COOM ER C COMMERCIAL & INDUSTRIAL - Community · apply to most real estate development. In the second phase, we have detailed steps needed to complete a project. This will require

COMMERCIAL & INDUSTRIAL

TOOLKIT

Community Economic

Development Toolkit

REAL ESTATE SERIES

COMMERCIAL (OFFICE AND RETAIL) AND INDUSTRIAL FACILITY DEVELOPMENT

Disclaimer

This fact sheet was produced by the California Community Economic Development Association, in partnership with the Community Action Partnership National Office, as part of the U.S. Department of Health and Human Services, Office of Community Services. The “Community Economic Development” publication series is designed to increase the knowledge of processes for community economic development projects nationwide. The contents of this manual are presented as a matter of information only. Nothing herein should be construed as providing legal, tax, or financial advice. The materials referenced and the opinions expressed in this product do not necessarily reflect the position of the U.S. Department of Health and Human Services, Office of Community Services, and no official endorsements by that agency should be inferred.

Support for the Community Economic Development project and this toolkit is provided by the Department of Health and Human Services Administration for Children and Families, Office of Community Services (OCS), grant award number: 90ET0426/01.

Entire contents copyright © 2011 Community Action Partnership. All rights reserved.

CO M M U N I T Y ECO N O M I C D E V E LO P M E N T TO O L K I TS


TABLE OF CONTENTS

Use of this Guide: An Overview .........................................5

First Phase: Initial Development Steps ............................9

Second Phase: Detailed Development Process ......... 15

Financing Notes.................................................................... 23

Development Notes ............................................................ 29

PLANNING

ACTIVITIES

Ongoing administration

MONEY IMPLICATIONS

$$

SKILL/ ORGANIZATIONAL NEEDS

Asset Management

Property Management

HOw A PrOjECT PrOCEEDS

Mostprojects--whetherphysicaldevelopmentorbusinessdevelopment--followasimilarplanningtrack.Theygothroughplanningandpredevelopment,andthenfaceaGO/NOGOdecision.Eachstagecarriesfinancialimplicationsandrequireasetofskills.Thefollowingtablesummariesthestagesofaproject,andtheirfinancial(thesizeofthefinancialcommitmentissignifiedbythenumberofdollarsigns)andskillneeds.

As you read the following Tool Kit, keep in mind the Project Steps outlined below.

PLANNING

ACTIVITIES

Form project idea

Examine community plans

Do preliminary needs analysis

MONEY IMPLICATIONS

$


Planning

Community Outreach

Funding

Fund Raising

Legal

PREDEVELOPMENT

ACTIVITIES

In-depth analysis

Secure financing

Finalize project team

Attain site control

MONEY IMPLICATIONS

$$


Architectural/ Engineering coordination

DEVELOPMENTGo/No go decision

ACTIVITIES

Construction or start up

MONEY IMPLICATIONS

$$$$$


Project Management

Administrative


Use of this Guide: An Overview

COMMUNITY ECONOMIC DEVELOPMENT — rEAL ESTATE SErIES

6 Commercial (Office and Retail) and Industrial Facility Development

ThIs GuIDE shOuLD bE usED fOR ThE fOLLOwING TyPEs Of PROjEcTs1.Commercial(retailandoffice)andindustrial

facilitydevelopment(newconstructionoracquisitionrehabilitation),forbusinesstenantsthatcanreliablymakemonthlyspace(rental)expenses.

2.Developmentofashoppingcenterorofficebuildingtoattractbusinessactivitytoyourtargetedcommunity.

3.Developmentofanofficebuildingforyourcorporateheadquarters,programsandpossiblyothernon-profitservices.

4.Developmentofacommercialfacilityforusebyothernon-profitorcommunityprograms.

5.Developmentofajobtraining,health,childorseniorcenterandcharterschools(ifthetenantcanaffordmarketornearmarketrents).

6.Developmentofmanufacturingorwarehousespaceforneworexpandingbusinesses.

7. Developmentofabusinessincubator.NOTE:Incubatorstypicallyrelyonongoingsubsidiestolowercommonservicesandspacecostsincurredbythe‘incubated’businesses.Thesourceofsubsidy(ifneeded)mustbereliableifthesponsoringorganizationiswillingtotakethedevelopmentriskofowningandmanagingacommercialfacilityanditsassociatedfinancialobligations.

8.Tenantsmayincludeyourorganizationorprogramsthereof,newbusinessstartups,existingbusinessesseekingbetterspaceorlocation,smallretailestablishmentsorlargersupermarketsormanufacturingbusinesses.Eachwillhavedifferentlevelsofrisk.

9.Ifyourproposedtenantmixcanonlypayminimalrent,pleaserefertotheCommunityFacilityDevelopmentGuide.

INTRODucTIONThisguideisintendedforusebycommunity

developmentpractitionersconsideringbecomingdevelopersofcommercial(officeand/orretail)andindustrialfacilities.Commercial/industrialfacilityprojectsmayvaryintermsoftheuse,sizeandscopeoftheintendeduse;howeveryourrolewillnotchange.Youarethedeveloper,ownerandmanagerofthephysical

structurewhetherornotyourorganizationorprogramslocateinthefacility.Yourorganizationwillberesponsibletoensurethatdebtpaymentsarebeingmadeandbuildingoperatesreliablyandsuccessfully.Ifyourproposeddevelopmentcannotsupportongoingdebt,pleaserefertotheCommunityFacilityDevelopmentGuide.

Thisguidewillhelporganizationsunderstandthecomplexitiesofdevelopmentandthecommitmentneededtoproceed.Itwillalsodetailthedegreeofsupportneededbycommunity,localgovernment,andpublicandprivatesectorpartners.

Mostimportantly,thisguidewilltakeyouthroughthekeystepsinthedevelopmentprocess.Asnon-profitdevelopers,itisimportanttominimizeunnecessarycosts.Toassistyou,wehavedividedthedevelopmentprocessintophases.Thefirstphasecanbeaccomplishedwithexistingstaffinterestedincommunitydevelopment.Stafftimemustbededicatedtoconductthepreliminaryworkrequiredtomakeasounddecisiononwhetherornottoinvestfundstotaketheprojectthroughanextensivedevelopmentprocess.Muchoftheinitialpreliminaryanalysisdescribesaprocessthat,oncelearned,couldapplytomostrealestatedevelopment.

Inthesecondphase,wehavedetailedstepsneededtocompleteaproject.Thiswillrequireyourorganizationtoinvestpredevelopmentfundingtoconductthenecessary“due-diligence”toensuretheprojectisfeasible.Thesecondphasewillalsodetailwhatneedstooccurtocompletedevelopment.

Projectsmightbedesignedtoprovideaddedbenefitsbyincluding“green”orotherenergy-efficiencymeasures.Projectscouldincorporateserviceprogramsandincludeaddedfeaturessuchaschildcarefacilities,learningcentersorlibraries.Mostoftheseusesmaynothavetheabilitytopayongoing“marketrents”andmayimpactthefeasibilityofyourproject.Theseaddedcommunitybenefitsmayincuradditionaldevelopmentcoststhatyouoryourpartnerswillneedtoconsider.

Forexperienceddevelopers,thisguidecouldalsobeusedasachecklisttoremindyouaboutkeyissuesandprovidearefresherontheprocessforthistypeofdevelopment.

Commercial/industrialprojectsrelyon

Commercial (Office and Retail) and Industrial Facility Development 7

thefacility’sabilitytogeneratethecashflowneededtoservicetheproject’sdebt.Sourcesofconventionalfinancingaresignificantlylessthansourcesforaffordablehousingdevelopment.NewMarketsTaxCreditsareavailableformanyoftheseprojectsbutgeneratelessequity(comparedtothe4%and9%LowIncomeHousingTaxCredits)sorelianceondebtfinancingishigherandrelianceonotherlocal,stateandfederalgrantsourcesisincreased.

Inaffordablehousingprojects,theabundanceofequityandgrantsourcesallowsprojectstokeeprentsatbelow-marketrates,creatinghighdemandfortheseaffordableunits.Commercial/industrialprojectsdonothavethisadvantage.Withfewersubsidysources,thesecommercialprojectsmustsurviveonthestrengthofitstenantsand(justasimportantly),localandregionaleconomicconditions.

Risksarehigherandittakesmorecreativitytostructurefinancing.Whenstructuringfinancing,weneedtodeterminemaximumdebtbasedonmarketrents,vacancies,operatingexpenses,etc.Weworkbackwardstodeterminetheamountofequityneeded.Atthispointanyadditionalequityreducestheneedfordebt,creatingafinancingcushionthatcanbeusedtolowerrents,subsidizeotherservices,orgenerateincomeforyourorganization.

Ifyourorganizationorproposedtenantneedsasubsidizedorbelowmarketrent,therewillbeaneedformoreequity.Thisguideincludessomeofthekeysourcesof“equity”andotherlowercostfinancingneededtocreateviable,successfulventuresthatwillbenefitbothyourorganizationandthecommunity.

Inmanycommunitiesitisdesirabletocreateprojectsthatsupportlocalbusinessstart-upsorincorporatenewstart-upsocialventures,butrememberleasingriskswillbegreaterunlesstheprojectsdebtisdecreasedaccordingly.

