Agenda - Economic Development Authority - 09/17/2015

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Patrick Brahma Analysis of Request For Assistance — PSD Apartments September 17, 2015 Page 3 • The projected cash -on -cash return (COC) on investment in year three (3) is 1.5% without assistance and 4.81% with assistance. This well below industry standards of 10%. Even with assistance, the cumulative COC return in year 15 is only 6.54%, which again is below industry standards. Changes to the Proforma to Determine If Assistance Is Needed Based upon our review, we reformatted the developer's proforma to adjust the following items to be in line with industry standard: 1. Land acquisition at $8,000/unit 2. Increased rents to average of $1.45 sq/ft (increased 1 & 2 bedroom units by $100/month and 3 bedroom units by $200/month) 3. Increased replacement reserves to $300/unit 4. Reduced vacancy to 5% 5. Increased developer fee to $565,000 (3%) Based up these revisions, the developer's return in year 3 is still only 5.91%, which is below industry standard. If we add in the requested assistance, the return in year 3 goes to 9.21% with the cumulative return in year 15 at 11.50% (closer to industry standards). Format of Assistance and Recommendations Based on our review of the developer's pro forma and current market conditions, the proposed development may not reasonably be expected to occur solely through private investment within the reasonably near future. Due to the costs associated with constructing a market rate multifamily housing development, this project is feasible only through assistance, in part, from City contributions. Our recommendation, however, is that the City provide the developer a pay-as-you-go note for $500,000 at 4% interest, which is the interest rate on the developers first mortgage. The TIF note will be paid with 85% of the TIF generated by the project over the first 4 years. It should be noted that starting in year 5, 100% of the TIF generated (approximately $184,000/year) will go to repay the City for its overall investment in the COR to date. The developer has indicated that they are accepting of this proposal and are willing to move forward based upon the TIF assistance. Please contact me at 651-697-8506 with any questions.