construction risk financing
Post on 24-May-2015
188 Views
Preview:
DESCRIPTION
TRANSCRIPT
Risk Financing of a Multi-unit Retirement
Residence Project
Construction options for building affordable housing for
seniors
Alan McCafferty
December 2009
Executive Summary
The following presentation is the result of a report designed to offer
insight into the risks and financing options required to build
affordable housing for a retiring or 55+ demographic
Risks and Financing
Costs of housing should not exceed 30% of the net disposable income
Housing sale prices are fixed after a sale for a period of up to 2 years while
construction material cost both increase and decrease during the same period
Construction and operational risks are both present because a project takes
numerous years to fully develop (ie people are living in the community while its
still being built)
Assumptions1. Hyde Park is used as a sample construction project for checking financing and construction
assumptions
2. Sample costs based on initial Hyde Park build are used as the “Status Quo” option unless
otherwise noted
Background Information and Retirement Demographics
As stated by David Foot in his book entitled Boom, Bust & Echo demographics
explains about two thirds of everything (Foot, 2000, p. 8). The Canadian baby
boomers born between 1947 and 1966 represent almost one third of the
population. Their sheers numbers have a profound affect on the economy and will
significantly alter the retirement industry over the next thirty years.
“Percentage of Canadian Population Comprised of
Persons Aged 65 or Older, 1921 to 2005 and
Projections to 2056 (Turcotte & Schellenberg, 2007,
p. 11)“Median Age at Retirement, by Class of Worker, Canada,
1976 to 2005” (Turcotte & Schellenberg, 2007, p. 123)
Is there a need for affordable housing?
Affordable Housing1
A term used to describe dwelling units whose total housing costs are
deemed "affordable" and do not exceed 30% of before tax household
income. Although the term is often applied to rental housing that is
within the financial means of those in the lower income ranges of a
geographical area, the concept is applicable to both renters and
purchasers in all income ranges.
Acceptable Housing2
On the other hand acceptable housing is defined as housing that is
adequate, suitable, and affordable.
In 2001, 28.7% of senior households lived in housing which did not meet one
or more of the three housing standards
Of the 30%, 59% fall below the standard due to insufficient income
1. Source: Wikipedia: http://en.wikipedia.org/wiki/Affordable_housing
2. Jakubec, J. (2005). 2001 Census Housing Series: Issue 9 Revised, The Housing Conditions of Canada’s Seniors. Canadian Mortgage and
Housing Corporation. Socio-Economic Series 05-006. Ottawa, Ontario. Retrieved July 5, 2009, from
http://www.cmhcschl.gc.ca/odpub/pdf/63820.pdf
City of Ottawa Housing Continuum
10th 20th 30th 40th 50th 60th 70th 80th
$17,048 $30,055 $42,345 $54,273 $66,839 $80,311 $96,429 $117,834Household Income
Income Percentile
Average CMHC
Market Rent
Resale Housing
(MLS)
New Housing
Prices (MLS)
Ho
usin
g S
up
ply
Rental
Ownership
$426 $751 $1,059 $1,357 $1,671 $2,008 $2,411 $2,946
$56,606 $99,792 $140,599 $180,206 $221,931 $266,660 $320,180 $391,253
Initial Purchase Price Other Builders Initial Purchase Price
Builder’s Goal
• 1 Bedroom Suites
• 1 & 2 Bedroom Apartments
• 2 Bedroom Courtyard Homes
Bach Apt 2 Bed Apt
1 Bed Apt
3 Bed Apt
Condo Apt Row/Link Semi-detached
Single Detached
Single Detached
Row house
Condo Apt
City of Ottawa Definition of
Affordable Housing Prices
Financial Risk
Source: City of Ottawa Housing Continuum
Sample Construction Swim Lanes
2009 2010 2011 2012 2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Apartment 1 Construction
Apartment 2 Const Apartment 3A Const
Apart 3B Const
$6M
mortgage
begins
Mktg &
Sales
Phase 2: Marketing & Sales Phase 3: Marketing & Sales
Apt 1
Mktg &
Sales
Apt 2
Mktg &
Sales
Apt 3
Mktg &
Sales
All
Units
Sold
Monthly 1% (ramp + income)
Long-term monthly mortgage payments
1. Project
Launch
2. Budget
Updated
Site Plan
Submitted
1. Site Plan
Approved
2. Project
Tendered
3. Budget
Updated
Building
Permits
Budget Management
Sales
Launch
Establish
Financing
Need
Secure Financing
Repay
Financing
Residents
Move In
Ph 1
Rev Based
on 85%
Capacity
First
RevenueRamp Payment
Notes:
1. Except where noted swim lanes are for
Phase 2 only
2. Ramp payment is calculated in the sale of
units to owners
Residents
Move In
Ph 2
Residents
