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Financial Model Technical Documentation

Miami, FL

This document details the construction and assumptions involved in the financial modeling tool. The tool is intended as a simple and generalized tool meant for exploratory analysis of preservation activities in the Miami region. An online version and a downloadable, more customizable version are both available on the Enterprise website. This document will document key aspects of both versions.

The FMT was developed using input and feedback from a range of local and national stakeholders with a range of expertise in aspects of small and medium multifamily preservation activities. It is structured to allow for a variety of user inputs within an online interactive tool setting with the goal of assisting users in determining whether a specified project might meet basic feasibility criteria and may be worthy of further modeling and due diligence.

Because the FMT is intended to be used across jurisdictions, for a variety of project types and deal structures, etc., many assumptions were required to create a working model. Some of these assumptions are embedded in the structure of the model, while others are exposed to users as modifiable inputs in the online and/or downloadable versions of the tool. Key assumptions in each of these groups are detailed below.

Structural Assumptions

The FMT is based on a pro forma model that covers the acquisition and rehabilitation of a currently occupied property in year 1 through the assumed sale of a property in year 10. It is assumed that all capital sources are maintained for the entire 10-year duration (i.e. no refinancing or investor buy-out occurs during this period). These are perhaps the strongest assumptions involved in the entire model, as deals and holding periods can vary significantly in duration and structure, and different developers have different approaches to these issues. Unfortunately, accommodating these variations was deemed too complex to capture in an interactive tool by the Enterprise project team due to the wide variety of possibilities. However, this could be revisited in future versions of the tool if there were enough demand to justify including additional flexibility in structure.

Project feasibility is determined based on two factors – whether the project is expected to meet the assumed (or user-specified in the downloadable version) debt-service coverage ratio and whether the project is expected to meet the developer and/or investor internal rate of return (IRR) requirement (depending on which are present in the capital stack)3

If both of these thresholds are met, the project is assumed to be feasible.

In cases where one of these conditions is not met, a value is calculated to determine what additional subsidy (in the form of a grant or no interest forgivable loan) would be required to meet these two feasibility thresholds. In cases where another form of subsidy was available, the amount required would vary based on the nature of the program and its impacts on the deal structure.

The amount is determined using a What-If Analysis table in the excel model using 0.5% increments of the total project cost to determine a) what (if any) subsidy would be required to decrease the amount of the project that is to be financed in order to meet the minimum debt service coverage ratio requirements; and b) what (if any) subsidy is needed to lower the upfront equity investment required (without reducing cash flow to equity) in order to increase the IRR for the investor/developer to the point where it meets the minimum threshold. In cases where both conditions are not met, the two values are calculated individually and then summed to produce a single total subsidy needed.

Additional embedded assumptions (i.e. not exposed as explicit user inputs in either version of the tool) include the following.

  • All construction/rehabilitation activities will be completed in year 1.
  • The property sale price in year 10 is based on the assumed (or user-specified in the downloadable version) market cap rate relative to modeled net operating income in year 10.
  • Debt service coverage ratios are applicable only to stabilized property operation (years 2 through 10) and thus ignore ratios in year 1 where temporary vacancies during the construction phase may temporarily push the ratios below typical lender thresholds.
  • All payouts to equity investments occur proportionally to equity share at each time period.
  • We heard from some stakeholders that developer lines of credit are often important sources of gap funding for projects, so we have included this as an option in the capital stack. For simplicity, we assume a line of credit is maintained as an interest-only loan with no principal repayment, however we recognize that there are a variety of possibilities here.
  • Within the unit affordability calculations (expressed as a percent of Area Median Income), we assume that household sizes are related to bedrooms in the following manner. This is based on the standard affordability calculations used by Novogradac’s Rent and Income Limit Calculator, as stakeholders indicated this was typical. Households with non-whole numbers of people have income limits that are the average of the income limits of the two whole-number sizes on either side – e.g. a household size of 4.5 would have an income limit that is the average of the 4 and 5 person household sizes.
3. Internal rate of return (IRR) is the primary metric of feasibility assessment for investment return for both the developer and investor. While we understand that for some developers/investors cash flow, cap rate, or other metrics may be more salient, we present these as additional evaluative criteria, rather than requesting specific thresholds and using it for feasibility cutoffs.
4. Feedback on individual operating expense line items varied substantially across developers, given experiences with different types of properties in different conditions. However, most agreed on the general range of total per unit per year operating expenses implied by this list, in spite of the variation across line items.