Commercialretailandofficeprojectsarecomplexbutarecontinuallybeingdevelopedbynonprofitcommunitydevelopmentorganizations.Yourtenant(whetheritisyourorganizationornot)mustbeabletoreliablypayitsshareoftherent.Astheowner,youareresponsibletocollectrental/leaseincomeandmakedebtpayments.Theamountofdebtthattheprojectcanreasonablyafforddeterminestheamountof“otherequity”needed.Thelowerthe

levelofdebt,thelowertherentscanbeandthelowertheleasingriskistoyou(thedeveloper).

Remember,youarethelandlord!Youmustmakesurethatthetenantsyouselectaresuccessfulandwillmakeleasepayments.Youmaywishtoaccesslocalbusinesstechnicalassistanceprogramstosupporttenantsandseekpartnershipswithlocalloanfundsthatcanprovideaccesstofinancingresources.Itisimportantthatyourtenantshaveaccesstohelpandotherfinancialresources.

Developmentisateameffort.Thisguidedescribesthedevelopmentteammembers,whatpartnersshouldbeincludedintheprocess,andidentifiesingredientsandstepsthatareessentialforasuccessfulproject.

ThIs GuIDE INcLuDEs ThE fOLLOwING sEcTIONs1.UseofthisGuide:Anoverviewofwhat

typesofcommercial/industrialfacilitydevelopmentprojectscanbedevelopedwithassistancefromthisguide.

2.FirstPhase:InitialDevelopmentSteps.Thissectionincludesthestepsneededforanorganizationtoclarifyitsdevelopmentconceptandtodetermineifaprojectispossible.Itexplainswhoyoushouldinitiallytalktoandwhatinformationyouwouldneedtodecidetoproceedwithyourproject.Thesearethestepsneededtoclarifywhatyouwanttodoandgatherthedataneededtoclearlyexplainyourprojectinthehopesofgarneringinterestbyprojectfundersandpartners.Inmanyways,thisisthebasicinformationneededtodevelopyourconceptpaper.Onceyoudecidetoproceed,wewillretracemanyoftheseactivitiestoincludegreaterdetailsneededforprojectandfinancingapprovals.

3.Go/NoGo:Thisisthepointwhereyouandyourorganizationwouldusethedatacollectedtodecideifyoushouldproceed.Ifyoudoproceed,youwillknowwhatresourcesorassistanceareneeded.ThisguidesuggestswaystokeepcostsminimalpriortotheGo/NoGodecision(mainresourcewillbestafftime).Thenextphaseentailsmoretimeandfinancialcommitmentsbyyourorganization.Youwillincurpredevelopmentexpenses(agreatportionwillbefundsusedforconsultantsthatwill


verifymanyofthedevelopmentassumptionssuchasmarketdemand,developmentcost,andappraisedvalue).

4.SecondPhase:DetailedDevelopmentProcess:Thesearethestepsthatoutlinethedevelopmentprocessandidentifykeydevelopmentstepsandimportantprojectresources.Thissectionwillprovideinsightintotheessentialstepsneededforthesuccessfulcompletionofyourproject.

5.Financing:Thissectionwillprovidedetailonthesourcesoffinancingandhowtheyareusedinthedevelopmentofaffordablehousing.

6.DevelopmentNotes:Thesearesome“tips”thatwehavecompiledfromexperienceddevelopersthathighlightimportantconsiderations.


First Phase: Initial Development Steps



Ifyouandyourorganizationdecidetoexplorethefeasibilityofdevelopingacommercialorindustrialproject,thissectionoutlineskeyitemsyouneedtoknowbeforespendingpredevelopmentfundsthatwillnotberecoveredunlesstheprojectiscompleted.Youwillneedtoinveststafftimetoinvestigateinitialfeasibility,butinthelongrun,itwillsavetimeandmoney.Itislikelythatyouwilllookatseveralprojectsbeforeonehastherightattributesneededforsuccess.Mostofthegeneraldatagatheredinthisprocesswillallowyoutocompleteaconceptpaperthatyourorganizationcanusetodecidewhetherornottoinvestthetimeandfinancialresourcestomoveforward.Itwillalsobeusedtogeneratesupportfromfuturefinancinganddevelopmentpartners.

1.Determinethemarketneedbytargetpopulation:Thefirststepistomakesurethereisaneedforyourfacilityandtheservicesorproductsyourtenantsareprovidinginthetargetedcommunity.Thisisyourinitialunderstandingofthescopeandneedsinyourcommunity.Thiscriticalespeciallyifyourprojectisseekingtoattractcertaintypesofbusinesseslackinginthecommunity.Remember,youarecompetingagainstthelocalmarket,soyouwillneedtounderstandwhoandwhereyourcompetingfacilitiesare.Finallyyoumustunderstandwhytenantswilllocate,stayandultimatelybecomesuccessfulinyourproject.Thiscaninitiallybeverifiedbyvarioussourcesincluding:

a.CommunityPlans

b.CommunityPlanningMeetings:Localbusinessorchamberofcommerce.

c.LocalGovernment

d.CommunityOrganizations:Businessdevelopmentassistanceorfinancingorganizations.

2.Istherelocalgovernmentfundingavailable?Localgovernmentfundingwillbeneededunlessthereareothersourcesofprojectequity.Governmentequityincludesgrantfundsordeferred/residualreceiptloansfromlocalgovernmentthatcouldbeanywherefrom25%to50%ofthetotaldevelopmentcosts.Deferred/residualreceiptloansare

structuredsothepaymentsarenotdueunlessthereisresidualcashflowthattheprojectcanaffordtopay.Additionally,theseloansareusuallyataverylowinterestrate.Ifyouarelookingtoprovidebelowmarketrentsorthetenant’sabilitytopayrentisunreliable,youwillneedtoincreaseanysourcesofequity.Insomecases,alocalitymightcommitfundingovertwobudgetperiods.

a.FundingSourcesinclude:

i.CDBG(CommunityDevelopmentBlockGrants):Federalfundspassedtolocalgovernmentsandcounties(above50,000populations).Forsmallerjurisdictions,countiesmaybethefundingentityandinsomeruralcitiesandcountiesthestatewillbetheentity.ThesearegrantfundsandcanbeusedforalltypesofCEDrealestatedevelopmenteffortsinlowandmoderateincomecommunities.Thefundsarecompetitiveandtraditionallyfundmanyongoingpublicsectorprogramsandinitiatives.

ii.RedevelopmentAgency:RedevelopmentAgency(RDA):Localredevelopmentagenciesgeneratetheirownfundsfromprojectareageneratedtaxrevenues.InCalifornia,aportionismandatedforlowandmoderateincomecommunities(projects).

b.Keydepartmentsthatadministerfundsinclude:

i.EconomicDevelopmentDepartment

ii.RedevelopmentAgency

iii.CommunityDevelopmentDept

Localgovernmentandfederalpass-throughfundingrequiresignificantlevelsofpublicbenefit,meaningthatthefundingisminimallytargetedtomeettheneedsoflowandmoderateincomeindividuals,familiesandcommunities.Themorepublicbenefityourprojectgeneratesthegreaterlikelihoodofsupport.

3.State,FederalandOtherFundingSources:Thesesourcesareneededtocomplement,augmentandsometimesreplacefundingfromthelocallevel.Thefundingwilllooksimilartolocalgovernmentfunding:residual

fIRST phASE: InITIAL dEvELopmEnT STEpS


receiptordeferredpaymentloans.Insomecasesitmaybeasubstitutesourceforlocalsupport;howeverthesesourcesvarysignificantlyfromstatetostate.Itisnotuncommontohavelocalsourcesaugmentedbystateorothersources.

a.FederalSources:Equity(SeeFundingSourcessectionfordetailsonthesesources)

i.USDepartmentofHealthandHumanServices,AdministrationforChildrenandFamilies,OfficeofCommunityServices(OCSCED):ThepurposeoftheCEDdiscretionarygrantprogramistopromoteandsupportprojectsthataddresseconomicself-sufficiencyforlow-incomepersonsanddistressedcommunitiestocreateemploymentandbusinessdevelopmentopportunities.

ii.USEconomicDevelopmentAdministration(EDA):PublicWorksandEconomicDevelopmentinvestmentshelpsupporttheconstructionorrehabilitationofessentialpublicinfrastructureandfacilitiesnecessarytogenerateorretainprivatesectorjobsandinvestments,attractprivatesectorcapital,andpromoteregionalcompetitiveness,includinginvestmentsthatexpandandupgradeinfrastructuretoattractnewindustry,supporttechnology-leddevelopment,redevelopbrownfieldsitesandprovideeco-industrialdevelopment.

iii.USDepartmentofAgriculture:Forruralmarkets,theUSDAhasacompetitivegrantprogramforfacilitydevelopment.

iv.CongressionalEarmarks:Yourcongressionalrepresentative(senatororcongressperson)willentertainrequestsforearmarksforyourproject(someactivelyuseearmarksfortheirconstituentsandsomedonot).

v.PrivateInvestment:NewMarketTaxCredits(NMTCs):ThecreditsareallocatedfromtheDepartmentofTreasurytoqualifiedlendingentitiesonacompetitivebasis(banks,loanfunds,localgovernmentsandsome

developmententitiesareeligible).Thesequalifiedentitieswillinturnallocatecreditstoprojectsthatmeetcertainlowandmoderateincomeguidelines(location)andcreatejobs.

