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City of Elk River, Minnesota <br /> But For Analysis of Jackson Hills Residential Suites TIF Project <br /> March 24,2017 <br /> Page 6 <br /> seek additional revenue sources in order to pay its debt. Typical lending standards will require a DCR of significantly <br /> greater than 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected. <br /> Based on the provided information, financial assistance from the City will be necessary to provide sufficient annual <br /> cash flow to meet those minimum coverage requirements. Without assistance, the annual coverage is projected to <br /> be just at 1x upon project stabilization. <br /> Our review of the various operating proformas based on with assistance as paygo and, alternatively, with no <br /> assistance, provides a range of projected returns to the developer and are illustrated in the table below. It is <br /> important to note that certain assumptions were made based on the developer's provided information including the <br /> debt and equity amounts, lease rates for the apartments, vacancy rates and annual revenue and operating expense <br /> inflators in order to analyze the projected returns to the developer and overall project performance. Changes to <br /> those assumptions may have a significant impact on the actual performance of the project. The table below <br /> represents the projected returns to the developer and debt service ratios utilizing the developer's provided financial <br /> information including sources and uses of funds and operating proforma. <br /> Projected Performance Metrics With Assistance Without Assistance <br /> Internal Rate of Return 12.52% 4.84% <br /> Debt Service Coverage 1.16x 1.01xx <br /> Based on the information provided and the calculated returns and coverage, we assume without assistance the <br /> project would be infeasible due to the low debt service coverage. With assistance it is projected to provide a <br /> reasonable internal rate of return which may indicate that a reduction in assistance due to the application review is <br /> possible to stay within reasonable ranges. <br /> *calculated using stabilized net operating income and net project costs financed by the developer <br /> Prosect Financinq <br /> There are generally two ways in which assistance can be provided for most projects, either upfront or on a pay-as- <br /> you-go basis. With upfront financing, the City would finance a portion of the developer's initial project costs through <br /> the issuance of bonds or as an internal loan. Future tax increment would be collected by the City and used to pay <br /> debt service on the bonds or repayment of the internal loan. With pay-as-you-go financing, the developer would <br /> finance all project costs upfront and would be reimbursed over time for a portion of those costs as revenues are <br /> available. <br /> Pay-as-you-go-financing is generally more acceptable than upfront financing for the City because it shifts the risk for <br /> repayment to the developer. If tax increment revenues are less than originally projected, the developer receives less <br /> and therefore bears the risk of not being reimbursed the full amount of their financing. However, in some cases pay <br /> as you go financing may not be financially feasible. With bonds, the City would still need to make debt service <br />