12-29--2020 JOINT FINANCE COMMITTEE PACKET

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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. Measuring project feasibility is typically accomplished by analyzing a combination of 1) projected rate of return – both annual and cumulative and 2) estimated debt coverage ratio (DCR). Rate of return analysis illustrates the projected return to the developer using the available cash flow after payment of operating expenses and debt as a measurement to the initial equity investment. Industry standards for development types indicate the level of investment a developer is willing to make based on projected returns from the project. Should the projected annual and cumulative returns fall below those standards, the project would require reduced level of equity participation and/or increased cash flow. Debt Coverage Ratio (DCR) is a calculation detailing the ratio by which operating income exceeds the debt 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. We reviewed the financial information as provided by the developer to assist with making the determination 1) that tax increment assistance is necessary and 2) what is an appropriate level of assistance. We analysed both the projected rate of return and debt coverage ratios using the available information. The level of debt financing the project can obtain and support is based on the net operating income (NOI). The annual lease and other (parking) revenues and operating expenses have been provided by the developer to project the NOI. 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, vacancy rates and annual revenue and operating expense inflators in order to understand the project performance. Adjustments made to those assumptions assist in understanding potential impact on project performance and what a required level of assistance may be. To understand viability of the project and need for public assistance, we provided a sensitivity analysis to the proformas with adjustments made to the total project costs (land acquisition) and funding sources, as well as annual lease rates. The property was previously purchased for redevelopment in 2014. Included in the total development costs is an acquisition price of $1,780,000 (approx. $10,000/unit). A per unit value land sale assumption is typically subject to market and condition of the site, post-redevelopment, and what can be supported by the development. An appraisal can also assist with determining purchase price. The developer has included as a funding source the value of the land as equity for the project. All other assumptions remaining the same, reducing the purchase price and corresponding equity amount, subject to market, is expected to positively impact the projected rates of return. However, it would not impact debt coverage or eliminate the need for public assistance. Upon review of the annual cash flow performance, adjusting the projected lease rates through an increase would result in additional cash flow that provides both higher debt coverage ratio and rate of return. Realizing these adjustments is subject to market conditions and what the project could command for rents. Other factors that may impact project feasibility include review of the City’s current TIF policy and implications to the proforma assumptions. The maximum amount of assistance that could be provided for the project following the policy guidelines is 15 years. The developer has requested 26 years of assistance with a letter of interest from its potential lender indicating 90% of the tax increment revenues over 26 years is needed to support debt service. Also related to policy guidelines is the requirement of owner cash equity of 10%. The developer’s level of equity as proposed is 20% and is a combination of land, cash and deferred developer fee. The City commissioned a Comprehensive Housing Market Study Update in 2018. At that time the study identified a potential demand for approximately 864 new housing units through 2025. There was also strong demand for additional market rate (172 units).