b.FederalSources:Debt(SeeFundingSourcessectionformoredetail)

i.Conventional:Conventionalfinancingforcommercialprojectsisverytough.Itisimportanttolocatepotentiallendersandinsuretheyunderstandtheprojectandthedevelopmentteam(thenon-profitanditssupportteam).Smallerregionalbanksmayhaveacloserelationshipwithyouandsupportyoureffort.Yourdealmustbe“solid”.Therewillbesignificantweightputtothestrengthandcapacityofthedeveloper(experienceandbalancesheet)andasolidrepaymentsource(strongtenantsandstrongcashflow).

ii.NewMarketsTaxCredits:AnotherstructureforNMTCsaredebtproductscreatedbyfinancialinstitutionthatinternallypurchasestheNMTCsandusetheproceedstolowerinterestratesonconventionaldebtproducts.Theloansaregenerallyfor7yearsandrateswillbe2basispointslowerthatmarketrates.LoanswillbemadeinNMTCeligibleprojectsandlocations.

iii.OtherLendingInstitutionsandCommunityDevelopmentFinancialInstitutions(CDFIs):Theseloanfundsareusuallysupportedbythepublicandprivatesector.Thesearepooledfundsthattargetacertainindustryormarketandtheseinstitutionshavebecomeverystrongandsuccessfulintheirnichemarket.

iv.CDBG/Section108:Thelocalgovernmententitywouldprovideloanstoprojects.Thelocalgovernments108loanfundsaresecuredbyfutureCDBGgrantfunding,andtheloanmadetoyouissecuredbytheproject).TheloantermsaredeterminedlocallyanduseissimilartoCDBGrequirements.

v.USDepartmentofAgriculture:Forruralmarkets,theUSDAprovidesloansforthedevelopmentoffacilities.


vi.OwnerCarry-back/501c3BondFinancing:Ownersmaybewillingtocarry-backfinancingtomakethedealwork.Ifyou(oryourprograms)aretenantsthebuilding,this“value”andcanworkforyou.Theowner’sfinancingistaxexemptaddingastrongincentivetoprovidecarrybackfinancing.

c.OtherSources:Foundationandcorporationsmaywanttosupportanimportantlocalprojectandcanprovidegrantfunding(equity).SomeFederalHomeLoanBank(FHLB)regionalbankshavegrantsavailableforeconomicdevelopmentprojects.

d. ConfirmFundingCycle:Forallsources,makesureyourecognizethetimingforeachfundingcycle.The“art”inmanyofthesedevelopmentsishavingtherightapplicationreadyforeachofthefundingcycles.Sourcesmayhaverequirementsofpriorapprovalfromotherfunding.

e. ConfirmEligibility:Isyourorganizationeligibleforthetargetedassistance?Isyourlocationandprojecteligible?

Forallofthesepotentialsources,makesureyouknowthetimingforeachfundingcycleandknowwhenproposalsaredue.The“art”inmanyofthesedevelopmentsishavingtherightapplicationreadyforeachofthefundingcycles.Itisalsoveryimportantthatyouconfirmthatyourprojectiseligible.Somesourcesmayrequireapprovalfromotherfundingpriortobeingeligibletoapply.Isyourprojectintherightlocationanddoyoumeetalloftheorganizationaleligibilityrequirements?

4.LocatingaSite:Locatingasiteisakeystepandshouldbeinitiatedaboutthesametimeasyouresearchfundingresources.Whenlookingatasiteyouwillneedtoresearch:

a. Zoning/AllowableUse

b. Restrictions:Checkthedeedandplanningrestrictionsforthesite.

c. UseCompatibility:Istheprojectcompatiblewithneighboringuses?

d. Availability/Ownership:Isthesiteavailable?Ifithasbeenavailable,why?(Issuesincludecost,environmentalconcerns,developmentconstraints,etc.)

5.PreliminaryDevelopmentTeam:Theinformaldevelopmentteamistaskedtoinvestigateanddefinetheproject.Insomeinstancesthesamemembersmightparticipateinprojectdevelopment.Theteamwillrepresenttheorganizationanditsactivitiesmaybeboundbyboardororganizationalapprovals.Inthispreliminaryphase,yourorganizationistryingtominimizecostsbylookingforvolunteersandfriendstoprovideestimates.

a. ProjectManager:Theprojectmanagermightbeahiredprofessionaloramemberofmanagement.Themanagermusthaveadequatetimetoinvestigatetheproject.Ifthemanagerdoesnothavedevelopmentskillsorexperience,adevelopmentconsultant,interestedvolunteer,orboardmembershouldberecruitedtosupportandofferguidancetothemanager.

b. Architect/Contractor:Thearchitect/contractorcouldbeaboardmemberorfriendoftheorganizationwhocanprovidesomeinputandinsightintoprojectdesignanddevelopmentissues,andcanprovideroughcostestimates.Localcontactorscanalsoprovidearoughcostpersquarefootestimatebasedondesignanduse.

c. Consultant(Ifneededforfinancialstructuring,developmentandplanning):Atthisearlystagetheconsultantcouldbeavolunteer,boardmemberorsomeonewhomightbeinterestedinsupportingtheprojectandwouldhavedevelopmentandfinanceexperienceandskills.Iftheorganizationhasanexperiencedprojectmanager,adevelopmentconsultantwouldnotbeneeded.

d. Attorney:Attheoutset,certainlyintheplanningstage,youshouldconsultanattorney.Heorshemightalsobeaboardmember,butitisimportantthattheattorneyhaveexperienceinworkingwithSEC.501(c)(3)organizationsandinrealestatedevelopment.Thereareunusualtaxissuespresentedwhennon-profitsengageinfor-profitrealestatedevelopment.Also,therearemanylanduseissues(zoning,height/density/use,etc.)whichmaycallforlegalanalysis.


6.PreliminaryFeasibilityoftheProject:Nowthatyouknowtheresourcesareavailabletodevelopaprojectandyouhavetheteamtosupportyourefforts,thenextstepswillhelpyouclarifythescopeoftheprojectanddetermineworktasks.Bythefinalstepsyourorganizationshouldbeabletomakeaninformeddecisiontoproceedwiththeproject(ortoproceedbymeetingcertainconditions).

Remember,thisanalysisisforyoutodetermineifyoushouldproceedandifsounderwhatconditions.Anyissueorpotentialproblemsthatyouhaveidentifiedwillneedasolutiontoallowyoutocontinue.Thesestepsinclude:

a. Planning:

i.LocalPlans,GeneralPlan:Howistheintendedusereflectedinlocal/communityplans?Isitconsistentwiththegeneralplan?

ii.PreviousDevelopmentEfforts:Whathashappenedtotheproposedsite?Whyisitavailable?Hasanyoneelseattemptedsimilardevelopmentactivities?

b. People:Youmustidentifythesupportersandopposition.Whatwouldtheywanttoseeintheprojectifyouweretoproceed?Communitysupportisessential.Organized“NotinMyBackYard(NIMBY)”effortscanendorsignificantlydelayyourproject.Talkto:

i.LocalPlanningStaff

ii.LocalElectedOfficials

iii.Community(businessassociations,chamberofcommerce,neighborhoodcouncils,communityorganizationsandkeycommunityleaders)

c. PreliminaryDesign:Yourprojectteamandthedatagatheredwillenableyoutodeterminethefollowing:

i.Facilitysize,office/retailunitconfiguration

ii.Parking

iii.Amenities

iv.Density:Whatdensitiesareallowed?Whatmakessenseforyourcommunity?

v.LocalDesignStandards:Whatmustbe

includedindesign?

vi.FundingDesignRequirements:Whatdothefundingsourcesrequire?

d. PreliminaryFinancialFeasibility:Financialfeasibilityisthemostimportantstepinyourpreliminaryprojectanalysis.Hereyouwillbegintomakeadjustmentsbasedonresourcesandwhatyoucanaffordtodevelop.

Nowthatyouknowwhatyouarebuildingandwhere,thisisyourinitialattemptatdeterminingprojectcosts,sourcesoffinancingandultimatelytheoverallfeasibilityofyourproject.Yourlenderswillalwaysaskforsourcesanduses:whoispayingandwhataretheypayingfor.Ouranalyticalstepswilllookatuses(costs)firstandthenlookatwhatsourcesyouhavetopayforit.

i.Uses(Costs):Together,thetwofollowingcostitemswillequalyourproject’sdevelopmentcost.

1.HardCost/ConstructionCostEstimate:Basedonsquarefootageanduses,yourdevelopmentteamwillbeabletoestimateconstructionhardcosts(whatitcoststobuildtheproject).Youalsowillbeabletoestimatetheoffsitecosts(curbs,guttersandutilities).

2.SoftCostEstimate:Thesearealloftheothercoststhatarenotpartoftheactualconstruction.Thisincludessomeconsultants,reservesandfees.

ii.Sources:Thisisyourestimateofwhatfundingsourcesmightbeavailabletoyou,howmuchyoumaybeabletoobtainandwhatthefinancingtermsare.Sourceswillneedtomatchusesandanydebt(loans)mustbeabletoberepaidfromtheproject’scashflow.

Youshouldalsocheckthefundingrequirementsforthesesources.Doyouandtheprojectteamqualifyforthetaxcreditorfinancing?Doesyourprojectmeettherequirementsandfinancingguidelinesforallothersources?

