REAL ESTATE DEVELOPMENT BY CDCs: A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS

1. REAL ESTATE DEVELOPMENT BY CDCs: A SEMINAR FOR CDC EXECUTIVES AND SENIOR MANAGERS Session 2 Stage I: Project Selection and Feasibility March 28,2012

2. Undertaking a new real estate development project requires at least two steps of assessment and evaluation The CDC must assess how the potential project aligns with its mission, strategies, organizational needs and capacities, and constituent/stakeholder needs and desires The CDC must make an initial determination with the information available that the project is feasible, financially, physically and politically.

3. When and Why Project Selection Occurs Time for a new project: The CDC’s business model requires real estate development activity to occur on a particular schedule. A specific opportunity or opportunities present themselves Site “prospecting” requires “go/no-go” decisions for specific properties Real estate development offers unique solutions for a community issue or challenge.

4. Evaluating Development Opportunities Mission and Strategy • Does the project align with mission and strategy? Is the project opportunity central, tangential or inconsistent with achieving current strategy and fulfilling mission. • Does project address community needs and desires? as articulated by • community leaders within and outside CDC • data • policy-makers, opinion-leaders, researchers, private funders

5. Evaluating Development Opportunities Organizational capacity • Capacity of staff to manage new project now • Capacity of staff to mange this type and scale of development • CDC’s track record with this type/scale of development?  external credibility? need for partner and/or new team members? • Availability of working capital and political capital to obtain funding and approvals to move forward?

6. Evaluating Development Opportunities Organizational Benefits and Risks (non-financial) • Are there innovative features that will produce future organizational recognition and/or funding? • Local political opposition: How strong? Could it de-rail project or damage CDC in long-run? • Opportunity costs: What will CDC be unable to do if it pursues this opportunity? Would CDC potentially compete with itself for project or other funding? • Will completed project complement other activities of CDC, strengthen portfolio, contribute to operating efficiencies

7. Evaluating Development Opportunities Organizational Benefits and Risks (financial) • Will the project generate sufficient revenue to cover its costs- in the short-run? In the long-run? • How financially risky is it? • Will the project generate additional cash to support overhead/operations? • Will the project provide access to new sources of capital? • Will the project require grant funding that would compete with other existing grant needs? • What is the reasonable timeframe from initial concept to construction completion? How long will you need to assign staff & carry the predevelopment work?

8. Evaluating Development Opportunities Project-specific issues • Site control: Is timing realistic and achievable • Zoning and other land use issues: Can approval of variances and permits reasonably be expected? • Knowable site conditions: geological and topographic, environmental contamination… • Market issues – especially for type of project contemplated.

9. Evaluating Development Opportunities THE EVALUATION PROCESS No Lifeguard on Duty? Wading into an undertow Who should be involved? When does it happen? Who manages it? How are decisions made? How are decisions recorded? Are there clear, specific and measurable timelines and outcomes?

10. Feasibility Analysis A feasibility analysis is undertaken to determine whether a real estate to be occupied by specified segment or segments of a market can be developed with the private and public financing sources that can reasonably be expected to be available… …and can provide the developer with full compensation for the costs of undertaking the development and a fair profit or return

11. Feasibility Analysis Approach Work with the Givens: price of the property; current zoning; maximum affordable rents (and resident income limits); policies on public subsidy limits and uses Building, health and other code requirements THE CDC’s PROGRAMMATIC REQUIREMENTS FOR THE PROJECT and the

12. Feasibility Analysis ASSUMPTIONS Best information you can obtain and infer about the property, the market, the neighborhood, the funding and regulatory environment with a limited budget and timeframe for investigation and research Calculations that will rely on Rules of Thumb, guesstimates based on current and recent local experience of typical or average practice and conditions

13. Feasibility analysis The basic feasibility analysis SHOULD include: • A building program- what are you proposing? What are the options? • Information gathering from key stakeholders, funders, elected officials • A zoning analysis; • A Development Sources and Uses Budget; • An Operating Proforma;

14. Feasibility Analysis The FAT (Feasibility Analysis Team, not in the glossary) • CDC’s Real Estate Director and/or project manager • Architect and/or Capital Needs Assessment consultant • [Development consultant] • [General contractor or cost estimator] • [environmental engineer; licensed site professional] • [Attorney]

15. Feasibility Analysis Caveats and cautions Feasibility is not determined at one moment in time… constant shift from feasible to infeasible to feasible throughout the development process Result of FA Go/No-Go decision on project Lay groundwork for property acquisition negotiation Modify CDC’s bottom line program requirements

16. Sample Feasibility Analysis The Scenario (The Givens) • One-half acre of vacant land in Lowell, MA • Land purchase price: $850,000 • Zoning: FAR: 3.0 height limit: 32 feet ( 3 stories ) parking: 1.1 space per residential unit • Median family income in target area: $56,900 • CDC Board requirements for program • All residential building • 60 percent of units for families ( 2+ bedrooms) including • 10 percent of all units for large families (3+ bedrooms ) • 10 percent of all units for market rate housing

17. Sample Feasibility Analysis Step 1: Determine building size, unit mix and parking on site Through an iterative process, architect lays out building and parking in accordance with zoning requirements and CDC’s program (See Building Characteristics tab of Session 2 feasibility analysis.xls file) The first iteration resulted in a building with 45- 47 units, almost meeting the family- and large-family requirements of CDC; however, the required parking -- 51 spaces – could not fit on the site By shrinking the footprint of the building… but keeping the maximum allowed floor area… and devoting half of the basement to underground parking a 34 unit building ( with 38 parking spaces) was configured

18. Sample Feasibility AnalysisStep 2: Unit and Income mix and operating proforma 22 Family units = 64 % of total 4 large family units = 11% of total *Extremely Low Income (ELI): State now requires at least 10 percent

19. Sample Feasibility AnalysisStep 2: Setting the rents

20. Sample Feasibility AnalysisOperating Pro Forma

21. Sample Feasibility AnalysisDevelopment Budget

22. Sample Feasibility AnalysisDecision and Next Steps $1.3M gap is significant, but before abandoning project • Do further and more detailed analysis and investigation of hard costs, soft costs, sources that are uncertain • Plan to seek a zoning variance to reduce parking spaces to 30 (0.9 spaces per unit), which would eliminate underground parking and save up to $1.6M in hard and soft costs • Convert market rate units to low income which would raise about $1.2M in investor equity and state subsidy

23. Paying for the Feasibility Analysis Sources • CDC’s working capital: good use of… and good reason to have … a CDC Development Fund • CEDAC Initial Feasibility Assistance loans ($7,500) • Lawyers Clearinghouse on Affordable Housing and Homelessness: pro bono legal services • CHDO Technical Assistance ( through, MACDC, LISC, CEDAC, DHCD, MHP, all to be determined) • LISC Recoverable Grants (not currently available) • Ask professionals to work “on spec”… architects, development consultants etc. would be paid for FA work and get all the project work if project moves forward.