8.1. SR 10-21-2013 - Laserfiche WebLink

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City of Elk River, Minnesota Preliminary Financial Analysis of Blackhawk Woods TIF Application 10/03/2013 Page 8 The second step in calculating the return to the Developer is to determine if the operating revenues and expenses are reasonable. • The Developer proposes average rental rates of $632 per month for the one-bedroom units and $895 per month for the two bedroom units. The rental rates will be limited based on the requirements of the Tax Credit program and tax increment statutes, assuming tax increment financing is provided to the project • The Developer is assuming operating expenses related to administration, utilities/trash, operations & maintenance, real estate taxes, insurance, and replacement reserves. The third step in performing an internal rate of return analysis is to assume a hypothetical sale of the asset at the end of the pro forma review period, which in this case is 10 years. The use of a hypothetical sale in this analysis is only for purposes of calculating the potential return to the Developer, and is by no means indicative of the likelihood of a sale in Year 10. In order to accurately perform the return analysis all assets have to be converted to a cash position at the end of the pro forma, in order to calculate the return on the initial equity investment. The Developer has indicated they intend to own and lease the building for an extended term greater than the 10 years we analyzed in calculating the return. For the purpose of accounting for the value of the asset in year 10 of the operating pro forma, we used a capitalization rate of 6.5%to determine the development value. The table below shows the result of our pro forma analysis based on the project costs and operating information provided by the Developer. Base Pro Forma With TIF Without TIF Assistance Assistance Estimated Leveraged IRR 17.90% 3.90% There is no set IRR benchmark that dictates whether a project needs TIF assistance or not. There are general market indicators that determine a project should be"doable"with a 10-year average return of 10-20%. However this is only an indicator and may or may not apply for each individual project, especially in today's market, and there may be other factors impacting the developer's ability to proceed. The developer has stated that the project will not occur without TIF assistance. Therefore, the City should view the IRR calculations as one factor in arriving at a decision for this particular project. An additional measure of project feasibility is the Debt Coverage Ratio (DCR), which is a calculation detailing the ratio by which operating income exceeds the debt-service payments for the project. If the DCR is greater than 1.0 it indicates the project has operating income that is greater than the debt-service payment by some margin; conversely if the DCR is less than 1.0 it indicates the project is incapable of meeting its debt-service payment and would need to seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of greater than