Thisisyourpreliminaryanalysis,sobeCONSERVATIVE.Donotuse


lowerestimatesjusttobeeligibleforafundingsource.Ultimately,developmentexpenseswillusuallybehigherduetounforeseenevents.Additionalexpenseswillbehardertosupportafteryouhavealreadybeenapprovedataloweramount.

1.Debt:Themaximumconventionalloanalenderiswillingtoprovidetoaprojectisbasedonthecashflowgeneratedbytheproject.Foraconstructionloan,thiswouldbethemaximumloan(ultimately“taken-out”or“repaid”bythepermanentloan).Inmanyinstancestheconstructionlenderiswillingtoprovide“bridgefinancing”,e.g.,financingtobridgeotherfundssuchasCityfinancingortaxcreditequitythatwillnotfundduringconstruction.

Therearetwomeasuresusedbybanksandlendinginstitutionstodeterminethemaximumloantheywillprovideaproject.Thebankwillusetheloansizeequaltothelowerofthetwofollowingstandards.Theyare:

•Loantovalue(LTV)isaratio(percentage)usedbybankstodeterminethemaximumloanaprojectcouldreceivebasedonitscalculatedvalue.A75%LTVwouldmeanthatthemaximumloanforprojectvaluedat$1milliondollarprojectwouldbe$750,000.A75%LTVistypicalforprojects.

•DebtServiceCoverageRatio(DSCR)isaratioofwhatthemaximumloanforaprojectwouldbebasedonitsabilitytomakeloanpayments.ADSCRof1.20wouldmeanthataprojectwouldneedtotalincomepermonth(lessexpenses)tobegreaterthan120%ofthemonthlydebtpayment.Youwouldhave20%extracashavailableafteryoumakeyourmonthlypaymenttothebank.DSCRmightbeaslowas1.15insomeeconomicmarkets.

2.Equity:Includes“softdebt”fromgovernment.TheCDBG,RDA,EDA,HHS/OCSsourcesareequitygrantsormaybedebtalowinterestand/

orrepaidonadeferredbasis(whenthereiscashflow).Thisisincludedinequityandisgenerally“valued”asequitybytheappraiserand/orlendinginstitutiontodetermineloantovalue.Remember,moreequityisneededifthegoalistoreducerentstothetenants.

3.Gap:Thisistheadditionalamountforwhichyouhavenotbeenabletoidentifyasource.Asaresult,youwillneedtogobackandlocate“otherequity”sourcesorseekincreasedcommitments.Youmightalsolooktocutcostsbyreviewingmaterialsandamenities.Moresquarefootageorhigherrentscanalsobepartofyouranalysis.

7. SecuringPreliminarySupport:Basedonthismorein-depthanalysis,youwillneedtoloopbackandconductadditionalmeetingstoascertainthelevelofsupportandleveloffundingcommitmentsfromthesourcesnotedbelow.Thisisthephaseofworkwhereyourorganizationwillmaximizeitslocalcommunitysupport,politicalconnections,boardconnectionsandgoodwilltoobtaincommitmentfromkeysourcesoffinancing.Youwillneedsupportfrom:

a. OrganizationalSupport(Board,Staff)

b. LocalCommunity

c. LocalGovernment

d. FederalGovernment

e. Debt,Equity,andGapSources

GO/NO GO/MODIfy Thisisthepointwheretheorganizationcan

determineifitiswillingtospendthefundstostartprojectpredevelopment.Remember,tothispointhavecommittedsomestafftimeandincurredverylittleexpenses.Theinformationyouhavegatheredwillgiveyouanindicationofwhetherornotyouhaveafeasibleprojectthatyouwouldbewillingtoinvestpredevelopmentexpenseson.


Second Phase: Detailed Development

Process



SECond phASE: dETAILEd dEvELopmEnT pRoCESS

Nowtheworkbegins.Thefollowingstepswillhelpyouandyourdevelopmentteamandpartnersproceedthroughthedevelopmentprocesswiththeintentofclosingfinancinganddevelopingtheproject.Youwillneedatechnicallycompetentdevelopmentteamandpartnerswhowillconductthedetailedanalysisandwork.Projectdetailswillberesearchedandcompleted.Designswillbefinalized.Costswillbeconfirmed.Loansandgrantswillbeapprovedbylenders,publicandprivatesectorfunders.Agreementswillbeconsummated.Constructionwillstartandtheprojectwillbecompleted.

8.Predevelopment(RefineAssumptions)

a. SiteControl:Begintheprocesstogainsitecontrol.

i.LetterofIntent:Theletterofintent(LOI)isyourwrittenoffertothesellerthatoutlinesthetermsandconditionofthesale.Thisisdraftedwithyourbrokerorrealestatespecialistandwillincludeclausestoensureyourdepositisrefundableandthatthereisampletimetoconductthestudiesneededtoproceed.Theseprojectstakeanenormousamountoftime(negotiatingmultiplesourcesoffinancingwheremanyhavealongapprovalprocess).Itiscriticalthatampletimeisnegotiated.Ifthereappearstobestronginterestfromafundingsource,itmightbeprudenttoallowpaymentstobemadetotheowner(portionsofthedepositgoing“hard”).

ii.Negotiations:Siteacquisitionisanegotiationwithoffersandcounteroffers.Theactualsalespricewillusuallybedeterminedbytheappraisal(mostlocalgovernmentscannotpayforasiteabovetheappraisedvalue).Insomecaseswhentheappraisalislowerthantheselleriswillingtoaccept,othercostsbornebythesellermightbepaidbyyou.

b. SiteDueDiligence:Mostofthefollowingitemsarerequiredbylendersandinvestorsandwillrequirepredevelopmentfundstoengagethese

3rdpartystudies.

i. TitleReport

ii. Appraisal

iii. Soils

iv. Environmental

v. Seismic

vi. Flood

vii. Noise

viii.TrafficStudies

ix. HistoricandLocalPublicDevelopmentRequirements

c. Entitlement/Planning:Theplanningdepartmentwillconfirmthatyourprojectmeetsalllocalplanningrestrictions,codeandutilityeasementrequirements.

d. MarketAssumptions(MarketStudy):Themarketstudyisaveryimportantanalysisthatwillhelpyouassesstherisksofthisproject.Itisespeciallyimportantifyouarebuildingaretail/officeprojectandrelyingonattractingbusinessesandservicesintoanunderservedcommunity.Yourprojectiscompetingagainstthelocalmarketandyourscheduledleaserateswillbesomewhatdeterminedbythelocalmarket.Sitelocationisthekeytosuccessfortheseprojects.

Yourprojectmayhaveamarketadvantageifyourdebtislowenoughtoallowforbelowmarketleaserates.Othermarketadvantagesmightbetheservicesandresourcesprovidedtothetenant.Amajor“anchor”tenantintheproject(itmightbeyourorganization)isdesirableandcanfinanciallysupporttheprojectandallowforlowerleaseratesforbusinessesyouaregrowingorattracting.

Themarketanalysiswillprovideyouwithbothexpectedincomeandexpenses.Thisanalysiswillalsoincludecommonareaexpenses:Whatisthelocalmarketpayingandhowtherateiscalculated.

Theanalysiswilldeterminewhatincomeandexpensesareifthiswasaprojectdesignedtoattracttenantsinanopenmarket(withoutsubsidiesortargetedassistance).Thisisthedatathatthe


appraisalwillverifyforlenders.Ifyourorganizationalandprojectgoalistoprovidelowerleaseratesorifyourtenantsmaynotbeasstrongasdesired,youwillwanttodecreasetheamountofdebtandincreaseequitytooffsettheaddedrisk.

TenantCategories/Cash-flowImpact:Yourfacilitywillbedesignedtoserveaspecificmarketandtypeofbusiness.Takeacarefullookatyourtenantstodeterminetheircapacitytomakeongoingleasepayments.Mostfinancialunderwriterswilldeeplydiscountmanybusinessesthattraditionalcommunitydevelopmentorganizationssupportandattractfortheirprojects.Forthisreasonyoumustmakesureyourtenantshavethecapacityandfinancialrecordstomakeastrongcasetoyourlender.Accesstobusinesstechnicalresourcesisveryimportanttoyourtenantsandproject.

i. Micro-BusinessorIncubatorTenant:Bydefinition,thesebusinessesneedsubsidizedtechnicalassistanceandbusinesssupport.Cashflowandreliabilitytomakeleasepaymentsisuncertain

ii. SmallBusinessStartUp:Cashflowandreliabilitytomakeleasepaymentsisuncertain

iii. SmallBusiness(2yearsorless):Cashflowandreliabilitymakeleasepaymentsisuncertain.

iv. SmallBusiness:Annualbusinessfinancialstatementsmustbecarefullyreviewed.Lenderswillrequireahighvacancyrate(discountingcashflow).

v. BusinessExpansion:Annualbusinessfinancialstatementsmustbecarefullyreviewed

vi. Government:Manygovernmentofficesaretreatedasratedtenants.Beawarethatmanylocalgovernmentsareintenuousconditionsduetoourcurrenteconomicuncertainty.

vii.RatedTenant:Tenantsfinancialcapacityisunderwrittenbyaratingagencyandwillattesttoitsfinancialstability.Highlyratedtenantssuchassupermarketsandmajorcompanies

areeasilyunderwrittenbylenders.Thetenantcandemandbetterleaseratesorotherconcessions.

e. Design:Designandsiteplanworkshouldbegin.

f. ConfirmConstructionandOperatingAssumptions:Basedonthemoreformalplans,youwillbeabletoconfirmconstructioncosts.

g. Appraisal:Youmayneedtoengageanappraisertodeterminethesalespriceofthelandorbuilding.Ifitisnotabsolutelyneededitisacostthatcouldbeavoidedandbeincludedintheappraisalcommissionedbythelenders.Theappraisalwillbeneededifyouhavepredevelopmentfundsthataretobeusedforsiteacquisition(fundingfromanothersource,usuallylocalgovernment).

