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Presented at:APA Northeast Region 1 Conference
June 25, 2015
Financial Analysis for Planners
2
Outline
1.Introduction to Financial Analysis
2.Pro Forma Review and Hand Out
3.Case Studies
4.Question and Answer
3
Financial Analysis: An Overview
4
Financial Analysis
What:
• Way to measure the financial feasibility of a particular project or development concept.
Who:
• Planners, economic development professionals, public officials, developers, property owners…. everyone involved in the project.
Why:
• To determine if a project will be viable as planned or whether there are “gaps” that need to be addressed.
When:
• After a development concept has been created but before public investment or commitments have been made.
How:
• Its simple!
5
Financial Analysis
6
Back to Basics – Key Terms
Gross Income
• Total potential income from a property – all rental income
Effective Income
• Actual income from a property after subtracting vacancy and credit loss
Operating Expenses:
• Expenses related to operation (taxes, utilities, management, maintenance), but limited only to what the property owner pays
Net Operating Income (NOI):
• Effective income minus operating expenses
Debt Service Coverage Ratio:
• NOI/Debt service payment (i.e. ratio of net income to payment requirement) – it better be >1!!!
Internal Rate of Return:
• The implied interest rate the developer “earns” on his/her equity outlay
7
Pro Forma Checklist
Project What is the development concept?
How much will it cost to purchase the property?
How much will construction cost?
Income Average rental rates
How much will the project sell for after 10 years?
Expenses What is the average vacancy rate?
Who will pay utilities, taxes and other charges
Debt Service How much of the project will be financed?
What is the interest rate?
8
Pro Forma Example
Construction Construction Cost Units
· 50,000 SF Residential @$135/SF $4,171,500 40· 12,500 SF Restaurant @ $135/SF $1,687,500 1· Site Work $600,000· Total $6,459,000
Total Construction $6,459,000Property Sale Price $45,000
General Assumptions 1-year construction periodTarget market - Urban PioneersAssume smaller units, mix of 1-2 bedroomNo Remediation Costs
Tip: Use assessed value as a proxy for sale price if
unknown.
9
Pro Forma Example
Income
Residential Total Residential Units 40 Monthly Rent (SF) $1,500Total Monthly Rental Income $60,000Annual Rent Increase 3%Year 1 Gross Annual Income (Monthly x 12) $720,000
Commercial Total Commercial Units 1 Total Size (SF) 12,500 Annual Rent (SF) $15.00Annual Rent Increase 3%Year 1 Gross Annual Income $187,500Tip: Check
LoopNet or online listings to get
typical rent rates
10
Pro Forma Example
Operating Expenses Year 0 Year 1Taxes (Residential) $2,196 $252,174Insurance (Residential) $5.50 per 1,000 of mortgage $0 $10,732Repairs & Maintenance (Residential) 3% Effective Gross Income $0 $20,052Management 5% Effective Gross Income $0 $41,775Utilities $0 $34,200
11
Pro Forma ExampleDebt Service
A Project Cost (Land & Construction) $6,504,000B % Equity 40%C Equity Contribution (A x B) $2,601,600D Amount Financed for Construction (A - C) $3,902,400
Construction Period (Year 0)E Construction Rate 4.5%F Construction Period Interest (D x E) $175,608
Operation Period (Year 1+)G Loan Origination Fee % 1.5%H Loan Origination Fee (D x G) $58,536I Total Financial Costs (F + H) $234,144J % Financing of Financial Costs 60%K Amount Financed for Financial Costs (I x J) $140,486
L Interest Rate 6.0%M Term 30N Principal (Amount Financed = D + K) $4,042,886O Annual Debt Service Payment $293,711
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Pro Forma ExampleDebt Service
A Project Cost (Land & Construction) $6,504,000B % Equity 40%C Equity Contribution (A x B) $2,601,600D Amount Financed for Construction (A - C) $3,902,400
Construction Period (Year 0)E Construction Rate 4.5%F Construction Period Interest (D x E) $175,608
Operation Period (Year 1+)G Loan Origination Fee % 1.5%H Loan Origination Fee (D x G) $58,536I Total Financial Costs (F + H) $234,144J % Financing of Financial Costs 60%K Amount Financed for Financial Costs (I x J) $140,486
L Interest Rate 6.0%M Term 30N Principal (Amount Financed = D + K) $4,042,886O Annual Debt Service Payment $293,711
To figure out annual debt service payments using Excel:
Formula: PMT(Rate,Nper,PV)Rate: permanent financing interest rate (6%)Nper: number of payments or term (30)PV: present value or amount being mortgaged ($4,042,886)
Result: fixed debt service payments ($293,711)
13
Pro Forma ExampleProject X Cash Flow Analysis
Year 0 Year 1 Year 2
Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$
-$ 907,500$ 934,725$
Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$
-$ 835,500$ 860,565$
Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds
3,902,400$ (153,225)$ (293,711)$
Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$
Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$
Add: Income
Gross Income
Less: Vacancy and Credit Loss
Effective Income
Less: Operating Expenses
Net Operating IncomeTip: Take the
Cash Flow Analysis out to
Year 10
14
Pro Forma Example
Project X Cash Flow AnalysisYear 0 Year 1 Year 2
Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$
-$ 907,500$ 934,725$
Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$
-$ 835,500$ 860,565$
Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds
3,902,400$ (153,225)$ (293,711)$
Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$
Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$
Add: Inflow (Debt Service)
Less: Capital Outlays
Net Operating Income
Project X Cash Flow AnalysisYear 0 Year 1 Year 2
Residential (3% annual increase) -$ 720,000$ 741,600$ Commercial (Restaurant) (3% annual increase) -$ 187,500$ 193,125$
-$ 907,500$ 934,725$
Residential (10% vacancy, 3% annual increase) -$ 72,000$ 74,160$ Commercial (0% vacancy because one user) -$ -$ -$
-$ 835,500$ 860,565$
Taxes (Residential) 2,196$ 252,174$ 259,739$ Insurance (Residential) -$ 10,732$ 11,054$ Repairs & Maintenance (Residential) -$ 20,052$ 20,654$ Management -$ 41,775$ 43,028$ Utilities -$ 34,200$ 35,226$
(2,196)$ 476,568$ 490,865$
Debt Service -$ (293,711)$ (293,711)$ Permanent Financing Draw 4,042,886$ Construction Financing Draw 3,902,400$ (3,902,400)$ Sale Proceeds
3,902,400$ (153,225)$ (293,711)$
Land Cost 45,000$ Construction & Site Prep 6,459,000$ Loan Origination Fee 58,536$ Construction Period Interest 175,608$
Pre-Tax Cash Flow (2,837,940)$ 323,343$ 197,153$
Add: Income
15
Big Questions
Bank wants to know…will this project make enough money to repay the loan?
