786 $5,931 $6,079 $6,231
<br />Admin & Management $40,901 $40,901 $41,924 $42,972 $44,046 $45,147 $46,276 $47,433 $48,618 $49,834
<br />Utilities and Garbage $38,456 $38,456 $39,417 $40,403 $41,413 $42,448 $43,509 $44,597 $45,712 $46,855
<br />Repairs & Maint.$58,205 $58,205 $59,660 $61,152 $62,680 $64,247 $65,854 $67,500 $69,187 $70,917
<br />Marketing and Advertising $12,911 $12,911 $13,234 $13,565 $13,904 $14,251 $14,608 $14,973 $15,347 $15,731
<br />Subtotal
<br />NOI Before Taxes and Reserves $425,524 $554,928 $568,801 $583,021 $597,596 $612,536 $627,850 $643,546 $659,634 $676,125
<br />Less Estimated Taxes 92,340 92,340 95,110 97,964 100,902 103,929 107,047 110,259 113,567 116,974
<br />Less Required Reserves $24,868 $24,868 $25,490 $26,127 $26,780 $27,450 $28,136 $28,839 $29,560 $30,299
<br />NOI Available for Debt Service $308,316 $437,720 $448,201 $458,930 $469,914 $481,157 $492,666 $504,448 $516,508 $528,852
<br />Development Costs ($8,274,950)
<br />1st Mortgage Debt Service (1.20 DCR, 5.5%, 30 yrs)$5,353,606 $294,448 $364,766 $364,766 $364,766 $364,766 $364,766 $364,766 $364,766 $364,766 $364,766
<br />Equity $2,921,344
<br />Net Cash Flow ($2,921,344)$13,868 $72,953 $83,435 $94,164 $105,147 $116,391 $127,900 $139,681 $151,741 $164,086
<br />DCR - 1st Mortgage 1.05 1.20 1.23 1.26 1.29 1.32 1.35 1.38 1.42 1.45
<br />SOURCES Total %
<br />Required Equity $1,791,963 22%
<br />Serviceable Debt $6,482,987 78%
<br />Total $8,274,950 100%
<br />RETURN MEASURES Total
<br />Development Costs $8,274,950
<br />Stabilized NOI $530,060
<br />Return on Cost 6.41%
<br />Return on Equity 9.92%
<br />IRR 15.8%
<br />Targeted Return on Cost 6.50%
<br />GAP $120,188
<br />September 11, 2019, Work Session – Item 1
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