9.RefineDevelopmentTeam:Thisistheprojectdevelopmentteamwhowillclosethefinancingandbuildyourproject.Theteamwillconsistofprofessionalswhoarehiredtoassistinthecompletionoftheproject.Bidswillusuallybetakentodecideonkeyprojectparticipantssuchasthecontractorandengineer.

Itisincumbentonyoutodoyourduediligence(homework)toensurethatthepartieshavetheskills,experience,timeandfinancialcapacitytocompletethework.Youmayalsowanttotalktoyourlendingsources(publicandprivatesector)tomakesuretheteammembersmeettheirrequirements(licenseandbonding).Theymayalsohaverecommendationsandprovideinsightfrompastexperiences.Keymembersofyourteaminclude:

a. Architect:Willmovefromdesigntoworkingdrawingsandspecifications

b. Contractor:Yourlenderswillhavecertainbondingandinsurancerequirementsforthecontractor.

c. Engineer

d. Attorney:MakesuretheyhaveexperiencewithLIHTCs.

e. Accountant

f. EnergyConsultant:Especiallyifyouaretryingtomeetcertainenergyefficiencygoals.


g. GeneralPartners(OwnershipStructure):(ThisitemwillapplyonlyifyourprojectisusingNewMarketsTaxCreditsasasourceofequity.SeetheNewMarketsTaxCreditSection.)Theattorneywillstructurethelimitedpartnershipthatbringstheequityinvestor(buyerofthetaxcredits)intotheproject.Theinvestorbecomesthelimitedpartnerandyourorganizationwillbecomethemanaginggeneralpartner.Atthisearlystage,youwillwanttotalktoseveralinvestors.Allhavedifferentterms(howmuchandwhattheyrequirewhentheyleavethepartnershipin10years).

h. FundingSources:Thiswouldincludeallofthesourcesofdebtandequityneededintheproject.Thesesourcesmustinagreementabouttheproject;itscost,whoispayingforwhat,whenthefundingoccurs,thedevelopmenttimeframeandinthecaseofdebtandbridge-loans),whentheywillberepaid.

10.Financing

a. ReviewDebt,EquityandGapFinancingApplication:Eachsourcewillhavespecificrequirementsforapproval.Thereareseparatechecklistsofforms,documentsandstudiesthatareneededforeachlendersapproval.Beawarethatanyunforeseenconditionwilllikelytriggertheneedformoreinformationandmaycreateadditionalfinancingrequirementsorcontingencies.Alsonotethetimingrequirementsforthesourcesoffinancing,somemayrequireapriorcommitmentfromothersourcesbeforetheycanapproveorconsideryourapplication.

b. RefineDevelopmentProFormasbasedonfundingsourcerequirementsandconditions:Eachsourcewilldeterminethesizeoftheircommitmentsandtheconditionsoftheirfunding.Thereisapossibilitythatmanyoftheconditionswillnotbeinsyncwithothers,andtherewillbeaneedtonegotiateasolution.Inaddition,theloanamountswilltypicallybelessthananticipatedand/oradditionalfundsmayneed

tobesetasidetomeetunanticipatedconditions.Theremaybeaneedtolocateadditionalsourcesorrequestmorefunds.

c. CommissionAppraisal:Theappraisalisusuallycommissionedbythefirsttrustdeedlenderandmightbesharedbyotherparticipatinglendersandfundingsources.Makesureyouchecktoseehowthisprocesscouldbecombinedtosavecosts.Theappraiserwilldeterminean“asis”appraisal,thevalueuponcompletionofconstruction,andavalueuponlease-up.Ifyouhaveamixeduseproject,theywillneedtovalueeachsegmentanddetermineanoverallvalue(appraisalcostswillbehigher).

d. ObtainConditionalCommitments:Afterreviewoftheapplicationandunderwritingtheproject,thelenderswillmakea“conditionalcommitment”subjecttoanumberofitemsthatcanincludebutnotbelimitedto:appraisal,reviewofenvironmental,reviewofarchitecturaldesignandspecifications,approvalfromparticipatinglenders,approvalofrelatedentitlements,andconditionsasaresultofotherfindingsfrom3rdpartyreports.

11.SiteAcquisition:Duringthisprocess(preferablyearlyaspossible),youshouldhaveanapprovedletterofintent(purchaseagreement)andhaveopenedescrow.

12.ProjectEntitlements:Projectentitlementsinclude:

a. PreliminaryPlans:YourarchitectwillsubmitpreliminarydrawingstotheCityforinitialreview.TheCitywillnotechangesandotherrequirements

b. PlanCheck:Planreviewundertakenbytheplanningdepartment

c. DesignReview:Localorcommunityrevieworreviewbylender(s).

d. Building,Utility,PublicSafety,PublicWorksRequirements

e. CommunityInput/Approval

f. FinalizePlans,Specifications


g. FinalCityApproval(communityhearingsandapprovalfromtheLandUseandPlanningCommissionandfromtheCity(Council)):Youmustknowbeforehandthatapprovalislikely.Ifthereisopposition,youshouldbereadyto“proveyourcase”forprojectapproval.Thismayincludebringingabusloadofseniorsorsupportersandhavethemcallthecouncilorcommissionersoffices.

13. AdditionalConstructionLoanRequirements:Thesearethekeyitemsoutlinedbylendersasaconditionofclosing

a. FinalWorkingDrawings:Thisincludesdrawingsandspecifications

b. ConstructionContract:Lendersorinvestorsmayrequirecertaintypesofcontracts(costorcostplus).NoteonConstructionBids:Thebidprocessbeginswhentheworkingdrawingsandspecificationsareready.Checkwithparticipatinglendersontheirrequirementsforthecontractorsbiddingontheproject(credithistory,bondingcapacity,prevailingwagecompliance,insurance,etc.)

c. ArchitectAgreement:UsuallystandardAmericanInstituteofArchitectsform

d. PropertyManagementContract:Thisisthefirmthatwillleaseupandmanagetheproject.Inmanycasesthelendershavespecificrequirements.Ifyourorganizationisinterestedinbuildingthiscapacity(especiallyifyouareprovidingadditionalservicessuchasafterschoolprograms,seniornutrition,healthandfamilycareoryouthprograms),youmaywanttoworkwithanexperiencedproviderwhilegainingtheexperience.

e. Leases:Lenderswillrequirepreleasesforyourkeytenantswhetherornotitmaybeyourownorganization.Theconventionallenderwillunderwritethesekeyleasestodeterminetheviabilityofthetenanttomakeitsleasepayments.Intheinstanceswhereyourprojectisbeingbuilttoattractakeysupermarket,majorjobcreatingbusinessorgovernmentoffice,theleaseagreementwillhavemoresignificance.Formanylargerbusinesses,especiallysupermarkets,thesetenantsareknownasratedtenants.Ratedtenants

arethoseestablishedbusinessesthatincludelargecompanies,majorchainandfranchisesthathavebeenratedbyafinancialinstitutionorratingfirmthatatteststoitsfinancialcapacity.Thesetenantsusuallycandemandalowerleaseratesincetheyare“valued”bythelenderandbythedeveloper.

14. Syndication:TheprocessofsyndicationbeganinSep9(whenyoudeterminetheownershipstructure).Youcanlocateasyndicator(investorwhopurchasedthetaxcredits)usingthefollowingsteps.

a. NewMarketTaxCredit(NMTCs)InvestorSolicitation(ifyouareplanningtouseNMTCs):The(taxcredit)investormarketchangesbasedoneconomicconditionsandtheappetiteoflenders.DemandfromlendersandfinancialinstitutionsarepartiallybasedontheirdesiretomeetCommunityReinvestmentAct(CRA)requirements.PurchaseoftaxcreditshasproventobeaverysafemethodofmeetingCRAinvestmentrequirements.Lendersareincentedtoinvestincertainlowandmoderateincomecommunitiesthatarepartoftheirserviceareas.Thishasdrivenupthemarketdemandfortaxcredits(theywillpayahigherpricefortaxcredits).Checkwithanylenderandtheywillknowwhichinvestorsareactiveinanyregion.

Besidesfinancialinstitutions,insurancecompanies,utilitiesandsomelargercorporationsareactiveinthetaxcreditmarket.Therearealsosyndicatorsthatpurchasecreditsonbehalfofcorporateinvestors.

b. NegotiateTerms(Pricing,Amount,PayinScheduleandOtherRequirements):Theseitemsandthetermsthereofareveryimportanttoyourproject.Twoyearsagothepurchasepriceofcreditsrangedfrom75centsforadollarworthofcredittooveronedollarpercredit.Posteconomiccrashhasdroppedpricingdowntoaslowas67cents,withveryfewinvestorsinthemarket.InsomehighCRAdemandareas,thepricingisbackuptothe70centplusrange.Thepayinscheduleisimportantbecausetheinvestordoesnotaccruevaluein


thecreditsuntiltheprojectcompletesconstruction.However,equityisneededduringconstruction(itisthecheapestsourceoffundsduringconstructionversusaconventionalconstructionloanthatchargesinterestovertheperiodofthefinancing).

c. FinalizingOwnershipStructure:Oncetermsareagreed,theattorneyswillfinalizethelimitedpartnership.Thisdocumentwilloutlinetheconditionsoftheequityinvestment,howthepartnersneedtoperformandhowtheycouldberemovedorreplaced.

d. ExecutionofPartnershipAgreement:Theactualexecutionusuallyoccursatthecloseoftheconstructionloan.

