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Presented at:APA Northeast Region 1 Conference

June 25, 2015

Financial Analysis for Planners 

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Outline

1.Introduction to Financial Analysis

2.Pro Forma Review and Hand Out

3.Case Studies

4.Question and Answer

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Financial Analysis: An Overview

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Financial Analysis

What:

• Way to measure the financial feasibility of a particular project or development concept.

Who:

• Planners, economic development professionals, public officials, developers, property owners…. everyone involved in the project.

Why:

• To determine if a project will be viable as planned or whether there are “gaps” that need to be addressed.

When:

• After a development concept has been created but before public investment or commitments have been made.

How:

• Its simple!

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Financial Analysis

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Back to Basics – Key Terms

Gross Income

• Total potential income from a property – all rental income

Effective Income

• Actual income from a property after subtracting vacancy and credit loss

Operating Expenses:

• Expenses related to operation (taxes, utilities, management, maintenance), but limited only to what the property owner pays

Net Operating Income (NOI):

• Effective income minus operating expenses

Debt Service Coverage Ratio:

• NOI/Debt service payment (i.e. ratio of net income to payment requirement) – it better be >1!!!

Internal Rate of Return:

• The implied interest rate the developer “earns” on his/her equity outlay

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Pro Forma Checklist

Project What is the development concept?

How much will it cost to purchase the property?

How much will construction cost?

Income Average rental rates

How much will the project sell for after 10 years?

Expenses What is the average vacancy rate?

Who will pay utilities, taxes and other charges

Debt Service How much of the project will be financed?

What is the interest rate?

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Pro Forma Example

Construction Construction Cost Units

·     50,000 SF Residential @$135/SF $4,171,500 40·     12,500 SF Restaurant @ $135/SF $1,687,500 1·         Site Work $600,000·         Total   $6,459,000

Total Construction $6,459,000Property Sale Price $45,000

General Assumptions 1-year construction periodTarget market - Urban PioneersAssume smaller units, mix of 1-2 bedroomNo Remediation Costs

Tip: Use assessed value as a proxy for sale price if

unknown.

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Pro Forma Example

Income

Residential Total Residential Units 40 Monthly Rent (SF) $1,500Total Monthly Rental Income $60,000Annual Rent Increase 3%Year 1 Gross Annual Income (Monthly x 12) $720,000

Commercial Total Commercial Units 1 Total Size (SF) 12,500 Annual Rent (SF) $15.00Annual Rent Increase 3%Year 1 Gross Annual Income $187,500Tip: Check

LoopNet or online listings to get

typical rent rates

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Pro Forma Example

Operating Expenses Year 0 Year 1Taxes (Residential) $2,196 $252,174Insurance (Residential) $5.50 per 1,000 of mortgage $0 $10,732Repairs & Maintenance (Residential) 3% Effective Gross Income $0 $20,052Management 5% Effective Gross Income $0 $41,775Utilities $0 $34,200

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Pro Forma ExampleDebt Service

A Project Cost (Land & Construction) $6,504,000B % Equity 40%C Equity Contribution (A x B) $2,601,600D Amount Financed for Construction (A - C) $3,902,400

Construction Period (Year 0)E Construction Rate 4.5%F Construction Period Interest (D x E) $175,608

Operation Period (Year 1+)G Loan Origination Fee % 1.5%H Loan Origination Fee (D x G) $58,536I Total Financial Costs (F + H) $234,144J % Financing of Financial Costs 60%K Amount Financed for Financial Costs (I x J) $140,486

L Interest Rate 6.0%M Term 30N Principal (Amount Financed = D + K) $4,042,886O Annual Debt Service Payment $293,711

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Pro Forma ExampleDebt Service

A Project Cost (Land & Construction) $6,504,000B % Equity 40%C Equity Contribution (A x B) $2,601,600D Amount Financed for Construction (A - C) $3,902,400

Construction Period (Year 0)E Construction Rate 4.5%F Construction Period Interest (D x E) $175,608

Operation Period (Year 1+)G Loan Origination Fee % 1.5%H Loan Origination Fee (D x G) $58,536I Total Financial Costs (F + H) $234,144J % Financing of Financial Costs 60%K Amount Financed for Financial Costs (I x J) $140,486

L Interest Rate 6.0%M Term 30N Principal (Amount Financed = D + K) $4,042,886O Annual Debt Service Payment $293,711

To figure out annual debt service payments using Excel:

Formula: PMT(Rate,Nper,PV)Rate: permanent financing interest rate (6%)Nper: number of payments or term (30)PV: present value or amount being mortgaged ($4,042,886)

Result: fixed debt service payments ($293,711)

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Pro Forma ExampleProject X Cash Flow Analysis