Move In
Ph 3A Residents
Move In
Ph 3B
Construction Risks
The table below identifies 4 risks associated with building a community
For financing purposes:
Units are sold the price is fixed until delivery which has been the status quo
Material cost can change significantly during this period in particular Lumber, Steel, Concrete, Drywall, Copper, Asphalt
The builder would look to adopt the required insurance only during the construction phases and should look for the appropriate insurance that can be phased so that:
Premiums will be kept to a minimum
Potential losses during the construction phases are addressed accordingly
Risk of Change in Material Cost
Overall Construction Costs versus Material Costs
Overall cost have increased 60%
Material cost vary significantly in any two year period
Material/hard costs represent 70 % of the total costs
Material Costs Analysis Using Hedging
Notes
1. Copper includes electrical and limited plumbing fixtures
2. Key material is 33% of the 70% of project hard costs
3. Cost of Capital = (1+0.07)2
Apartment 1
Construction Conclusions
1. Material hedging is only viable in a very volatile market
2. Fixed prices should be calculated with a projected cost of inflation
3. Project costs should be separated and monitored
Hard costs should be limited to 70% of the budget
Hard costs should be monitored as whole and forecasted based on
industry indexes if the material market is not volatile
Construction Budget Soft Costs: Should be 30% of overall budget
Builder’s Overhead and Profit: Part of the hard costs therefore
negotiate a split of take out financing and profit sharing as an option
Architect Fees: Part of the hard costs therefore negotiate a split of take
out financing and cost recovery bonus
Construction Risk Insurance Plan
1. Premium = Material Costs X Rates
2. Premium = Limits Selected and Underlying Premiums x Rates
3. Premium = Payroll/Sales x Rates x Experience
4. Premiums = Payroll x Rates x Experience Factor
2. Umbrella or Excess
(Depends on the project
requirements)
1. Builders
Insurance
3. General
Liability4. Workers
Compensation
Project Status Quo
• 1. $5k/project year
• 2. None
• 3. $5k/year
• 4. Not Released
Operational Risks
The table below identifies the 4 main operational risks that
management or a management company will need to address
For financing purposes management would look to adopt a modular
insurance plan that addresses the needs as they arrive yet can be
adjusted independently if required
Proforma Statement of Financial Position
NOTES:
1. Project is a Not For Profit
2. Capital assets are recorded at cost and depreciated using straight-line method
3. Promotion, and marketing costs start six month prior to opening and continue at the same rate for six months then decrease proportionately to the occupancy rate
4. Financial forecasts are based on conservative estimates and represent 50% slower ramp up time then observed in similar bui ldings
5. Reserve Fund Contribution is the proportional amount for the Building, Site Works and Water System Funds.
Risk Financing Options
Notes:
1. Business interruption is equal to 3 months of revenue in order to repair
the damage, place residents in temporary housing or offset the loss of
key business personnel
2. General Liability Premium = Payroll/Sales x Rates x Experience
3. Property is equal to 80% of the construction costs this represents the
hard costs and 10 to 15% new soft costs
4. Professional Liability assumes up to 4 people
Immanuel House Insurance Landscape
Pro
pe
rty I
ns
ura
nc
e =
$2
0M
Business
Interruption
Primary
Insurance = $1M
Business
Interruption
Excess
Insurance = $2M
General Liability
Insurance = $1M
Professional
Liability
Insurance = $2M
Umbrella Liability Insurance = $3M
to offset risk of injuries in the
community centre and theatres
etc…
Note: Project is not built therefore there is not Status Quo at this time
Recommendations
Conclusion
Building affordable housing for the 20th to 40th percentile of the housing
continuum includes both risks and financing challenges
Recommendations
Traditional construction model is very difficult to fit into this model
If the builder is active for all phase then Umbrella Insurance is required
to offset risks between phases and once operations start
Material hedge is only viable in a volatile market
Business interruption insurance has a higher weight than usual because
of the age of the clients
Keep the construction and operations separate even if the phases
overlap
top related