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WELCOMEMultifamily Housing Seminar: Trends & Topics for Developers 

and Owners

March 21, 2013

© Husch Blackwell LLP

Multi-Family ConstructionPlanning and Implementation

By: Richard Walters

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Planning / Due Diligence

Get Engaged in Planning / Proactive Role

– City / County ARC Meetings

• Planning Department

• Building Services Department

No Surprises

Due Diligence

Zoning / Utilities / Property Tax Levies

Contractor Selection Qualifications / Multi-Family Construction Experience Delay Claims Payment and Performance bond - Mitigation strategy

– Lender Requirement– Bond underwriter will also closely examine the financial strength of the contractor

before underwriting the project Financial Strength

– Contractor Financial Statements Key Risks of This Stage: Selecting a contractor that is unqualified or does not have the financial

stability to deliver the project and support its warranty obligations A financially weak contractor may result in suppliers and subcontractors not

getting paid. The impact to the owner is significant:– Liens against the building may prevent occupancy– Construction delays until subcontractors and suppliers are paid– Reluctance or refusal by professionals to work on the project– Lost discounts and credits

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Competitive Bid / Negotiated Contract

Competitive Bidding– More risk to owner– More risk for contractor– Sets up adversarial relationship among contractor, architect/engineer and owner– High charges for change orders– No contractor involvement during planning stage– Assumes that the quality workmanship will be the same with all contractors– Price is the deciding factor

Negotiated Contract– Less risk to owner– Less risk for contractor– Sets up "TEAM" relationship among contractor, architect/engineer and owner– Emphasizes quality– Reasonable charges for change orders– Heavy involvement of contractor during planning– Requires good conceptual estimator– Emphasizes service– Considers experience, quality, reliability, on-time completion and creativity

Contract Documentation

Contract Documents

– AIA

– Assumptions / Qualifications

Schedule of Values

Contingency

– Owner Approval

– Limit use to errors in contract documents (plans) and unforeseen conditions

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Guaranteed Maximum Price (GMP) Contracts

Benefits:– Establishes a not-to-exceed price

• Costs that exceed the GMP are the responsibility of the Contractor– Budgetary Certainty and the benefit of cost savings

• Benefit from value added engineering, price reductions, and well managed procurement

– Enables the owner to select and contract with the contractor while still designing the facility

Burdens:– Requires proper administration and oversight

Commonly executed in 2 parts– Initial Contract – Retain the services of a contractor acting as a design phase GC

• Provides cost estimating, alternative construction methods and materials• Fee is generally lump-sum (preconstruction services)

– Second Contract (Addendum) – Establishes the GMP• Cost Breakdown

Shared Savings

AIA Contract Forms do not provide language for Shared Savings or Savings Split

– Owner must provide language

Cost of the Finished Project and GMP

– Shared on a percentage basis

Accountability / Documentation

– Audit Rights

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Liquidated Damages

Enforceable liquidated damages generally have 5 elements (may vary from state to state)– 5 elements:

• Actual damages must be difficult to quantify.

• The amount must be liquidated (i.e., agreed on and set in advance)

• The amount must be reasonable

• They must be compensation, not a penalty

• They must be exclusive (i.e., the only remedy available)

Substantial Completion and Final Completion• Impact on Occupancy

Construction Implementation / Completion

Disbursement

– Title Company

– Mechanic’s Lien Endorsement

Change Orders

– Impact on construction and loan budgets

Work In Process / Schedule of Values

Warranty / Punchlist / Close-Out Documentation

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Affordable Multi-Family Construction

Significance of construction budget Affordable Multi-Family Construction Contract Requirements (MHDC) Prevailing Wage

– MHDC’s 2013 Qualified Allocation Plan requires that all MHDC financed projects pay at least the Federal prevailing wage

– Prevailing wage will apply to any person performing construction labor on the construction site

– Certified Payrolls MBE / WBE Requirements

– Initiative to encourage MHDC funded projects to utilize businesses certified as a Minority Business Enterprise (MBE) and as a Woman Business Enterprise (WBE)

– Minimum participation goals of 10% for MBE companies 5% for WBE companies for both hard and soft project costs

– Preference in funding – Evidence of MBE/WBE participation and certification for soft cost firms are required at

application. Evidence of MBE and WBE proposals and certifications for hard cost firms will be required as a part of the firm submission

Bank Financing for Multifamily Projects

How does a deal get done? 