Year 0 Year 1 Year 2

Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$

-$ 907,500$ 934,725$

Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$

-$ 835,500$ 860,565$

Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$

(2,196)$ 476,568$ 490,865$

Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds

3,902,400$ (153,225)$ (293,711)$

Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$

Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$

Add: Income

Gross Income

Less: Vacancy and Credit Loss

Effective Income

Less: Operating Expenses

Net Operating IncomeTip: Take the

Cash Flow Analysis out to

Year 10

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Pro Forma Example

Project X Cash Flow AnalysisYear 0 Year 1 Year 2

Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$

-$ 907,500$ 934,725$

Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$

-$ 835,500$ 860,565$

Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$

(2,196)$ 476,568$ 490,865$

Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds

3,902,400$ (153,225)$ (293,711)$

Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$

Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$

Add: Inflow (Debt Service)

Less: Capital Outlays

Net Operating Income

Project X Cash Flow AnalysisYear 0 Year 1 Year 2

Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$

-$ 907,500$ 934,725$

Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$

-$ 835,500$ 860,565$

Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$

(2,196)$ 476,568$ 490,865$

Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds

3,902,400$ (153,225)$ (293,711)$

Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$

Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$

Add: Income

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Big Questions

Bank wants to know…will this project make enough money to repay the loan?

Developer wants to know… will this project

make me enough money that it is worth

the risk?

What is the debt service coverage ratio?

What is the internal rate of return?

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Bank – Debt Service Coverage Ratio

What is the debt service coverage ratio?

= Net Operating Income Debt Service

Must be greater than 1.25

Debt Service Coverage Ratio

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Net Operating Income 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$

Debt Service 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$

Debt Service Coverage (1.25 min) 1.62 1.67 1.72 1.77 1.83 1.88 1.94 2.00 2.06 2.12

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Developer – Internal Rate of Return

What is the internal rate of return?

Year 10 - Sale of Project Net Operating Income Year 10 $621,813Cap Rate 8.0%Sale Value $7,772,658Sale Commission Rate 6.0%Sale Commission $466,359Remaining Principal on Debt $3,368,845Sale Proceeds $3,937,453

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Internal Rate of Return

Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Net Operating Income (2,196)$ 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$

Debt Service and Other 3,902,400$ (153,225)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ 3,643,741$

Capital Outlays (6,738,144)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Pre Tax Cash Flow (2,837,940)$ 323,343$ 197,153$ 211,879$ 227,047$ 242,670$ 258,761$ 275,335$ 292,407$ 309,990$ 4,265,554$

Interal Rate of Return (IRR) 11%

Developer – Internal Rate of Return

What is the internal rate of return?

Internal Rate of Return

Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Net Operating Income (2,196)$ 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$

Debt Service and Other 3,902,400$ (153,225)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ 3,643,741$

Capital Outlays (6,738,144)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Pre Tax Cash Flow (2,837,940)$ 323,343$ 197,153$ 211,879$ 227,047$ 242,670$ 258,761$ 275,335$ 292,407$ 309,990$ 4,265,554$

Interal Rate of Return (IRR) 11%

IRR = 11%

Don’t retreat!Reload!

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The Numbers Don’t Work–What Now?

Consider different uses

Tax abatements

Tax credit programs

Grant programs for specific uses

Low interest loans

Loan terms – lower equity

contribution

Why Pro Formas Matter in the Planning Process…

Putting the Pro Forma to Work: Testing Project Feasibility• Master Plans• Site Specific Development• Funding

• Avoid Un-Buildable Projects

Applying the Pro Forma to Create Opportunity

The Grand Hotel…looking not so grand

A “grand” vision identified…

But would it work?

A “grand” result!

Vision:Downtown Hotel

Master Plan:56 units$120 / night60% occupancy

Reality:Viable project!

Location, programming & marketing key to success

It’s Not Always Good News…but Best to Know the Truth• City of Lockport• City of Binghamton• Steuben County

Vision:Waterfront Mixed Use

Master Plan:25 residential units and a single occupant restaurant

Reality:Low rate of return, Tax abatements needed

• Re-evaluate mix of uses

• Weigh pros and cons of making building taller, to accommodate more residential units

• Negotiate price of land purchase

• Research potential abatement and incentive programs, such as 421-m

Now What?

The Site Today

Future Vision

• Re-evaluate use

• Financing

• Tax abatements

Project to be further evaluated, with alternatives considered

Now What?

Potato Vodka DistilleryCraft farm distillery producing premium vodka made

with unused potatoes from Steuben County

Benefits• Direct and Indirect

Jobs

• Payments to Potato Farmers

• Tourism

But…• Numbers Don’t Add Up

• Grant funding from CFA

• Preferential financing

• Free or reduced rent

Pro Forma provided direction to County and stakeholders for future CFA application

Now What?

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Thank You

Michael N’dolo, CEcDVice President, Camoin Associatesmichael@camoinassociates.com518-899-2608 x103

www.camoinassociates.com/APA.aspx All files, including handouts, powerpoint and interactive spreadsheet:

Kimberly Baptiste, AICPBusiness Segment Manager, Bergmann Associateskbaptiste@BERGMANNPC.com585-232-5137 x323