8.1 SR 05-17-2021 - Laserfiche WebLink

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projected return to the applicant 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 applicant to assist with making the determination 1) that tax increment assistance is necessary and 2) what is an appropriate level of assistance. We analysed the financial information as provided by the applicant including total development costs as compared to operating income to estimate both the projected rate of return and debt coverage ratios. 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 applicant 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 applicant’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 (number of years and total amounts) may be. To understand viability of the project and need for an appropriate level of public assistance, we provided a sensitivity analysis to the proformas with adjustments made to the total project costs (including land acquisition, development and construction management fee and contingency) and corresponding funding sources, as well as projected annual lease rates and operating expenses. As stated earlier within the memo, the property was previously purchased for redevelopment in 2014 by Sun Rae Development, LLC. Sun Rae Development, LLC and Stonewood Development, LLC have entered into a purchase agreement contingent on receipt of 20 years of TIF for an estimated purchase price of $2,000,000. Included with the request for financial assistance were appraisals supporting the anticipated purchase price. All other financing and operating performance assumptions remaining the same, reducing the total development costs including potential purchase price and other related development costs is expected to positively impact the project performance and would reduce the level of public assistance that is necessary. However, the participants have indicated a reduced sale price is not possible and adjustments to any assumptions would not eliminate the need for public assistance. Upon review of the annual cash flow performance, increasing the projected lease rates beyond what is currently estimated would also result in additional cash flow that would provide both a higher debt coverage ratio and rate of return. Realizing these adjustments are all based on assumptions, and current market conditions support the projected lease rates. The purpose of the sensitivity analysis is to test the level of assistance that may be needed using those assumptions to understand if the recommended level of assistance could be consistent with the City’s policy objectives and less than what has been requested. Analysis also requires a balancing of existing market conditions with what the project could support. Conclusion The applicant has requested financial assistance related to redevelopment of the former Saxon site and subsequent construction of two 90-unit market rate apartment buildings. Through submission of the tax increment financing application and supporting financial information, the applicant has indicated that the project would not occur as proposed without financial assistance from the City due to below market debt coverage and rates of return. The applicant has provided documentation from a potential lender indicating financing for this project subject to: availability of sufficient equity such as cash, land or acceptable soft costs, appraisal, environmental and title for the property, and a minimum 20 year TIF equal or greater than 90% of the total tax estimate. The purchase agreement of $2,000,000 for sale of the property is contingent upon receipt of 20 years of tax increment assistance from the City to Stonewood Development, LLC. Included with the request for