By: Kent Lammers

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Stage 1‐‐Plan Vs Dream

• Financials

– Personal

– Business

– Debt Schedules

• Budgets

• Plans

Stage 2—Bank Goals and Analysis

• Construction‐‐Bank “insures” completion and/or credits issued– Does it make sense?

• Cost/unit

• Market Vacancy

– Cast of Characters (usual suspects)• CPA

• Attorney

• GC—Bonding/GMP

• Management Company

• Investors

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Stage 2 Cont—Developer Analysis

• Experience

• Current construction/lease up on other projects

• Completed projects performance

– Underperforming

– Strong Performers—wrap to new project initially?

• Global Analysis

– Personal debt, business debt schedule

Stage 2 Cont Project Analysis

• Market Study

– AMI Mixes—30%, 60% AMI

– Enhanced Units

– Vacancy—market and tax credit

– Location 

• Competition

– Age

– Projected Rents—can you get it? 

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Stage 2 Perm Debt Analysis

• Debt/Door

• Sensitivity Analysis

– Rate Shocking

– Break Evens

• Interest Rates

• Vacancy

• Rental Rates

Stage 2 Cont Equity

• Investor

– Cash 

– Letters of Credit‐‐Issuer

– Timing vs Construction Needs vs Debt

• Developer

– Cash

– Cash flowing projects

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Stage 3—Construction

• On Time

• On Budget

• Change Orders

• Inspections

• Draws

Misc

• Phasing

• Amenities Packages

• Guarantor Release

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Conclusion

• Communication

– “Much unhappiness has come into the world because of bewilderment and things left unsaid.” 

– ― Dostoevsky

Gershman

Permanent Financing: Navigating the Waters

By: Ron Weis

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Gershman

Understand what has happened

Gershman

Prior to 2007 ‐ 2008• Multiple sources for permanent financing• Rates 6.0% ‐ 7.0%• Aggressive underwriting, quick turnarounds• Financing chasing deals• New construction at a high pace putting pressure on 

occupancies

After • Wall Street CMBS go away.  Investors are burnt by 

defaults and delinquencies.  • Strong regulatory response: Fannie & Freddie troubles• Underwriting so tight that lending dramatically slows• New construction almost ceases• Deals chasing scarce financing: supply & demand

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Gershman

Results of slow economic recovery• FHA and GSEs Fannie Mae & Freddie Mac 

become the dominant sources• Rates drop as the Fed drops rates, 10 year T‐

note rate drops as the market seeks security.  CMBS make slow progress with much tighter underwriting as investors seek higher yield

• Tight, conservative underwriting, likely to last • Cap rates drop in response to low rates and 

demand for existing product: rent increases and high occupancies

• New construction returns as occupancies rise.  Occupancies and low rates attract equity. 

• Risk mitigation becomes key to successful underwriting

Gershman

Getting Permanent FinancingIdentify possible perceived risks

• Rents & expenses vs. the market area• Physical condition/property age• Handicap accessibility • Leverage• Borrower

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Gershman

Getting Permanent Financing“Risk Mitigation”

• Rents & expenses vs. the market area› Underwrite to market rents or lower› Expenses based upon market, not historical› LTV and debt service coverage above the minimum› Change in management agent

• Physical condition/age› Required repairs & escrows for repairs› Reserves› Shorter term› Renovations & updates

• Handicap accessibility › Required repairs & escrows for repairs› Reserves

Gershman

Borrower• Experience

› Partner with experience› Management agent with experience

• Financial strength› REO/Debt schedule & demonstrating that 

maturing debt or interest rate resets will be accommodated

› Partner with strength• Financial & operational history

› Tell the story with supporting documentation

› Independent & strong management agent› Demonstrate that things have changed› Have a plan that is being implemented› Partner with strength