Number of Bedrooms

Household Size

0

1.0

1

1.5

2

3.0

3

4.5

4

6.0

5

7.5

Assumptions Exposed as User-Inputs

The FMT also incorporates several assumed values that have been separated out from the model’s structure to enable users to modify them based on project specifications or to perform their own sensitivity analysis. In the online version of the tool where there are a more limited set of user inputs available, many of these function as true assumptions that the user is unable to adjust. In the downloadable version, each of these is easily adjustable by the user, so the assumptions described in the table below function more as default values for the user’s analysis rather than as true assumptions. Description of Assumed and Starting Values for FMT Variables

Description of Assumed and Starting Values for FMT Variables

Variable Name

Version Available to User

Description of Assumed or Starting Value

Preservation Costs

Acquisition cost

Both Versions

Starting value of $2,500,000. This will vary significantly based on property size, unit condition, location and a variety of other factors and will certainly be a key user input, so this is simply a middle-range, round number included to prompt user input rather than a sound starting value.

Rehab Cost Per Unit

Both Versions

Starting value of $40,000. This is also a key user input for this model that will vary significantly across projects and so is another middle-range, round number to prompt user input.

Retail space rehab cost per sq ft

Downloadable Version Only

Starting value of $33 per square foot in the downloadable version; assumed as 1/1200 th of the user-input Rehab Cost Per Unit variable in the online interactive version with the expectation that this would realistically be used in concert with a tenant improvement allowance. This ratio was based on local stakeholder input.

Year 1 Additional Vacancy

Downloadable Version Only

Starting value of 10% in the downloadable version. In the online version, this is assumed to scale with the Rehab Cost Per Unit Variable with values less than $30,000 per unit assumed to have 0% additional vacancy; values between $30,000 and $60,000 per unit assumed to have 10% additional vacancy and values greater than $60,000 assumed to have 30% additional vacancy. Note that these values only apply to year 1 and are in addition to the base vacancy rate. These thresholds and values were based on local and national stakeholder interviews.

Tenant Relocation Cost Per Unit due to Construction

Downloadable Version Only

Starting value of $500 in the downloadable version. In the online version, this is assumed to scale with the Rehab Cost Per Unit Variable with values less than $30,000 per unit assumed to have $0 relocation costs; values between $30,000 and $60,000 per unit assumed to have $500 relocation costs and values greater than $60,000 assumed to have $5,000 relocation costs. These thresholds and values were based on local and national stakeholder interviews.

Additional % of Project Cost For ADA Accommodation (Up to 20%)

Both Versions

Starting value of 0% in both versions. This will vary based on current building conditions/program and so is an important user input.

Hurricane Proofing Required (if not already factored into rehab cost)?

Both Versions

Starting value of ‘Yes’ in both versions. This is based on interviews with local stakeholders, who said that many new developers in the space do not account for this requirement in evaluating projects.

Miami Hurricane Proofing Additional Cost Per Unit

Downloadable Version Only

Starting/assumed value of $5,000. This is based on local stakeholder interviews.

Retail Tenant Improvement Allowance/sq ft

Downloadable Version Only

Starting/assumed value of $30. This is based on a review of local and national pro forma’s.

Landscaping and Other Site Work Required as Part of Rehab

Downloadable Version Only

Starting/assumed value of $0. This is based on local stakeholder interviews who reported that small and medium multifamily preservation projects do not generally involve many site improvements if they can be avoided.

Studies and Surveys - Geo, Market Study, etc.