15.ConstructionLoanClosing

a. FulfillOtherFundingConditions

i. EscrowAccount/Instructions:Theescrowinstructionsarecriticalandincludeallofthedocuments,exhibitsandapprovalsthatmustbepresentedbeforeclosingandrecordingofthedocuments.Escrowalsomanagesthefundingprocess(fromlenders,investorsandothergrantsources)andpaymentstoparticipatingpartiesandconsultants.

ii.Other:Signedconstructioncontracts,approveddrawings,permitapprovalsandfundedreserves.

b. Documentation:Alloftheloandocuments,fundingagreements,inter-creditoragreements,partnershipagreementsanddeedsaredraftedbyrespectiveattorneysandreviewedbyyouandyourattorney.Note:Thepermanentloanproviderwillprovideacommitmenttofundbasedonmeetingconditionsrelatedtoconstructioncompletionandleaseup.Thetakeout(orpermanentloanprovider)willrequirespecificdocumentation.Insomecasestheconstructionlenderwillalsobethepermanentloanprovider.Thereisastrongdesiretoclosetheconstructionloansincetheinterestrateonaconstructionloanishigherthantherateonthepermanentloan.

c. Negotiations:Representativesofevery

sourceofdebtandequityparticipatesinnegotiationswhileclosingthefinancing.You(theproject),bearthecostofallattorneyfees.Itisessentialtomanageyourattorneytoensuretheirfeesarenotbeinggeneratedbyinsignificantnegotiations.Businessdecisionsshouldbethecenterofnegotiations.

d. Execution:Signingbyallpartiesandsubsequentrecordingofdocuments.

16. StartConstruction:Constructioncannotbeginuntilthedocumentsaresignedandapprovaltoproceedisgiven.Insomecases,demolitionandsitepreparationmightbeapprovedunderaseparatecontractandfundedoutsideoftheconstructionfinancing.

17. ConstructionPeriodManagement

a. MonthlyDraws

i. Inspections:Thereareusuallymonthlymeetingswithallparticipatingentities(variouslenders,architect,contractor,buildinginspector,andtheowner).Yourparticipationmightbethroughahiredconstructionmanagerwhohasexperienceinallaspectsofconstruction.Allpartiesshouldagreeonthepercentageofcompletionandhowitmatchesthecompletionschedule.Yourconstructionmanagerwillhelpensurethatcostsandchangeordersarejustified.

ii. ArchitectSignOff:Seeabove

iii. ChangeOrders/Clarifications:Yourconstructionmanagerisimportantinmanagingchangeordersandapprovingclarifications(betweencontractorandarchitect).Allpartiesmustagreeonanychangeorder.

iv. DrawRequest:Aspartoftheinspectionmeeting,thedrawrequestisreviewed.Constructionprogressisagreedupon,billsreviewedandchangeordersexaminedandapproved(signedbyallparties).

v. Lien/LienReleases:Uponcompletionofworkbyvarioustradesandsuppliers,lienreleasesareissued,signedandforwardedforrecordation.

vi. Payments:Pertheloanagreement,


fundsarereleasedbytheconstructionlenderandparticipatinglenders(cityand/orstatesources)totheconstructionaccountmanagedbyyourorganization.Youwillsubsequentlytransferfundstothecontractor.Theagreementalsodefinestheturn-aroundperiodforfundingbyboththebankandbyyoutothecontractor.

b. PreLeasing:Eachfundingsource(includingthetaxcredits)mayhaverestrictionsontypesofbusinessesandservices(iftheprojectistargetedfornon-profituses,microbusinesses,start-upsorrestrictedbygeography(localbusinessonly).

c. ConstructionCompletion:Taxcreditsrequirethataprojectmustbeplacedintoservicebyaspecifieddateorthecreditswillnolongerhavevalue.Additionallytheequityinvestorhasestimatedtheirequityinvestmentintotheprojectbasedonwhattheplaced-inservicedateis(thepartnershipagreementwillincludemonetary“penalties”ifdaysaremissed.

d. TenantImprovements:Theconstructionbudgetwillallocatefundstosupporttenantimprovementshoweverthetenantwillbearsomeoftheexpenses.Thedegreeofthissplitisdeterminedbytheprojectsgoals:towhatdegreeistheprojectdesignedtoassistnewstartupbusinessesortoprovideincentivestohavebusinesseslocateinthecommunity?

e. ArchitectSignOff:Finalcompletionsignoff

f. BuildingInspectionSignOff:CompletionandissuanceoftheCertificateofOccupancyisbythecitybuildinginspector.

18. Leasing/MoveIn:Themanagementcompanywillcoordinatemovein.

19. ProjectStabilization(ConstructionLender):Theconstructionlenderwillberepaidbythepermanentlenderuponmeetingcertainagreeduponleasinggoals(projectleaseupstabilization).Thetermsoftheleaseuparerequirementsofthepermanentlender,peryourloanagreement.Inmostcasestheinterestrate

fortheconstructionloanishigherthanthatofthetermloan,soitisbeneficialtomeettheleaseuprequirementassoonaspossible.

20. Conversion/ClosingofPermanentFinancing:Stabilizationisthemaintriggerfortheconversionhoweverthereareanumberofitemsthatareoutlinedinthepermanentloanagreement(cleartitle,occupancycertification,approvalofparticipatinglenders,etc.)



Financing



1. NewMarketTaxCredits:

a. ThesearetaxcreditsthatarefederallyallocatedtoCertifiedDevelopmentEntities(CDE’s)inmostcasesthesearefinancialinstitutions,experiencedlendersandinsomecases,localgovernmentsordevelopers.

b. EachCDEhasitsownallocationplanbasedongeographyandorlendingactivity.Theseincludemanysmallbusinesslending,industrialdevelopment,commercialrealestateorbusinessexpansion.AllprojectsmustbelocatedineligiblelowandmoderateincomecensustractsdefinedbytheUSTreasury.

c. NMTC’scanbeusedbytheCDEtolowerinterestrates,orcangenerateequitybybeingsoldtoinvestorsforaspecificbusinessorcommercial/industrialfacility.Thegoaloftheprogramistosupportjobcreation.

d. ForspecificdetailsonNMTCs,pleaserefertothefollowingsectionofEquityandDebtfinancingsources.

2. ConventionalDebt:

a. Loantermcanrangefrom5to10years,andamortizedoveramaximumof25years.DebtServiceCoverage(DSC)isusuallyaround1.20-1.25.

b. Iftheproposedtenant(s)arenotfinanciallystrong,thelendermayrequestthatyourorganizationbecomethemastertenantandthatthespacebesub-leasedtoyourtenants.Thisstructurewillprovidemorecomforttothelender,butyouarenowonthe“hook”tomakesurethespaceisleased.Thismaybeasolutionifyourorganizationcanmoveitsprogramsorofficesintothebuildingiftheneedarises.

c. SinceloansarebasedonDSCthepermanentloanamountwillnotcovertheremainingfinancingneed,thustheneedforotherlocal,stateorfederalfunding.

3. Gap:

a. Residualreceiptloansprovidedbygovernmentsources(localandstate

funds)

b.Directfederalandstategrantsandfoundationsupport.NOTE:thevariousgrantsources(especiallyfederal)haveverystrictjobcreationrequirementsandthedeveloperwillneedtomonitorandreportitssuccessinmeetingthesegoals.

c. Termsusuallyabout55yeartermsat3%-5%,alongwithrestrictions

d. PossiblegaploansfromCDFI,ownercarryorSection108ifthereiscashflowavailable.

4. Predevelopment:

a. Hardtogetunlessyouhaveastrongbalancesheetorhaveanextensivesuccessfultrackrecord

b. Localgovernmentisyourbestsource

c. IntermediarysourcessuchasLocalInitiativesSupportCorporation,EnterpriseortheLowIncomeInvestmentFundsarecheapbutmaytakesometimetoapprove

d. CommercialBanklinesofcredit.Manyinstitutionsofferlinesusinginvestmentfundsintheformofequityequivalentloans.Thesearebasedonorganizationalfinancialstrength.

EquITy AND DEbT sOuRcEsThefollowingisashortsummaryofsomesourcesforequity(grants)anddebt(loans)forcommunityeconomicdevelopmentprojectsdevelopedbynonprofitcommunitydevelopmentorganizations.Wehaveaddedsomecommentsandthoughtsunder“NOTE”,reflectingwhatweareseeinginthemarketplace.Thisanalysisdoesnotreflect“official”fundingguidelinesanddevelopersneedtoreviewtheguidelinesandfundingrequirementsofeachprogramorlendinginstitution.