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Gershman

Trump Cards

• Equity

• Cash

Gershman Getting ready to finance

“Think like a lender”

• Analyze strengths & weaknesses• Document the strengths• Document and be prepared to mitigate 

weaknesses• Ask questions, ask for help• Be ready to prepare a detailed package.• Be over prepared – anticipate all the 

questions, even if you think the answers are self‐evident

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© Husch Blackwell LLP

By: S. Shawn Whitney

• Low Income Housing Tax Credit • Section 42 of the Internal Revenue Code

• Chapter 135 of the Missouri Revised Statutes

• Credit is a dollar for dollar tax reduction on Federal and State Income Tax

• Credit Amount is based upon cost of constructing or rehabilitating housing developments

• Objective: To provide investor equity to lower/eliminate debt service to allow for lower rents

• Projects Subject to MHDC Compliance Requirements

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• Syndication is the process by which the owner of an affordable housing building brings an equity investor into the ownership structure to allow the investor to claim the credits in exchange for providing equity to the project.

• Investors become owners in the property as members/limited partners of the ownership entity

• Investors receive other economic and tax benefits from ownership

• Investors require a certain amount of control, disclosure/reporting, and removal rights.

• Project Team (important to have experienced architect, general contractor, accountant, property manager, and lawyer)

• Investor will require a loan commitment

• Investor will perform significant due diligence on the developer and underlying real estate (personal financials, environmental, title, zoning, etc.)

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• Economic Benefits – to be evidenced by CPA prepared projections. Investors consider:– Amount of credits

– Depreciation (losses passed through to the investor)

– Cash flow

– Location of Project

• Community Reinvestment Act (banks receive credit for participation CRA developments)

• Higher equity pricing for CRA developments (20% to 30%)

• Difficult to Developer Areas (DDAs) and Qualified Census Tracts (QCTs) areas where the need is greatest for affordable housing, but which can be the most difficult to develop.

• distressed areas, the LIHTC can be claimed for 130% (instead of the normal 100%) of the project’s total cost excluding land costs.

• Project Feasibility– Experienced developer (built and managed other LIHTC

projects)

– Strong guarantors

– Strong project (low loan to value/no debt)

– Strong market (need evidenced by market study)

• Searching for Investors– Relationships are key components

• Investors with working knowledge of development/key team members allows for better deal terms and less fact finding.

– Hire professionals with strong relationships within equity markets

– Consider investor reputation before selection (past deals/ due diligence/ integrity)

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• Key terms to negotiate within Investor Letter of Intent

– Pricing (but not always most important)

– Pay in schedule - Time value of money (discount future payment by interest rate paid on construction loan)

– Annual asset management fee/ Preferred Return

– Costs (whose paying investors costs for due diligence and professional fees)

– Kick out clause in LOI

– Reserves (how much and when reserves can be used)

– Income allocation provisions (whose taking recharacterization of income risk)

– Tax opinion

– Adjusters

– Cash flow waterfall

– Guarantees (limit duration and amount)

– Exit strategies (Put & Call provisions)

• Abatements – Great for Market Rate and LIHTC– Two main considerations when applying for an abatement:

• Type of Abatement to pursue

• Location of project

• Two most common types of abatement:– Chapter 99

– Chapter 353

• The purpose of both abatements is to facilitate eradication of blight in a community by encouraging redevelopment by private enterprise.

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• Offers tax abatement for 10 years – Receive a full tax abatement on the increased value of the real

property and improvements

• Any person may apply for Chapter 99 abatement

• Must demonstrate that the property is blighted under the standards for a Chapter 99 tax abatement and submit a redevelopment plan for the property

• Offers tax abatement for 25 years– First 10 years: Receive a full tax abatement on the value of the improvements

– Last 15 years: The land and improvements are assessed at 50% of their true value

• Must prove property is blighted under the standards for a Chapter 353 tax abatement and submit a redevelopment plan for the property

• Must demonstrate the project is not financially viable without the abatement (referred to as the “but for” test)

– This typically requires submitting a pro forma and internal rate of return analysis with the application.