Downloadable Version Only

Starting value of $25,000 based on a review of local and national pro forma’s and interviews with local stakeholders.

Taxes, permits, closing transaction studies

Downloadable Version Only

Starting value of $30,000 in the downloadable version. In the online version, this is assumed to be equal to 70% of the Rehab Cost Per Unit variable (e.g. an expected $40,000 per unit rehab cost would result in an estimated $28,000 in Taxes, Permits and Closing Transaction Studies for the project as a whole). This is based on a review of local and national pro forma’s and interviews with local stakeholders who indicated that this should scale with rehab intensity.

Legal & Accounting (Re-Zoning/Partnership/Debt)

Downloadable Version Only

Starting value of $40,000 in the downloadable version. In the online version, this is assumed to be equal to 100% of the Rehab Cost Per Unit variable (e.g. an expected $40,000 per unit rehab cost would result in an estimated $40,000 in Legal and Accounting costs for the project as a whole). This is based on a review of local and national pro forma’s and interviews with local stakeholders who indicated that this should scale with rehab intensity.

Arch & Engineering (both site and building)

Downloadable Version Only

Starting value of $30,000 in the downloadable version. In the online version, this is assumed to be equal to 70% of the Rehab Cost Per Unit variable (e.g. an expected $40,000 per unit rehab cost would result in an estimated $28,000 in Architecture and Engineering costs for the project as a whole). This is based on a review of local and national pro forma’s and interviews with local stakeholders who indicated that this should scale with rehab intensity.

Marketing

Downloadable Version Only

Starting/assumed value of $5,000 (total for the project, not per unit). This is based on interviews with local stakeholders who indicated that marketing is generally a very small cost for small and medium multifamily projects because the units rent without significant marketing effort.

G&A

Downloadable Version Only

Starting/assumed value of $10,000. This is based on a review of local and national pro forma’s and interviews with local stakeholders.

Other

Downloadable Version Only

Starting/assumed value of $0. This is included in the downloadable version to catch additional upfront costs the user is anticipating.

Soft Cost Contingency (%)

Downloadable Version Only

Starting/assumed value of 3%. This is based on a review of local and national pro forma’s and interviews with local stakeholders.

Hard Cost Contingency (%)

Downloadable Version Only

Starting/assumed value of 10%. This is based on a review of local and national pro forma’s and interviews with local stakeholders. Some stakeholders noted that construction overruns were common in these projects, particularly in older buildings where unexpected code compliance or legacy building system complications can result in hidden costs.

Typical operating reserve (months)

Downloadable Version Only

Starting/assumed value of 6. This is based on a review of local and national pro forma’s and interviews with local stakeholders. Some stakeholders noted that specific state or local programs occasionally have longer reserve requirements.

 

Unit Affordability

Which utilities does tenant pay directly?

Both Versions

Starting value of All Except Water/Sewer. This is based on local stakeholder feedback that small and medium multifamily buildings almost never have tenant-paid water but vary with respect to other utilities.

Average vacancy rate

Downloadable Version Only

Starting/assumed value of 4.00%. This is based on local stakeholder feedback that vacancy rates in small and medium multifamily buildings tend to be very low and typically only account for short-term tenant turnover, rather than sustained unit vacancies.

Typical monthly commercial/retail rent /sq ft

Downloadable Version Only

Starting/assumed value of $3.25. This is based on a 2019 report from Cushman Wakefield on the retail sector in Miami.

Number of units in each floor plans (with Rents and Number of Bedrooms)

Both Versions

This is a key user input, so starting values are primarily included to prompt user input. Starting values include 2 floor plans for each unit size (0, 1, 2 and 3 bedrooms) with 5 units for each floor plan. Rents for each floor plan are set at either the 50% of AMI or 80% of AMI limit rounded down to the nearest $5. In addition, affordability limits are calculated for each floor plan based on the user-specified number of bedrooms and rent levels based on Novogradac’s Rent and Income Limit Calculator .