Developer wants to know… will this project
make me enough money that it is worth
the risk?
What is the debt service coverage ratio?
What is the internal rate of return?
16
Bank – Debt Service Coverage Ratio
What is the debt service coverage ratio?
= Net Operating Income Debt Service
Must be greater than 1.25
Debt Service Coverage Ratio
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Net Operating Income 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$
Debt Service 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$ 293,711$
Debt Service Coverage (1.25 min) 1.62 1.67 1.72 1.77 1.83 1.88 1.94 2.00 2.06 2.12
17
Developer – Internal Rate of Return
What is the internal rate of return?
Year 10 - Sale of Project Net Operating Income Year 10 $621,813Cap Rate 8.0%Sale Value $7,772,658Sale Commission Rate 6.0%Sale Commission $466,359Remaining Principal on Debt $3,368,845Sale Proceeds $3,937,453
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Internal Rate of Return
Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Net Operating Income (2,196)$ 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$
Debt Service and Other 3,902,400$ (153,225)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ 3,643,741$
Capital Outlays (6,738,144)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Pre Tax Cash Flow (2,837,940)$ 323,343$ 197,153$ 211,879$ 227,047$ 242,670$ 258,761$ 275,335$ 292,407$ 309,990$ 4,265,554$
Interal Rate of Return (IRR) 11%
Developer – Internal Rate of Return
What is the internal rate of return?
Internal Rate of Return
Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Net Operating Income (2,196)$ 476,568$ 490,865$ 505,591$ 520,758$ 536,381$ 552,472$ 569,047$ 586,118$ 603,702$ 621,813$
Debt Service and Other 3,902,400$ (153,225)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ (293,711)$ 3,643,741$
Capital Outlays (6,738,144)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Pre Tax Cash Flow (2,837,940)$ 323,343$ 197,153$ 211,879$ 227,047$ 242,670$ 258,761$ 275,335$ 292,407$ 309,990$ 4,265,554$
Interal Rate of Return (IRR) 11%
IRR = 11%
Don’t retreat!Reload!
19
The Numbers Don’t Work–What Now?
Consider different uses
Tax abatements
Tax credit programs
Grant programs for specific uses
Low interest loans
Loan terms – lower equity
contribution
Why Pro Formas Matter in the Planning Process…
Putting the Pro Forma to Work: Testing Project Feasibility• Master Plans• Site Specific Development• Funding
Applying the Pro Forma to Create Opportunity
The Grand Hotel…looking not so grand
A “grand” vision identified…
But would it work?
A “grand” result!
Vision:Downtown Hotel
Master Plan:56 units$120 / night60% occupancy
Reality:Viable project!
Location, programming & marketing key to success
It’s Not Always Good News…but Best to Know the Truth• City of Lockport• City of Binghamton• Steuben County
Vision:Waterfront Mixed Use
Master Plan:25 residential units and a single occupant restaurant
Reality:Low rate of return, Tax abatements needed
• Re-evaluate mix of uses
• Weigh pros and cons of making building taller, to accommodate more residential units
• Negotiate price of land purchase
• Research potential abatement and incentive programs, such as 421-m
Now What?
The Site Today
Future Vision
• Re-evaluate use
• Financing
• Tax abatements
Project to be further evaluated, with alternatives considered
Now What?
Potato Vodka DistilleryCraft farm distillery producing premium vodka made
with unused potatoes from Steuben County
Benefits• Direct and Indirect
Jobs
• Payments to Potato Farmers
• Tourism
But…• Numbers Don’t Add Up
• Grant funding from CFA
• Preferential financing
• Free or reduced rent
Pro Forma provided direction to County and stakeholders for future CFA application
Now What?
39
Thank You
Michael N’dolo, CEcDVice President, Camoin [email protected] x103
www.camoinassociates.com/APA.aspx All files, including handouts, powerpoint and interactive spreadsheet:
Kimberly Baptiste, AICPBusiness Segment Manager, Bergmann [email protected] x323