• Also must submit a tax impact analysis with the application showing how the taxing districts will be impacted with and without the abatement

• Typically longer and more expensive process than Chapter 99 abatement since the application is more comprehensive and the components take more time and to prepare

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• Several parts of Springfield are already blighted under Chapter 99. Some of these areas have redevelopment plans in place and some do not.

• If you redevelop in a blighted area and your project conforms to the redevelopment plan in place, you will only need to submit a Chapter 99 tax abatement application to the LCRA for approval to receive tax abatement on your project.

• If you redevelop in a blighted area that does not have a redevelopment plan, you will need to submit a redevelopment plan for approval that is specific to your proposed redevelopment and, once the plan is approved, apply for chapter 99 tax abatement under the plan.

• Both of these options will allow for considerable cost savings since it eliminates the need to demonstrate that the area is blighted.

– City Grants/Soft loans

– HOME Funds

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S. Shawn Whitney901 St. Louis St., Suite 1800

Springfield, MO 65806Direct: (417) 268-4030Fax: (417) 268-4040

Email: shawn.whitney@huschblackwell.com

An Overview of Value Trends and Appraisal Issues in Multi-Housing

Presented by

Stephen Cosby, MAI, MRICSManaging DirectorCBRE Valuation & Advisory Services

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United States Valuation & Advisory Services

9 Regions in USA 60 offices Over 400 Appraisal Professionals Nationwide

Pacific Northwest

NorthernCalifornia

SouthernCalifornia

Intermountain

SouthCentral Southeast

North Central

Northeast

New England

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Line of Services

Appraisal ServicesAppraisal Services

Assessment & Consulting ServicesAssessment & Consulting Services

Financial & Tax Reporting ServicesFinancial & Tax Reporting Services

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Clients and Reporting

Our Clients• Investment and commercial banks• Corporations• Pension funds• Investors• REITs• Government agencies

All CBRE reporting conforms to• The Appraisal Institute• USPAP• FIRREA• FNMA/FHLMC• International Standards as applicable

Our ClientsOur Clients

All CBRE reporting conforms toAll CBRE reporting conforms to

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CBRE VAS Multi-Housing Assignments

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CBRE VAS Multi-Housing Contacts

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The Health of the Apartment Market

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The Health of the Apartment Market

Source: Reis

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Effect of Class on Rent

Source: Reis

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Effect of Class on Vacancy

Source: Reis

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National Trends – 2001-Present - Apartments

Source: Real Capital Analytics

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What is a “Cap Rate”

Basic Formulas for Direct Capitalization

Where:• I = Income (NOI)• V = Value• R= Rate• F = Factor

I = R x V R = I / V V = I / R

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Band of Investment

BAND OF INVESTMENTMortgage Interest Rate 4.25%Mortgage Term (Amortization Period) 30 YearsMortgage Ratio (Loan-to-Value) 75%Mortgage Constant 0.05903Equity Dividend Rate (EDR) 10%

Mortgage Requirement 75% x 0.05903 = 0.04427Equity Requirement 25% x 0.10000 = 0.02500

100% 0.06927

Indicated OAR: 6.90%Compiled by: CBRE

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Agency 10-Year Mortgage Rates

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Avg. Cap Rate – Garden Apartments

