7.2. HRSR 06-01-2020 - Laserfiche WebLink

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its “but for” finding and provide tax increment assistance. We recommend, however, that the City review the provided assumptions to consider if the project meets the but-for test and, if so, what an appropriate level and type of TIF assistance may be based on the information submitted by the developer. Following thorough evaluation of the project as provided allows the City to be prepared to make an informed “but-for” decision based on the likelihood of the project needing assistance, as well as the appropriate level of assistance. To complete this analysis, we reviewed the developer’s provided operating proforma and constructed similar ten-year project proformas, showing a result if the developer received the assistance as pay-as-you-go (reimbursement for TIF eligible costs) and showing a result if the developer did not receive assistance. Our analysis of the proformas included a review of the development budget, projected operating revenues and expenditures, and the project’s capacity to support annual debt service on outstanding debt. The purpose of evaluating the operating proformas is to understand the potential cash flow performance through initial development of the project and the annual operations of the project over a 10-year period to assist with determining if the project is financially feasible and would need public participation. Due to the financing structure that incorporates primarily tax credits and debt financing, we are not testing the developer’s projected investment returns like we would for a privately financed for-profit project. Instead we are reviewing the project proforma that includes upfront sources and uses and annual cash flow to assist with making the determination that 1) tax increment assistance is necessary and 2) an appropriate level of assistance. The amount of financing available for the project is based on net operating income. Net operating income is revenues less operating expenses. The annual revenues (rents) as included in the proforma are lower than a market rate project and using current rent and income levels would fall below 50% of AMI. As a result, under the current financing structure, additional annual cash flow would be necessary to obtain a level of debt financing necessary to fund all project costs. The developer has identified tax increment pledged from the City as a method of providing the additional cash flow revenues required to achieve financial feasibility. 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 1.0 as a measure of cushion in the event actual revenues and expenses are different than projected. The developer’s operating proforma with tax increment assistance includes a 1.12x DCR, which is the minimum level generally required for this type of project. Our review of the operating proformas based on with assistance as pay-as-you-go and with no assistance provides the range of financial feasibility for this project and what the estimated gap would be without assistance. It is important to note that certain assumptions were made based on the developer’s provided information and market industry standards for annual lease rates at the targeted income levels, vacancy rates and annual revenue and operating expense inflators in order to analyze the project performance. Adjustments were made to those assumptions to understand the potential impact on the project performance and required need for and level of assistance. To understand viability of the project and need for public assistance, we provided a sensitivity analysis to the proformas with adjustments made to the funding sources and annual operating revenues and expenses. Increases in the projected lease rates or decreases in operating expenses may result in similar returns and DCR calculations as would be through providing tax increment assistance. The developer’s proforma includes 100% of the units at or less than approximately 50% of the AMI. To qualify as a housing TIF District, 20% of the units would need to be at 50% AMI or 40% of the units at 60% AMI. Housing Credit (LIHTC) properties must be rented only to families whose income is at or less than 60 percent of the area median income. Tenants’ rent payments are limited to 30 percent of their income. Without annual tax increment financing revenues and developer-provided assumptions, the project is not projected to be viable at the current rent levels. The annual revenues would not be sufficient to support the level of debt necessary for the project to proceed. However, increasing the rents to meet the 60% AMI threshold is projected to make it a viable project and would reduce the level and/or need for tax increment as the revenues would be increased to a level that could support repayment of the required debt levels.