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based on a recent comparable student housing project financed by Fannie Mae and on the hedge
<br />needed to account for estimating a rate two years from now. Banking industry representatives on
<br />the City’s Loan Advisory Committee also confirmed that the interest rate assumption is
<br />reasonable.
<br />
<br />Return & Value
<br />Without the MUPTE savings, the year 1 return on equity is forecasted to be 6% (Cash on Cash).
<br />The projected market value for the completed project is $87.6 million, as determined by the Net
<br />Operating Income (NOI) divided by the capitalization rate. The estimated capitalization rate is
<br />7.25% based on information from a local appraiser who indicated an acceptable range up to and
<br />including 7.5%.
<br />
<br />ANALYSIS
<br />Although the without MUPTE pro-forma seems to qualify for debt (with adequate debt coverage
<br />ratio of 1.35 and loan-to-value of 71%), the project lacks the ability to attract the needed equity.
<br />The proposed project will require the investor to assume some risk from the major
<br />redevelopment costs associated with the site and from the rate of absorption of the large number
<br />of proposed units brought into the local student housing market. Capstone has indicated that
<br />their primary investor will require a minimum return of 9%. Without the MUPTE savings, the
<br />project generates a 6% return, which is insufficient to attract the required $27 million equity
<br />investment. The Cash on Cash only reaches 8% by year 10 in the absence of the MUPTE.
<br />
<br />
<br />Pro-Forma With The MUPTE
<br />
<br />
<br />With MUPTEYear 1Year 2Year 10
<br />
<br />
<br />Income$ 9,946,200$ 10,045,700$ 10,878,100
<br />
<br /> - Vacancy (6%)$ 602,400 $ 608,400 $ 658,800
<br />
<br /> = Effective Gross Rent$ 9,343,800$ 9,437,300$ 10,219,300
<br />
<br />
<br /> - Operating Exp (32%)$ 2,990,000$ 3,019,900$ 3,270,100
<br />
<br /> - Property Tax
<br />$ (846,000)$ (871,400)$ (1,103,700)
<br />
<br />(saved by MUPTE)
<br />
<br /> = NOI$ 7,199,800$ 7,288,800$ 8,052,900
<br />
<br /> - Debt Service$ 4,699,800$ 4,699,800$ 4,699,800
<br />
<br />
<br /> = CF$ 2,500,000$ 2,589,000$ 3,353,100
<br />
<br />Cash on Cash Return 9%10%12%
<br />
<br />
<br />Value$ 99,308,000$ 100,535,000$ 111,074,000
<br />
<br />DCR1.53
<br />
<br />
<br />The pro-forma above shows that the project improves with the MUPTE. The Cash on Cash
<br />return reaches 9% in year 1 and 12% by year 10, consistent with long-term expectations for
<br />multi-family housing investments. The project valuation is 62% loan to value.
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