+ LIHTC Nuts & Bolts Budgets and Feasibility. + Budgets and Feasibility Operating and Development...

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LIHTC Nuts & BoltsBudgets and Feasibility

+Budgets and FeasibilityOperating and Development

Two key components in determining financial feasibility:

Development Budget – includes all of the costs necessary to construct a project and all of the funding sources needed to pay for these costs.

Operating Budget – reflects the income a property is expected to earn less all of the ongoing operating costs and loan payments – what is left is cash flow.

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The Development Budget

+Budgets and FeasibilityThe Development Budget

Refer to the LIHTC application provided and check the following:Pages 18, 19, 19A, and 20 – Development UsesPages 21 and 22 – Development Sources

A Development Budget format, as with this one, should include all of the categories of expenses necessary to construct a project.

An electronic format allows quick changes as projected costs change – and costs will change.


Cost Categories include: Acquisition - land and building Construction “hard costs”

Site Work Rehabilitation / New Construction General Conditions, Overhead, and Profit

Contingency Architect and Engineer Fees Interim Costs – construction period costs like taxes /

insurance Construction and permanent financing fees and expenses Professional reports and other soft costs Syndication costs Developers fees Reserves


Construction Costs – also known as “hard” costs – categories include:

Off-site work Site-work Demolition / Abatement New Construction Rehabilitation General Requirements, Overhead, and Profit Bonding / Letter of Credit Appliances / FFE

Costs should get more precise over time – initially based on estimates but eventually based on a contract.

Initially expressed as $/unit or $/SF.


Architect and Engineering – includes fees paid to architects and engineers for building and site design, construction supervision, and testing.

Initially may be estimated, but eventually finalized in a contract.

Often estimated as percentage of construction costs: 4%-8%.


Interim Costs are non-construction costs incurred during the construction period, and include: Construction interest Construction loan fees Inspection fees Taxes Insurance

Calculating construction loan interest is important as this is not a fixed expense, but varies based on the length of time a loan is outstanding and the loan balance over the loan period.


Soft costs are project-related but not directly related to construction like: Legal – only legal expenses related to construction

financing are basis-eligible. Accounting – includes, at least, a cost audit at the end of

the project – the cost certification Consultants Tax credit reservation / application fees Syndication fees – costs of forming the ownership entity Title, survey, and recordation fees Due diligence costs – market study, appraisal, and Phase I

ESA


Financing fees and expenses are the costs of obtaining permanent financing including: Points (on permanent financing) Closing costs (for permanent financing) Credit enhancement fees

Developer’s Fee is intended to compensate the developer for staff time, entrepreneurial effort, and risk – amount is limited by project circumstances in the LIHTC application.


Acquisition costs reflect the cost of purchasing land on which to build a project and/or the cost of a building or buildings to be rehabilitated.

Land and building costs should be separated in a budget – for tax credit and, later, tax reasons.

Contingency is an allowance intended to covers the unknown – may be required by lenders / funders.


Reserves are funds set-aside in the development budget to cover specific costs or risks:

Lease-up expenses. Operating losses. Replacement of capital assets. Debt service payments. Rent subsidies.

Reserves will required by lenders and investors.


Financing falls into different categories depending on the stage of the development process and the need that the financing fills.

Some of the different types of financing include: Predevelopment – for costs associated with the planning of a

construction project Construction – short-term financing for construction-period

expenses. Permanent (aka Take Out Loan) – long-term financing to

cover period of indebtedness of note.


Different types of financing (continued): Bridge – temporary or interim loan made between a

short-term (construction) and permanent financing. Also used to bridge between extended equity pay-in

Gap – additional funds necessary for completion of construction or purchase of property. Fills a“gap” between equity and debt.

Mini Perm – a construction loan that rolls into a short-term (usually five years or less) permanent loan


Financing consists primarily of grants and loans Grant – normally funds given by a public entity

for a particular project - funds may have conditions.

Loan – money lent with conditions: Amortizing – payment of debt in regular installments of

principal and interest Deferred – payment made at a future date Forgivable – after a period of time or condition is met,

debt is wiped clean Interest – amount or percentage of money charged for

use of a principal sum of money Term – maturity or period of time from beginning to end

of a payment of a loan


Equity is funding provided by the owner of a project.

Equity includes: Owner’s cash down payment. Equity from tax credits.

Loans are usually secured to ensure that the conditions of indebtedness are met.

Security is - real or personal property pledged to help guarantee an amount of indebtedness


Types of security and some security terms are: First or Primary Position: Interest in property whereby the

security is guaranteed by the value of the property and no other rights to property exist

Subordinate: Interest in property which may take a second or third position behind first

Title: Legal evidence that one has right of ownership to property

Lien: Legal instrument placing an encumbrance against property for money. All liens are encumbrances, but not all encumbrances are liens. Normally, a secured interest created by a mortgage

Other terms: balloon, accrued interest, grant structured as a loan, principal and interest deferral.