Someofthekeysuggestionsofemphasizeare:

1. “Bereadytohaveanearlydiscussion”:Haveyourconceptpaperreadythatdefinestheprojectasbestasyoucanandhavenumbersready(theyneedtoknowhowmuchyouneed).Explainhowtheprojectmeetsthegoalsofthetargetedfundingprogramandletthemknowaboutallofthelocalpartners

fInAnCInG


thatalreadysupporttheproject.Haveyourdevelopmentteamlinedupasbestasyoucanwiththeunderstandingthatthingswillchange.

2. “Setupameeting”:Ifthefundingsourceislocal,haveyourlocalcouncilofficesorsupervisor’sofficemaketheappointmentforyou(intheirofficesisaplus).Thisishelpfulforlocalgovernmentfundingandishelpfulifyouaretargetingafoundationorcorporationthatisrepresentedbyalocalorregionalcommunitydevelopmentofficer.Thisshowsthatyourprojecthasthesupportofnotonlythecommunitybutsupportfromlocalgovernment.Forstateorfederalprograms,yourassemblypersonorcongressionalrepresentativeisyourbestpartner.Ifitmakessense,aprominentboardmemberatthesemeetingsneverhurts.

3. “Understandtheprocess”:Makesureyouunderstandtherequirementsandtheprocessforobtainingfunding.Notethedeadlinesandthedeadlinesforitemsthatyouwillneedfromthirdpartiestomakeyourapplicationcomplete.

EquITy REsOuRcEs1. USDepartmentofHealthandHuman

Services,AdministrationforChildrenandFamilies,OfficeofCommunityServices(OCSCED):ThepurposeoftheCommunityEconomicDevelopmentdiscretionarygrantprogramistopromoteandsupportprojectsthataddresseconomicself-sufficiencyforlow-incomepersonsanddistressedcommunitiesbyawardingfundstocommunitydevelopmentcorporations(CDCs)tocreateemploymentandbusinessdevelopmentopportunities.

Eachyearapproximately40-45grantsareawardedwithamaximumgrantawardlevelof$800,000.Grantsareawardedtocoverprojectcostsforbusinessstart-uporexpansionandthedevelopmentofnewproductsandservices.Thegrantsserveascatalystsforattractingadditionalprivateandpublicdollars;foreveryCEDdollarawarded,$3-5isleveraged.Typesofprojectsfundedincludebusinessincubators,shoppingcenters,manufacturingbusinessesandagricultureinitiatives.Fundedprojectsaretocreatenewemploymentorbusiness

opportunitiesforlow-incomeindividuals.

NOTE:Thesegrantsbecomeequityinprojects.ThecurrentroundisdueinthebeginningofJulyandoccursannually.Youwouldessentiallyneedafulldetailedbusinessplantobeabletocompletetheapplicationprocess.Moreandmore,programsarebeingintegratedandprojectsthatcreatejobs,withstrong“green”elements.Wealsounderstandthataccesstohealthyfoodwillbeofinterest.

ForGuidelinesandmoreinformation:http://www.acf.hhs.gov/programs/ocs/ced/

2. USEconomicDevelopmentAdministration(EDA):PublicWorksandEconomicDevelopmentinvestmentshelpsupporttheconstructionorrehabilitationofessentialpublicinfrastructureandfacilitiesnecessarytogenerateorretainprivatesectorjobsandinvestments,attractprivatesectorcapital,andpromoteregionalcompetitiveness,includinginvestmentsthatexpandandupgradeinfrastructuretoattractnewindustry,supporttechnology-leddevelopment,redevelopbrownfieldsitesandprovideeco-industrialdevelopment.

NOTE:Thesearesubstantialgrantsintoprojects.Inprioryears,jobtrainingfacilitiesandincubatorshavebeenfinanced(theyhavehighjobcreationnumbers).Again,jobs,greenandfoodarethecurrent“buzz”trends.Ifyouareclosetoyourcongressperson,andtheysupportyourproject,havethemcoordinatetheinitialmeetingwiththelocalEDArepresentative.Grantamountswillusuallymatchalocalcontribution(publicandprivate).

Formoreinformation:http://www.eda.gov/InvestmentsGrants/Programs.xml

Forsomeexamplesoftheiractivities:http://www.eda.gov/NewsEvents/NewInvestments.xml

3. DepartmentofHousingandUrbanDevelopmentCommunityDevelopmentBlockGrant(CDBG):Thesearefederalfundspassedtolocalgovernmentsandcounties(above50,000populations).Forsmallerjurisdictions,countiesmaybethefundingentityandinsomeruralcitiesandcountiesthestatewillbetheentity.ThesearegrantfundsandcanbeusedforalltypesofCED


realestatedevelopmenteffortsinlowandmoderateincomecommunities.Thefundsarecompetitiveandtraditionallyfundmanyongoingpublicsectorprogramsandinitiatives.

NOTE:Again,thesearegrantfundssotrytogetasmuchaspossible.Thesefundsarevery“political”andcontrolledbylocalgovernment,soyourlocalcommunitydevelopmentdepartmentandlocalcouncilorsupervisor’sofficeisagoodstart.

4. CongressionalEarmarks:Yourcongressionalrepresentative(senatororcongressperson)willentertainrequestsforearmarksforyourproject(someactivelyuseearmarksfortheirconstituentsandsomedonot).Iftheydo,theywillusuallyhaveashortformthatyouwillsubmittotheiroffice,andiftheysupportit,willtietherequestintoaspendingbill.Thisisaverypoliticalprocess,anditisessentialtherepresentativeknowyourorganizationandisfamiliarwithyourproject.

Ifapproved,thefundingprocesswillbeassignedtooneofthefederalagenciesthatwilladministerandmonitorthegrant.

5. RedevelopmentAgency(RDA):Localredevelopmentagenciesgeneratetheirownfundsfromprojectareageneratedtaxrevenues.InCalifornia,asmallportionismandatedforlowandmoderateincomecommunities(projects).ThisisanotherlocalsourceofCEDgrantfunds.

NOTE:SimilartolocalCDBGfunds,RDAfundsarecontrolledlocallybytheredevelopmentagencyandlocalpoliticalsupportisveryimportant.

6. FoundationsandCorporations:Aquicksourceofsmallgrantswouldbefinancialinstitutions,especiallyifyourorganizationhasagoodrelationshipwithalender(onyourboard,oriftheyareyour“bank”).Grantsandcorporatesupportcanrangefrom$1,000to$50,000ormoredependingonthesizeofyourrelationship(whatinstitutionyoudobusinesswith).

NOTE:Generally,itismoredifficulttoobtainfinancingwith“cold”applicationsorrequests.Itisimportanttodeveloparelationshipbyhavingacommunitydevelopmentrepresentativemeetyouand

seeyouractivitiesandprojects.Agoodwaytolocatetherightcontactperson(thecommunitydevelopmentlender,CommunityReinvestmentActofficerorcommunityrelationshipofficer),istotalktotheFederalReserveBankcommunitydevelopmentrepresentativeforyourregion.Similartoafoundation,youneedtonurturethisrelationship.AlthoughtheFederalReserveBankdoesnothavefunding,theyknowwhototalktoatfinancialinstitutionsandwillinviteyoutokeymeetingsandevents.

7. PrivateInvestment:NewMarketTaxCredits(NMTCs):Ifyourproject’sdevelopmentcostsaregreaterthan$8millionyoumaywanttoconsiderNMTCs.ThecreditsareallocatedfromtheDepartmentofTreasurytoqualifiedlendingentitiesonacompetitivebasis(banks,loanfunds,localgovernmentsandsomedevelopmententitiesareeligible).Thesequalifiedentitieswillinturnallocatecreditstoprojectsthatmeetcertainlowandmoderateincomeguidelines(location)andcreatejobs.Fora$8millionprojectyoumaybeableto“sell”thecreditstoinvestors(corporationsandsyndicatedfunds)forapproximately$1.75million(estimatebasedonmarketconditionsinJuly2010,andwillchangebasedoncorporatedemandfortaxcredits).Thecreditbuyerbecomesalimitedpartnerintheprojectfora7yearperiodandwillexitthepartnership,typicallyatanominalcost.

ThefundsgeneratedbytheNMTCbecomeequityintotheproject.The$8millionthresholdisbasedonveryhighfixedcostsrelatedtothelegalandtechnicalexpensesandthelowermarketpriceinvestorsarewillingtopayforthecredits.Theequityremainsintheprojectfor7years(theinvestorusesthecreditsoverthisperiod)andthislimitedpartnershipwillexpirewiththeinvestorexitingthepartnership.

NOTE:Inourcurrenteconomicclimate,itisincreasinglydifficulttofindaninvestorANDaconventionallenderfortheseprojects.Inmostcases,thesameinstitutionprovidesboth,howeverthemarketforfinancingcommercialprojectsisverytough.TheallocationsforNMTCarealso“hitandmiss”.YouneedtohaveaCommunityDevelopmentFinancialInstitution(CDFI,seenextsection)whocoversyourlocal


geographyandtheyneedtobeasuccessfulapplicantforthecreditsintheyearthatyouneedthem.Inadditionyourtypeofprojectneedstobeapriorityforthem(somespecializeinonlybusinessfinancing,someforcharterschools,etc.).

