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<br />ATTACHMENT F <br /> <br />Financial Analysis <br /> <br /> <br />The Pro-Forma for Alder Park Apartments (below) shows three key reasons that the project would not <br />be built without MUPTE. First, the debt coverage ratio (Net Operating Income (NOI) divided by debt <br />service) is 1.07, below the amount needed to qualify for conventional financing. (The common bank <br />preference is for 1.25 or higher.) Second, the perceived risk is high demonstrated by the Cash on Cash <br />return (Cash Flow divided by the equity that is invested by the developer) well below the market- <br />expected 10% to 15% level. The Cash on Cash only reaches 4% by year 10. Third, the project <br />valuation is below the amount needed to qualify for conventional financing. (The value is determined <br />by NOI divided by the capitalization rate.) At project stabilization, the projected value of the property is <br />$2.5 million. The total cost of the project is $2.6 million. At 75% loan to value, the project needs to be <br />valued over $2.7 million to qualify for $2.04 million in bank debt. <br /> <br />Sources <br /> <br />Total Cost <br /> <br />EQ$ 575,00022% <br /> <br />Conventional Debt$ 2,040,000 78% <br /> <br />Total project$ 2,615,000 <br /> <br />Pro-Forma <br /> <br />Without MUPTEYear 1Year 2Year 10 <br /> <br /> <br />Rent Income$ 248,400 $ 250,884 $ 271,671 <br /> <br /> <br /> - Vacancy (5%)$ 12,420$ 12,544$ 13,584 <br /> <br /> = Effective Gross Rent$ 235,980 $ 238,340 $ 258,088 <br /> <br /> - Operating Exp (25%)$ 58,995$ 62,721$ 67,918 <br /> <br /> <br /> = NOI$ 176,985 $ 175,619 $ 190,170 <br /> <br /> - Debt Service$ 165,291 $ 165,291 $ 165,291 <br /> <br /> <br /> = CF$ 11,694$ 10,328$ 24,879 <br /> <br />Cash on Cash Return 2%2%4% <br /> <br />Value$ 2,528,000$ 2,509,000$ 2,717,000 <br /> <br /> <br />dsc 1.07 <br /> <br /> <br />The pro-forma uses conservative assumptions for property value growth and market assumptions for <br />vacancy and operating expenses. The model assumes that assessed property values increase by 2% per <br />year. The vacancy rate is assumed at 5% of rental income and operating expenses are estimated at 25% <br />of rental income, both standard assumptions in financial underwriting. The financial information is <br />based on projections prior to financing, tenanting, and construction. The cap rate was estimated at 7%. <br /> <br /> \\Cesrv500\cc support\CMO\2011 Council Agendas\M110725\S1107253.doc <br />