+ lihtc nuts & bolts budgets and feasibility. + budgets and feasibility operating and...
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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.
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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%.
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
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.
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Development Budget
Conventional Financing
Tax-Exempt Bonds (VHDA)
Taxable Bonds (VHDA)
HOME or CDBG (VDHCD and localities)
USDA
FHLB of Atlanta
Local governments
PHAs
Private sources
+Budgets and FeasibilityThe Development Budget
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
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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.
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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.
+Budgets and FeasibilityThe Operating Budget
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
+Budgets and FeasibilityThe Operating Budget
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)
+Budgets and FeasibilityThe Operating Budget
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.
+Budgets and FeasibilityThe Operating Budget
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%