Affordable Rental Housing: Development & Operation
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Transcript of Affordable Rental Housing: Development & Operation
Affordable Rental Housing:Development & Operation
AHS gratefully acknowledges the use of materials developed by the
Virginia Community Development Corporation(AHS has deleted slides and made minor edits on others )
The Development ProcessOverview
FOUR phases (roughly) in development process:• Predevelopment• Development• Operations• Disposition
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PredevelopmentThe Development Team
Responsible for completing development tasks
Includes range of stakeholders, both paid and volunteer:• Developer staff and board members• Design professionals• Representatives of regulatory and funding
agencies• Clients• Contractors
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PredevelopmentThe Development Team
Includes range of stakeholders, both paid and volunteer (continued):− Local building officials− Neighborhood residents− Property managers− Attorneys
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Predevelopment
Site Selection and Control
PredevelopmentSite Selection
CONSIDER TRADE-OFFS: Access / Utilities Environmental Conditions Inspections Legal / Zoning Services Timing Cost Community Need and/or
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Predevelopment
Determining the Market
PredevelopmentDetermining the Market
Market Analysis: Defining the market
− Where will residents come from? Local area only Commuters In-migration New household formation Pent-up demand
− Who will residents be? Factors may be defined by developer
Age specific Special needs Income level – maximum and minimum incomes Household size
Housing preferences Location Design
Focus on the right households
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PredevelopmentDetermining the Market
Market Analysis (continued): Evaluate all available data including:
− US Census data for Income level Household size Age Housing Tenure Employment trends Commute to work Age of housing Quality of housing “Movership”
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PredevelopmentDetermining the Market
Market Analysis (continued): Evaluate all available data (continued)
− Local data Employment trends Residential building permits by type Completions by type Neighborhood evaluation-amenities School report
Utilize local knowledge− Comparable survey
Unit size Rent Amenities Vacancy/waiting list
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PredevelopmentDetermining the Market
Market Analysis (continued): Provide an appropriate analysis of the data
− Capture Rate Percentage of qualified households necessary to fill the proposed units
− Absorption Period Amount of time expected for lease-up
− Estimate of Market Vacancy− Estimate of Market Rent
Draw conclusions− Is the project feasible− Mitigating circumstances peculiar to market or project
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PredevelopmentDetermining the Market
Typical Market Study should include: Intro/ Executive Summary – salient facts and conclusions Project Description Site Evaluation Description of the Market Area – primary and secondary Description of the area economy and market
demographics Supply and Demand Analysis
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PredevelopmentArchitecture and Engineering
PredevelopmentArchitecture and Engineering
Design Issues to Consider: Appropriateness Scale Context Accessibility Desirability Environmental Issues Cost
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PredevelopmentArchitecture and Engineering
Levels of Completion Preliminary conceptual drawings, renderings, elevations Sufficient to apply for financing Bid documents Construction Ready As-builts or post-construction
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PredevelopmentEnvironmental
PredevelopmentEnvironmental
Most projects require completion of a Phase I Environmental Assessment
In addition to typical hazards, including asbestos, lead, and storage tanks, lenders and investors are seeking clearance of mold and radon concerns
Phase I happens earlier in adaptive reuse or rehabilitation projects
Sometimes necessitates more testing
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Predevelopment
Appraisal
PredevelopmentAppraisal
Appraisals, particularly those performed by third parties, are essential in the real estate business
Establish fair market value (FMV) to be relied on by developers, owners, and third parties
Generally involves valuation based on three approaches: income, sales comparison, and cost. Typically one of these valuation approaches provides the basis for FMV
Value adjusted for restricted rents and below market financing
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Project FeasibilityThe Development Budget
Project FeasibilityThe Development Budget
Consists of all costs necessary to build the project Will be a fluid number that will become more
precise as the time of construction approaches The number should be firm before the construction
starts Stages:
− Owner’s Estimate− Architect’s Estimate / Contractor’s Estimate− Contractor’s Bid− Construction Contract
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Project FeasibilityThe Development Budget
Cost Categories Land and Building Site Work Rehabilitation / New Construction Contingency Architect and Engineer Fees Interim Costs Financing Fees and Expenses Soft Costs Syndication Costs Developer’s Fees Project Reserves
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Project FeasibilityThe Development Budget
Land and Building The cost of purchasing land on which to build a project
and/or the cost of a building or buildings to be rehabilitated or occupied as is by low / moderate-income renters
Land and building costs should be separated Look at:
− $ / Acre− $ / Unit− % of project cost− Compare with other projects
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Project FeasibilityThe Development Budget
Site Work & Rehabilitation / New Construction Separate categories for hard construction costs including:
− Off-site work− Site-work− Demolition− Abatement− New Construction− Rehabilitation− General Requirements− Overhead− Profit− Bond− FFE (Financing Fees and Expenses)
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Project FeasibilityThe Development Budget
Contingency Covers the unknown. May be required by and regulated by the lender. Can get smaller as development proceeds. Higher for rehabilitation than new construction. Discussed as a percentage of construction costs.