AnotherstructureforNMTCsthatbenefitscommunitydevelopmentprojectsaredebtproductscreatedbyfinancialinstitutionthatinternallypurchasestheNMTCsandusetheproceedstolowerinterestratesonconventionaldebtproducts.Becausethetaxcreditsareexpendedbytheinvestorin7years,theloansaregenerallyfor7yearsandrateswillbe2basispointslowerthatmarketrates.LoanswillbemadeinNMTCeligibleprojectsandlocations.

LOAN sOuRcEs (DEbT)1. Conventional:Asnotedintheprevious

section,conventionalfinancingforcommercialprojectsisverytough.Itisimportanttolocatepotentiallendersandinsuretheyunderstandtheprojectandthedevelopmentteam(thenon-profitanditssupportteam).Insomecases,thesmallerregionalbanksmayhaveacloserelationshipwithyouandsupportyoureffort.Onceyougetpastthishurdle,yourdealmustbe“solid”.Therewillbesignificantweightputtothestrengthandcapacityofthedeveloper(experienceandbalancesheet)andasolidrepaymentsource(strongtenantsandstrongcashflow).

2. OtherLendingInstitutionsandCommunityDevelopmentFinancialInstitutions(CDFIs):Theseloanfundsareusuallysupportedbythepublicandprivatesector.Thesearepooledfundsthattargetacertainindustryormarketandtheseinstitutionshavebecomeverystrongandsuccessfulintheirnichemarket.CDFI’sareloanfundsthatare‘certified’bytheUSDepartmentofTreasuryandcanbecomeeligibleforfederalgrantstosupporttheirloanfunds.

Inourcurrentmarkets,theseloanfundsarethemostactivefinancialinstitutions.

NOTE:Everyloanfundspecializes.Thefundmaybegeographicallytargetedandwilltargetcertainnichemarketssuchassmallbusinesses,microbusinessesoraffordablehousingdevelopment.Theycouldbe

targetedtoindividuals,businessesorinsomecases,nonprofitorganizations.Anaddeddifficultyisthateachhastheirownlendingguidelinesandlimits,soonemustlocatetherightloanfundandhopetheyhavetherightproductforyou.

3. CDBG/Section108:AnotherlesserknownresourceistheuseofSection108loansbylocalgovernmentsthatreceivedCDBGgrants(seeCDBGabove).Thelocalgovernmententitywouldprovideloanstoprojects.Thelocalgovernments108loanfundsaresecuredbyfutureCDBGgrantfunding,andtheloanmadetoyouissecuredbytheproject).TheloantermsaredeterminedlocallyanduseissimilartoCDBGrequirements.

NOTE:Thisisdebtandmustberepaidmuchlikeaconventionalloan.Thereislikelyalongapprovalandclosingprocesssincemostlocalitiesdonothaveasetprogramforthisfinancing.Useofthisfundingwouldlikelybesomewhatswayedbylocalpolitics,sotalktoyourcouncilpersonorsupervisoralongwithyourcommunitydevelopmentdepartment.

4. OwnerCarry-back/501c3BondFinancing:Inthisverytoughrealestateandfinancialmarketssomeopportunitiesexistforinnovativestructuresthatareavailabletopotentialbuyersthathaveaccesstocapital.Manylargerdeveloper/investorsmaybemotivatedtosellpropertiesthatarevacantandareinverypoormarkets.Ownersmaybewillingtocarry-backfinancingtomakethedealwork.Ifyou(oryourprograms)aretenantsthebuilding,this“value”andcanworkforyou.

Asaqualified501(c)(3)organization,thebuyeriseligibletousetax-exemptbondfinancingasthemainsourceofacquisitionfinancing.BasedontheexemptionoftheinterestonthebondsfrombothfederalandStatetaxation,theresultingmortgageratederivedfromthesaleofthebondsisgenerally1%-1.5%belowconventionallyavailablerates.Forexample,ifthebondrateissetat5%,thetaxableequivalenttotheinvestorinthe35%federaland9.3%Statebracketwouldbe8.977%(theydonotpaytaxesontheinterestincometheyreceiveaspartoftheirfinancingtotheproject).


Thebondscanbesoldeithertoinvestorsthroughpublicsale(basedonunderwritingbyalenderwhowouldguaranteerepaymentofbonds);ordirectlytoalenderthroughprivateplacementbasedonanegotiatedrate.Withapublicsale,thetransactioncostsarehigherthanaprivateplacement(bankortheseller)

Inthecaseofasellerfinancing,therewouldbethreepossibleadvantagesavailabletotheseller:

1. Tax-exemptionofinterest(bothfederalandState)negotiatedunderthenote;

2. Exemptionfromcapitalgaintaxationduringtheperiodofinterestonlypayments;and

3. Reductionoftaxableincomethroughcharitabledonationdependingontheseller’sparticularsituation.Also,incaseapurchasepriceissmallerthanappraisedvalue,thedifferencecanbedeductedasacharitablededuction.

Thebondissuanceprocessusuallytakesafewweeksfollowingtwoevents:

1. Issuanceoffinancingcommitmentbythelender/seller;and

2. Approvalbyapublicbodyinwhichtheprojectislocated

However,sincewearenotauthorizedtoprovidetaxadvice,itisrecommendedthatthesellerconsulthisaccountantand/ortaxadvisortoseeifanyoftheabovewouldprovideanadvantageunderhisparticularsituation.


Development Notes



1. Mostcommercialretailandofficeprojectscompetefortenantsinanopenmarket:youarecompetingagainstcompetitorsinyourmarketarea.Thisistheviewtheconventionallenderswillusewhentheyunderwritethesizeandtermsoftheloantheymayprovidetotheproject.Youwillneedtoconductastrongfundraisingeffortfrombothprivateandpublicsectorsourcestomeetyourequityrequirements.Yourprojectwillalsobenefitbyhavingtheleastamountofdebtpossibletoreduceanyrisksofdefault.

2. Userealestatebrokersexperiencedinlargercommercialtransactions.

3. Beawarethatlandcostswillberestrainedbylocalgovernmentsourceswhicharetypicallylimitedbytheappraisedvalue.

4. Don’tfixateonthefirstsiteorprojectyoufindorfocusonlyononeproject.Inmostinstancesyouwillfindonepossibleprojectoutofseveralthatyouinvestigate.

5. Negotiateongoingfeeswithlocalgaplenders(withresidualreceiptfinancing),toensurethatexcesscashflowdoesnotgotorepaythegaploan(insteadofgoingtomanagementfeesorprojectservices).

6. Makesurethereiscushioninthedevelopmentbudget.Youwillneverhavetoomuchmoney,andexpectthemostunexpectedreasonsforcostover-runs.Itisdifficulttogobacktoequityandgrantsourcesformorefunds.

7. Keeparchitectincheckforcostpurposes.

8. Keeplawyersincheckforcostpurposes.

9. Keepconsultantsincheckforcostpurposes.

10. Donotbuildforcashflowordeveloperfees,benefitstothecommunitywillalwaysbegreaterthananyfinancialreturnsyouwillgenerate.

11. Thestrongerthedevelopmentteam,thestrongertheprojectanditsabilitytofindsolutionswhenproblemsarise.

12. Havingbusinesstechnicalassistanceandaccesstofinancingwillenhancethesuccessofyourtenantsandmakeasignificantimprovementintheprojectslongtermviabilityandsuccess.Ifthereisexcesscash

flowgeneratedbytheprojectitwouldbebeneficialtoaddthisintothepro-forma(tocoveryourmanagementexpenses),versususingexcesscashflowtopaybackdifferedloansfromthecity.

13. Ifyoudonothaveexperience,considerpartneringwithsomeonewithextensiveexperienceandwithsomeoneyoulike.Youwillbewiththemformanyyears,workingcloselyinstressfulsituationsleadinguptotheclosingofthefinancingandmanagingtheunitsoncetheyareoccupied.

14. Makesureyouhavestaffdesignatedtobethepointpersonor“quarterback”fortheproject.He/shewillberesponsibleforcommunicatingwithstaffandmanagementandwithalloftheprojectdevelopmentteammembers.Theymustberesponsibleandhavetheabilitytomulti-taskassignments.

15. Negotiatehardwithyourinvestor.Ifyoudonothavethisskill,useaconsultant.Totalpurchaseamount,terms,dates/timeofequitypaymentsandexittermsareallnegotiable.

fInAL noTEDevelopmentofcommercial(retail/office)orindustrialprojectsisnoteasyandrequiresastrongcommitmentfromtheorganizationandthemembersofthedevelopmentteam.Thegoalcanbeaccomplishedwiththesupportofthecommunity,localgovernmentandinterestedfinancialinstitutions.Itismostimportanttohavestaffdedicatedtotheprojectandiftheydonothavetheexpertise,locateresourcestosupportandguidetheeffort.

Thisdocumentisintendedtobeaguidethatoutlinessomeofthekeyissuesandidentifiespossiblesolutionsandsteps.Itisnotintendedtobeyoursourcesinceeveryprojecthasitsownissues,concernsandpeculiaritiesanditsownuniquesolutions.Thedocumentisnotintendedtoencourageanyorganizationintoprojectdevelopmentbutonlytolayoutsomeofthekeystepsandissuesoncethedecisionismadetoproceed.

fInAnCInG

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Washington,DC20036202.265.7546|fax202.265.5048

www.communityactionpartnership.com|www.partnershipCED.org

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COOM ER C COMMERCIAL & INDUSTRIAL - Community · apply to most real estate development. In the second phase, we have detailed steps needed to complete a project. This will require