Loan underwriting ratios: Lenders look at a projects debt capacity in two ways:

Debt coverage ratioLoan to value ratio

Debt coverage ratio:Debt coverage ratio = NOI

Annual Debt Service

Loan to value ratio: Provides the lender with a measure of collateral coverage - value does not equal cost. Often will vary greatly for affordable housing – value usually much less than cost. LTV a factor for both the construction and the permanent lender.

Loan to value ratio = Loan amount Value


Conventional Financing

Tax-Exempt Bonds (VHDA)

Taxable Bonds (VHDA)

HOME or CDBG (VDHCD and localities)

USDA

FHLB of Atlanta

Local governments

PHAs

Private sources


Historic Tax Credits Provide a dollar for dollar reduction in taxes due to a taxing

body. Federal credit of 20% of the improvement cost of

certified historic buildings – used to offset federal taxes. Virginia credit of 25% of improvement cost – used to

offset VA taxes. Reduce LIHTC basis by an amount equal to the Federal

Historic credit. Available for properties listed on the Federal / State

registers of historic properties. Rehabilitation guided by Secretary of Interior’s Standards.

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The Operating Budget

+Budgets and FeasibilityThe Operating Budget

Income Sources relating to rental of low-income units – each

of these sources will require adjustment for utilities and number of bedrooms: Housing Choice Vouchers / HAP Tax Credit rents – 50% test and 60% test Other rental subsidy (USDA RD, ACC, and so on)

Sources not directly related to the rental of low-income units: Market rate units Commercial space Laundry Surcharges


Two income constraints: regulatory and market The Tax Credit rent calculations described are for the maximum

allowable rents. Market conditions may make these rents unattainable or

unaffordable.

Rent types: Gross rent includes all utilities Net rent includes no or limited utilities Gross rent minus utility allowance equals net rent

Utility allowance establishes figures for out-of-pocket utilities: Heating & Cooling Cooking Lights Hot water Water / Sewer


Vacancy – adjustments to potential income – there are two types of vacancy: Normal vacancy - a function of the area market and

the types of units available: sensitive to management. expressed as a percentage of gross income – 7%.

Lease-up vacancy - occurs at the end of construction as occupancy goes from empty to full: Lease-up reserve or equivalent reserve of cash from

development can help offset costs incurred during lease-up period.


Operating Expenses Costs that arise from operation of the project, rather than

from its development/construction. Expenses that are recurring and necessary for the proper

functioning of the project. Typical operating expenses include:

Taxes Insurance Water/Sewer Utilities Maintenance Management Other Replacement Reserves


Projecting operating appropriately expenses accurately is critical as there is little margin for error.

Rents are often fixed and regulated Cash flow is thin The ability to raise rents in future years is limited


Real Estate Taxes Tax paid to local government based on value of property Initial valuation can be pulled from an assessment, if

available, but an appraisal will provide market value. Insurance

An insurance agent can provide an estimate for insurance – insurance may include property, liability, workmen’s compensation, fidelity bonding, health, and auto.

May be able to estimate based on other projects. Ensure coverages are consistent with those required by

your lenders and partners.s


Water / Sewer: Can be estimated by the locality or a utility company

engineer based on typical usage for comparable facilities. Good design can reduce usage. Rates vary greatly from community to community.

Other utilities – may include the following: Electricity (not paid directly by residents – for common areas) Heat Cooking gas Electricity Trash


Maintenance – day-to-day items like: Redecorating – cleaning and painting when tenants move

out Grounds maintenance and supplies Snow removal General repairs:

Leaky faucets Broken windows Water heaters

Clarify amounts for salaries and staffing, materials, and for outside contracts.


Management: Management fee paid to firm responsible for overseeing

property management: Generally paid as percentage of collections – 5% to 10% Varies based on project size, complexity, and unit rents Does not include cost of site manager or maintenance people

– separate salary line items. Does not include cost of operating on-site office or manager’s

unit.

Other operating expenses: Accounting / legal Inspections / Compliance Ground rent


Replacement Reserve: Funds set aside to replace major capital items:

Roofs Water heaters Appliances Lot paving Generally $300 per unit per year (different for USDA RD)


Net Operating Income - cash available to pay all stakeholders (lenders get paid first – investors and owners last) - Calculated as follows:

Gross Income- Vacancy= Effective Gross Income- Expenses= Net Operating Income

Cash Flow: Cash flow = NOI less debt service payments to lenders. This is the owner’s return on their investment in real

estate.


Proforma Tips Real estate is a long-term investment. The pro forma

illustrates potential benefits five to ten years into the future.

Increase income and expenses annually to account for inflation Income 3% Expenses 4%

+ LIHTC Nuts & Bolts Budgets and Feasibility. + Budgets and Feasibility Operating and Development...

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