Item 6: Resolution Approving MUPTE for Park Place Apartments

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ATTACHMENT E Financial Analysis The Pro-Forma for Park Place Apartments (below) shows three key reasons that the project would not be built without MUPTE. First, the debt coverage ratio (Net Operating Income (NOI) divided by debt service) is 1.12, below the amount needed to qualify for conventional financing. (The common bank preference is for 1.25 or higher.) Second, the perceived risk is high demonstrated by the Cash on Cash return (Cash Flow divided by the equity that is invested by the developer) well below the market- expected 10% to 15% level. The Cash on Cash only reaches 3% by year 10. Third, the project valuation is below the amount needed to qualify for conventional financing. (The value is determined by NOI divided by the capitalization rate.) At project stabilization, the projected value of the property is $2.5 million. The loan to value would be 91%, instead of 75% or lower needed to qualify for bank financing. Sources EQ$ 1,473,160 39% Conventional Debt$ 2,293,359 61% Total project$ 3,766,519 The City sold the property to the developer for $1 million - $700,000 cash and $300,000 on a note to be repaid upon reaching 14% return. For purposes of this analysis, the $300,000 is included as part of the equity. Pro-Forma Without MUPTEYear 1Year 2Year 10 Rent Income$ 269,568 $ 272,264 $ 294,823 - Vacancy (5%)$ 13,478$ 13,613$ 14,741 = Effective Gross Rent$ 256,090 $ 258,650 $ 280,081 - Operating Exp (25%)$ 67,392$ 68,066$ 73,706 = NOI$ 188,698 $ 190,585 $ 206,376 - Debt Service$ 168,999 $ 168,999 $ 168,999 = CF$ 19,699$ 21,586$ 37,377 Cash on Cash Return 1%1%3% Value$ 2,516,000$ 2,541,000$ 2,752,000 dsc 1.12 The pro-forma uses conservative assumptions for property value growth and market assumptions for vacancy and operating expenses. The model assumes that assessed property values increase by 2% per S:\CMO\2012 Council Agendas\M120123\S1201236.doc