− 5% for new construction− 10% for rehab
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Project FeasibilityThe Development Budget
Architect and Engineering Fees Fees paid to architects and engineers for building and site
design, construction supervision, and soil testing, concrete testing, storm-water management plans, etc .
Does not include cost of construction lender’s, or other required third party inspecting architect.
Discussed as percentage of construction costs: 4%-8%.
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Project FeasibilityThe Development Budget
Interim Cost Non-construction costs incurred during the construction
period.− Construction interest− Construction loan fees− Inspecting Architect’s fees− Title updates− Taxes− Insurance
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Project FeasibilityThe Development Budget
Financing Fees and Expenses Cost of obtaining permanent financing including:
− Points (on permanent financing)− Closing costs (for permanent financing)− Credit enhancement fees− Title and recording work− Appraisal, market study, environmental− Mortgage Broker Fee
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Project FeasibilityThe Development Budget
Soft Costs & Syndication Expenses Fees that are project-related but not directly related to
construction like:− Legal− Accounting− Consultants− Tax credit reservation / application fees− Syndication fees – costs of forming the ownership entity
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Project FeasibilityThe Development Budget
Developer Fee Compensates the developer for staff time,
entrepreneurial effort, and risk. Should include fees, overhead, and profit. The developer’s major return from the project.
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Project FeasibilityThe Development Budget
Reserves Funds set-aside out of the development budget to cover:
− Lease-up expenses. − Operating losses. − Replacement of capital assets. − Debt service payments. − Rent subsidies.
May be required by the lender and/or investor May be determined by the developer to be necessary for the
financial viability of the project.
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Project Feasibility
The Operating Budget -Income
Project FeasibilityThe Operating Budget - Income
Income Sources (continued)Tax Credit rents:
− The maximum rents allowed under the tax credit program are established in the law based on: Which qualifying test is met Area Median Income (from HUD data) The size of the households occupying the
units
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Project FeasibilityThe Operating Budget - Income
Income sources (continued): Sources not directly related to the rental of low-income
units:− Market rate units− Commercial space− Surcharges
Air conditioner Parking Late charges Other
− Laundry− Other
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Project FeasibilityThe Operating Budget - Vacancy
Vacancy There are two general types of vacancy:
− Normal vacancy Market vacancy and credit losses Turnover
− Initial vacancy and lease-up expense
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Operating Expenses Costs that arise from operation of the project, rather than
from its development/construction. Expenses that are recurring and necessary for the proper
functioning of the project. Typical operating expenses include:
− Taxes− Insurance− Water/Sewer− Utilities− Maintenance− Management− Other (Inspections; Accounting; Legal; etc)− Replacement Reserves (for major capital items)
Project FeasibilityThe Operating Budget - Expenses
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Project FeasibilityThe Operating Budget - Expenses Projecting operating appropriately expenses is
critical There is little margin for error
− Rents are often fixed and regulated− Cash flow is thin− The ability to raise rents in future years is limited
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Project FeasibilityProjecting the Proforma
Net Operating Income: Cash available to pay all stakeholders (lenders get paid first – investors and owners last).
Calculated as follows: Gross Rents- Vacancy= Effective Gross Collections- Expenses= Net Operating Income
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