Source: Real Capital Analytics/St. Louis Federal Reserve Bank

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Valuation - LIHTC

VALUATION Total Per Unit

Land Value $85,000 $1,771

Cost Approach - Conventional $1,900,000 $39,583

Sales Comparison Approach - Conventional $2,200,000 $45,833

Income Capitalization Approach - Conventional $1,900,000 $39,583

Cost Approach - LIHTC $1,150,000 $23,958

Income Capitalization Approach - LIHTC $1,150,000 $23,958

Insurable Value $2,750,000 $57,292

CONCLUDED MARKET VALUE

Appraisal Premise Interest Appraised Value

As Is - Conventional Fee Simple Estate $1,900,000

As Is - LIHTC Fee Simple Estate $1,150,000

Compiled by CBRE

Date of Value

January 4, 2013

January 4, 2013

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Federal LIHTC Sales

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Valuation – HAP Contract

VALUATION - Market Total Per Unit

Land Value $550,000 $3,986

Market Value As Is On February 19, 2013Cost Approach $1,800,000 $13,043

Sales Comparison Approach $1,850,000 $13,406

Income Capitalization Approach $1,800,000 $13,043

Market Value As Stabilized On November 19, 2013Cost Approach $3,950,000 $28,623

Sales Comparison Approach $4,000,000 $28,986

Income Capitalization Approach $3,950,000 $28,623

Insurable Value (Replacement Cost) $6,200,000 $44,928

CONCLUDED MARKET VALUE

Appraisal Premise Interest Appraised Value

As Is - Market Fee Simple Estate $1,800,000

As Stabilized - Market Fee Simple Estate $3,950,000

As Is - HAP Contract/ Restricted Rents Fee Simple Estate $3,250,000

As Stabilized - HAP Contract/ Restricted Rents Fee Simple Estate $5,400,000

Compiled by CBRE

November 19, 2013

Date of Value

February 19, 2013

November 19, 2013

February 19, 2013

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Student Housing

Because of rapid enrollment growth at many universities and colleges along with tight capital budgets, on-campus housing has been outgrown.

Student housing has filled this gap with a variety of lease-by-the-bed products.

Student housing is characterized by a “true” cyclical market – due to 9 or 10 month university calendars.

Student housing complexes are typically priced with capitalization rates 50-100 basis points higher than otherwise equivalent traditional apartment complexes

71 properties are known to be in development across the US at present totaling nearly 40,000 beds• Two complexes, totaling 1,626 beds, are under

development at Columbia, MO

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Student Housing

According to ARA, 2012 was a record year for sales of student housing complexes. • Based on transactions with a sale price of $5MM

and above, total sales volume was $3.7 Billion for 83 properties.

• This is higher than the previous peak in 2008 of approximately $2.8 Billion for 64 properties.

The average cap rate for stabilized student housing complex sales in 2012 was 6.76%.• In late 2012, MSU purchased The Monroe, a 122

bed student housing complex built in 2011 for $8,000,000 – which equates to a 6.75% OAR based on proforma income.

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Student Housing in Springfield, MO

SUMMARY OF COMPARABLE APARTMENT RENTALS

Comp. No. Property Name Location

Year Built Occ.

No. Units

No. Bedrooms

Avg. Rent Per Unit

Avg. Rent Per Bed

1 2012 100% 48 96 $1,106 $553

2 2012 85% 50 200 $2,300 $575

3 2012 98% 32 86 $1,519 $565

4 2012 81% 38 115 $1,713 $566

5 2010 100% 12 48 $2,040 $510

6 2010 95% 114 208 $878 $481

7 2010 100% 8 32 $1,800 $450

Compiled by CBRE

Beacon Park 415 East Monroe,Springfield, MO

The Jefferson

Beacon Commons 525 East Madison,Springfield, MO

835 South Jefferson,Springfield, MO

815 South Kimbrough,Springfield, MO

701 East Elm,Springfield, MO

Deep Elm

Bear Village

Walnut Quads 450 East Walnut,Springfield, MO

1744 West Catalpa,Springfield, MO

Eko Park

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Student Housing at University of Arkansas

Thank you

Stephen Cosby, MAI, MRICS | Managing DirectorCBRE | Valuation & Advisory Services438 E Millsap Ste 204 | Fayetteville, AR 72703425 W Capitol 15th Floor | Little Rock, AR 72201T +1 479 4427401 x. 3 | F +1 479 4427806

steve.cosby@cbre.com