Property Characteristics

Property tax rate (including expected abatements/rebates)

Both Versions

Starting value of 2.13%. This is based on an Enterprise analysis of property tax bills relative to market values for a sample of commercial properties in the City of Miami (inclusive of non-city taxes levied).

Rentable Nonresidential space (sq ft)

Both Versions

Starting value of 0. Local stakeholders interviewed indicated that very few properties of this size will have retail or other commercial space.

Property management approach

Both Versions

Starting value of Self-Manage. This value is purely a user input and does not actually affect the model in any way other than to report out a cost in the evaluation measures that estimates the cost the user would need to internalize to manage the property (which could be a pro or a con, depending on the situation).

Typical market cap rate

Downloadable Version Only

Starting/assumed value of 6%. This is based on a review of local pro forma’s and an analysis of multifamily properties sold in Miami on LoopNet.com

Upfront Developer Fee/Working Capital

Both Versions

Starting value of $0. This is based on feedback from local stakeholders that strategies vary widely across developers in how best to capture value from a project. So this is included as an option for an upfront fee, but many developers may choose to recapture this as cash flow over the course of the project, rather than raise the upfront cost of the project.

Annual Per Unit Operating Expenses 4

Repairs

Downloadable Version Only

Starting/assumed value of $1,200. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Turnover

Downloadable Version Only

Starting/assumed value of $200. Based on a combination of local and national pro forma reviews and interviews with stakeholders. Note that this accounts only for the administrative costs of turnover. Revenue loss associated with vacancy is covered by the vacancy rate variable above.

Accounting

Downloadable Version Only

Starting/assumed value of $600. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Admin & Marketing

Downloadable Version Only

Starting/assumed value of $500. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Services

Downloadable Version Only

Starting/assumed value of $700. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Common Area Utilities

Downloadable Version Only

Starting/assumed value of $250. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Property Insurance

Downloadable Version Only

Starting/assumed value of $450. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Reserve Replacements

Downloadable Version Only

Starting/assumed value of $400. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Other

Downloadable Version Only

Starting/assumed value of $0. This is meant as an additional line item for users to specify if desired.

Property management cost

Downloadable Version Only

Starting/assumed value of 5%. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Water/Sewer Utilities

Downloadable Version Only

Starting/assumed value of $528. Based on the 2019 HUD Utility Model for Miami-Dade County assuming a property in the City of Miami.

Other Utilities

Downloadable Version Only

Starting/assumed value of $1,500. Based on the 2019 HUD Utility Model for Miami-Dade County assuming a property in the City of Miami.

Cost/Revenue Inflation

Annual Expense Escalation

Downloadable Version Only

Starting/assumed value of 2%. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Annual Rent Escalation

Downloadable Version Only

Starting/assumed value of 2%. Based on a combination of local and national pro forma reviews and interviews with stakeholders.

Capital Sources

Capital Sources and Terms

Both Versions

This is a key user input, so starting values are primarily intended to prompt user input. Starting values and terms are based on a combination of local and national pro forma reviews and interviews with local and national stakeholders. Note that LIHTC equity is included as a source primarily to encourage users to consider it, though in many cases this will not be a realistic source of capital and, if it were considered, would entail a much broader and more detailed set of considerations than are covered in this tool. It is thus treated similarly to other sources of equity but without a specific expected IRR.

Financing Fee

Downloadable Version Only

Starting/assumed value of 1%. Based on a combination of local and national pro forma reviews and interviews with local and national stakeholders.

Required Debt Service Coverage Ratio

Downloadable Version Only

Starting/assumed value of 1.15. Based on a combination of local and national pro forma reviews and interviews with local and national stakeholders.

Debt Service Reserve (months)

Downloadable Version Only

Starting/assumed value of 12. Based on a combination of local and national pro forma reviews and interviews with local and national stakeholders.

Broker Fee for Sale

Downloadable Version Only

Starting/assumed value of 5%. Based on a combination of local and national pro forma reviews and interviews with local and national stakeholders. Some stakeholders indicated that the rate might be closer to 3% for larger projects.